Construction Company Can Deduct Motocross Racing Expenses of Owner's Son.
(Parker Tax Publishing December 7, 2014)

A construction company's outlays to sponsor the motocross racing activities of the owner's son were valid promotional expenditures, deductible as ordinary and necessary business expenses. Evans v. Comm'r, T.C. Memo 2014-237.

Background

Dave Evans Construction (DEC) is a construction company based in Boise, Idaho, owned and operated by William Evans. DEC develops land and constructs residential homes and commercial buildings in the Boise area. The company, which is not licensed to operate in any state other than Idaho, had gross revenues of over $16.2 million in 2006 and over $16.7 million in 2007. DEC was operated as a sole proprietorship through mid-2006 and as an S corporation thereafter.

Evans' son Ben is a talented motocross racer who has been competing since the age of seven. In 2005, Ben's racing career took off as he competed in nationally televised races and was featured in various motocross magazines. Sponsors, including industry leaders such as American Honda, began coming forward to support him. Realizing that his teenage son's talent and "star power" might help to boost DEC's business, Evans consulted with his CPA, who advised him that supporting Ben's motocross racing could be a valid promotional activity for DEC. The company subsequently became one of Ben's sponsors and DECs logos were placed prominently on Ben's motorcycles, trailer, and promotional posters.

In 2006 and 2007 DEC incurred motocross-racing-related expenses (excluding depreciation and Code Sec. 179 expenses) totaling at least $86,619 and $74,579, respectively. These expenses consisted mostly of payments for motorcycles, parts, equipment, racing fees, membership fees, fuel, and food. In addition, DEC claimed depreciation and Code Sec. 179 expenses for three capital assets purchased for the motocross activity: a motorhome and two trailers.

Following a 2007 win at Loretta Lynn, a premiere title in the national amateur racing circuit, Ben began racing as a professional, and DEC's sponsorship of his racing activities came to an end.

Analysis

The main issue before for the Tax Court was whether DEC's outlays on Ben's motocross racing activities were ordinary and necessary business expenses deductible under Code Sec. 162.

Under Reg. Sec. 1.162-1(a), for an expenditure to be an ordinary and necessary business expense, the taxpayer must show a bona fide business purpose for the expenditure and a proximate relationship between the expenditure and the taxpayer's business. As explained in Welch v. Helvering, 290 U.S. at 113, to be "necessary" within the meaning of section 162, an expense needs to be "appropriate and helpful" to the taxpayer's business. The requirement that an expense be "ordinary" connotes that "the transaction which gives rise to it must be of common or frequent occurrence in the type of business involved."

The Tax Court previously found, in Boomershine v. Comm'r, T.C. Memo. 1987-384, a proximate relationship between car racing activities undertaken for promotional purposes and businesses engaged in construction.

The IRS argued there was no proximate relationship between the motocross racing activity and DEC's construction business. Seeking to distinguish the current case, the IRS argued that: (1) the motocross racing activity expenses were actually personal expenses, (2) most of Ben's races took place outside of DEC's operating area, and (3) DEC failed to show that the motocross racing activity brought in new customers.

To support its claim that Ben's motocross racing expenses were personal in nature, the IRS pointed out that the Evans had supported all of their five children in motorcycle racing pursuits. The Tax Court rejected the arguments, observing that the taxpayers had deducted expenses only for Ben's activity because he was the only one of their children to attain a level of celebrity that held promotional value to DEC. Moreover, the taxpayers made the decision to treat Ben's racing activity as a form of promotion for DEC's business after consulting with their CPA and reasonably calculating that it would be beneficial to the company. The court noted that DEC was not the only company to capitalize on Ben's celebrity: Ben had a number of other corporate sponsors including Western Power Sports, Carl's Cycle Sales, American Honda, all leading companies in the sport.

The IRS also argued that the racing activity's promotional value was virtually nonexistent because most of Ben's races took place outside of the Boise area whereas DEC performs work only in Idaho. The Tax Court disagreed, citing its own precedent in Brallier v. Comm'r, T.C. Memo. 1986-42. The court pointed out that Ben's increasing national stature, fueled by his participation in races on the national circuit, served to improve his fame and name recognition locally.

Finally, the IRS argued that the taxpayers had failed to prove that the motocross racing activity brought in new customers and was therefore was not a valid promotional activity. The court rejected this argument as well, concluding that: (1) the taxpayers provided credible evidence that sponsoring Ben's motocross racing activity did help DEC to attract business; (2) the development of business relationships resulting from the sponsorship benefited DEC's bottom line; and (3) it mattered not whether benefits to DEC came in the form of deals with subcontractors and investors or from increased sales.

Thus, the Tax Court concluded that DEC's outlay's on Ben's motocross racing activities were ordinary and necessary business expenses, deductible under Code Sec. 162. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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