An Empirical Assist To Determine Whether An Activity Is Engaged In For A Profit

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Ted D. Englebrecht
W. Brian Dowis
Justin S. Cox


Hobby Activities, Judge Gender, Tax Court


Taxpayers engage in activities for both tax and nontax reasons.  Some of these undertakings are geared to earn a profit.  Other activities provide personal pleasure and recreation.  Regardless of the activity type, expenses are incurred and can be substantial.  Depending on the type of engagement, profit may or may not be achieved.  Naturally, many of these pursuits are undertaken for a number of consecutive years.  Because of the tax benefits these activities possess, this issue remains highly litigated and closely scrutinized by the Internal Revenue Service.  This study investigates the guidance delineated by the Service and creates a model of the significant variables that affect the judiciary’s decision-making.  Backwards stepwise logistic regression is used to create the model.  Chi-square is also used to determine statistical significance between the decision rendered and judge’s gender.  Also, political affiliation of the judge is examined.  The one variable (manner in which the taxpayer carries on an activity) model created correctly classifies 96.3% of the decisions made in the U.S. Tax Court.  Additionally, a statistically significant difference is found between male and female judges.  However, no difference is found based on the political affiliation of the judge.


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