How does the IRS attack tax shelters on IRC Section 183

Some people have significant income from more than one source. And some of these people seek to reduce their taxable income by reporting losses from other activities they engage in. However, IRC Section 183 says those losses may be deducted only to the extent it was engaged in for profit.

The determination whether one operates an activity with an actual and honest profit motive involves analyzing nine factors mentioned in Treas. Reg. § 1.183-2(b):

1. the manner in which the taxpayer carried on the activity,
2. the expertise of the taxpayer or his or her advisers,
3. the time and effort expended by the taxpayer in carrying on the activity,
4. the expectation that the assets used in the activity may appreciate in value,
5. the success of the taxpayer in carrying on other similar or dissimilar activities,
6. the taxpayer’s history of income or loss with respect to the activity,
7. the amount of occasional profits, if any, which are earned,
8. the financial status of the taxpayer, and
9. elements of personal pleasure or recreation.

The determination is based on all relevant facts and circumstances, with a focus on nine factors. For more, see: