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The defeat of Batman, IRC prevails against a superhero

Batman, IRS, hobby, taxThe last couple of weeks have been odd ones for me. I’ve been caught up with my work load and on occasion my mind has wandered. Today was no exception to that, and in my wandering, I questioned whether Batman would survive the hobby loss rules in an IRS audit.

I should confess I’m not a huge superhero follower so I’m certain there are nuances in the life of a superhero that I’m just not privy to. I can, however, imagine the IRS auditor’s frustration when the interview begins with a simple question, “What is your name?” You all know what’s coming, “I’m Batman.” No last name, address unquestionably not disclosed, occupation – super hero on a part-time basis. I don’t sense that the audit will go well.

I would anticipate that the costs associated with being Batman are extensive. Maintenance and operation of the Batmobile, research and development related to the Bat Suit, utilities and operating costs of the Bat Cave all have to add up to a sizeable dollar amount. One of my colleagues has suggested that the costs are likely operational costs of Wayne Enterprises. That may be so, but let’s assume that Batman – aka Bruce Wayne – reported them on a schedule as a sole proprietor. Could he survive the IRC Section 183 rules, commonly known the hobby loss rules?

The tax code denies deductions for activities that are not engaged in for profit. This limitation is commonly known as the hobby loss rule and surfaces time and time again in court cases. There are, of course, objective factors that are applied to make a determination and while there are often similarities, each case is viewed on its own set of facts and circumstances. The IRS applies 9 factors to make the determination of hobby vs business engaged in for profit. There is no set rule that yes to 6 makes it a hobby or a business. Ultimately, it is a preponderance of answers on one side or the other that leads to the conclusion. Let’s see how Batman would fare.

1. Manner in which the taxpayer carries on the activity. Batman obviously conducts his activities in a professional manner. I’d like to believe that as Batman, meticulous records are kept regarding his expenditures. I’d even guess he uses QuickBooks to keep his records. He certainly employs new techniques in his crime fighting crusades displaying a recognition that if something isn’t working to produce positive results you need to change. Batman could win on this point.

2. The expertise of the taxpayer. I don’t think there is any question as to the expertise. He certainly understands the activity and surrounds himself, albeit on a very limited basis, with trusted advisors who are also experts. Batman wins this one.

3. Time and effort spent by the taxpayer in carrying on the activity. The activity of being Batman is a part time job. There may be seasonal rushes, but the bottom line is that the majority of Batman’s time is spent as Bruce Wayne. Batman loses this one.

4. The expectation that assets used in the activity may appreciate in value. This would be a tough argument for Batman to win. The suit is custom made and obviously holds little resale value. The real estate due to the lack of disclosure as to location makes it an unlikely sale. The Batmobile, while unique, has a bad Carfax report. Batman loses.

5. The taxpayer’s success in carrying on other similar or dissimilar activities and (6) the taxpayer’s history of income or losses from the activity. Unless there is something that has not been disclosed, this is Batman’s only crime fighting activity he has been engaged in. His life as Bruce Wayne as a billionaire industrialist is certainly a dissimilar activity. His immense wealth certainly can be viewed as success in carrying on an activity, but honestly, I’m not clear what the activity is other than being a billionaire. Given that Batman does not charge for his services, I believe he would report losses from his crime fighting activity year after year. Continuing an activity when you lose money on a regular basis over an extended time period is not indication of a profit motive. Batman loses.

7. The amount of occasional earned profits, if any. I don’t think there’s much to be said here. Batman does not receive payment for his services in monetary consideration. The satisfaction of ridding the world of evil may provide an emotional pay off but at the end of the day it doesn’t pay the bills. Batman loses.

8. The taxpayer’s financial status. The Service will often look to a taxpayer’s income from other sources to assess whether the activity is engaged in for profit or a hobby that provides tax benefits. Suffice it to say that given Bruce Wayne, billionaire is Batman, the presumption as a hobby weighs heavily in the IRS favor. Batman loses

9. The presence of elements of personal pleasure or recreation. An activity that includes elements of recreation or personal elements can lead to the conclusion that the activity is not engaged in for profit but yet as something fun to do. Many Tax Court cases reflect activities that a taxpayer liked to do but also wanted to get some tax benefit from writing off the costs to participate in the activity. I’ve watched the satisfaction that is had when Batman destroys a villain and saves the city. I think the personal pleasure he gets from his crime fighting part-time gig is immeasurable. Batman loses.

Batman has battled some tough characters and prevailed over the years. I’m afraid, however, this is one battle he loses. I would surmise from the count of losses in the 9 factors that Batman would never prevail if subjected to the hobby loss rules. I guess it’s a good thing that he has his day job to fall back on.

Cheryl Dickerson, CPA