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TAX MATTERS

IRS criminal investigations
cases involving Johnson’s investors,
that Johnson’s operation had been by fiscal year
investigated by the IRS as a tax shelter,
and that the Department of Justice 3,500
had obtained an injunction against
it (Olsen, T.C. Memo. 2021-41). The
3,000
court also noted that in his promo-
tional materials to investors, Johnson
suggested they could “zero out” their
2,500
federal tax liability and that he referred
Olsen and others to tax preparers who
helped them do so.
2,000
The Tax Court held that Olsen
was not entitled to the deductions and
credits because he was not engaged in a 1,500
trade or business or a rental activity with
respect to the lenses. Neither was he able
to claim a deduction for the production 1,000
of income under Sec. 212, the Tax Court
held, since he did not demonstrate a
profit motive. In addition, the Tax Court 500
held, Olsen’s losses were passive, against
which he had no passive income to offset
0
(Olsen, slip op. at 42).
2017 2018 2019 2020 2021
Olsen appealed the Tax Court’s
Initiated  Completed
decision to the Tenth Circuit.
Issues: For a taxpayer to claim a Source: IRS Data Book, Table 24.
depreciation deduction, property placed
in service during the year needs to be
used in a trade or business or for the demonstrate when a taxpayer’s activity business plan, marketing strategy, etc.)
production of income (Secs. 167(a)(1) lacks a profit motive. to carry on PFO Solar as a profit-
and (2)). The taxpayer must also show The nine nonexclusive factors of seeking entity. Furthermore, Olsen
a profit-seeking motive behind the Regs. Sec. 1.183-2(b) are: (1) the man- kept buying lenses even though he
deduction (see Wiles, 312 F.2d 574 ner in which the taxpayer carries on the stated that the items “always look[ed]
(10th Cir. 1962)). The motive, though, activity; (2) the expertise of the taxpayer a little like junk.”
needs to be more than incidental (see or his advisers; (3) the time and effort The Tax Court also determined that
Cannon, 949 F.2d 345 (10th Cir. 1991)). expended by the taxpayer in carrying Olsen lacked the requisite expertise in
Olsen needed to show that profit was on the activity; (4) the expectation that the field and had not consulted experts
the dominant or primary objective of assets used in the activity may appreciate in the field. Although he claimed he
the venture. Intent surrounding profit in value; (5) the success of the taxpayer visited the site quarterly, he submit-
motive is based on the objective facts in carrying on other similar or dissimilar ted no travel logs or documentation
surrounding the case and not on the activities; (6) the taxpayer’s history of that he did so. Olsen conceded that
taxpayer’s subjective intent (see Nickeson, income or losses with respect to the his business activities were limited to
962 F.2d 973 (10th Cir. 1992)). activity; (7) the amount of occasional “writing annual checks to buy lenses,
The Tax Court had used the nine profits, if any, that are earned; (8) the renewing the limited liability company
nonexclusive factors of Regs. Sec. financial status of the taxpayer; and each year, maintaining copies of the
1.183-2(b) to analyze whether Olsen (9) elements of personal pleasure or agreements, and deciding annually
had a profit motive. The Tenth Circuit recreation. how many lenses to buy.”
also applied the Nickeson test, under In applying these factors, the Tax As Olsen testified, he did not
which it analyzed Olsen’s claimed profit Court had held that Olsen lacked a expect the lenses to appreciate, stating
motive using five characteristics the profit motive. First, he lacked sufficient that they were essentially “worth-
Tenth Circuit identified in Nickeson that business records (i.e., bank account, less” and that it was “very unlikely”

40 | Journal of Accountancy March 2023