By: A.J. Cook


Taxpayers will go an extra mile for a deduction, but chinchilla breeder Howard Mager went a fur piece indeed.

Mager, a successful securities analyst specializing in the aerospace and electrical equipment industries, bought 72 female chinchillas for $789 each when the going price was $300. He hired Great Eastern Breeders, Inc. to keep them and visited them four times in three years. The Brooklyn, N.Y. activity lost money: Mager never sold a pelt.

When the Internal Revenue Service saw the analyst's loss deduction, it pelted him with additional taxes. Considering the way he operated, it said, he couldn't expect a profit. For instance, his chinchillas didn't have pedigree cards; no one ever heard of a herd without cards.

Mager appealed. In court the facts bred skepticism in the judge. He disallowed the deduction saying this looked more like a hobby than a business: Mager had no experience, sought no expert advice and made only a cursory investigation before purchasing the chinchillas.

The Moral: To get a deduction, you have to ride herd on your hobby in a businesslike manner.

Randy R. Reed III of Nederland, Tex., knew about diving for sunken treasure -- he had taught five divers who became millionaires from their underwater discoveries.

Reed, a chemical processor for DuPont, used his diving skills to inspect ships, raise sunken tugboats and conduct rescue missions. He often lectured about shipwrecks in the Mediterranean with archaeologists from Texas A&M University.

Watching others benefit from his teaching, Reed decided to go into treasure hunting himself. He bought a 26-foot boat. He learned to fly, so he could take aerial infrared photos and he located several shipwrecks but none of much value.

The IRS disallowed his $11,851 deduction saying he lacked a profit motive.

Reed sailed to the Tax Court. The judge disagreed with the agency. The taxpayer operated in a businesslike manner and was a likely candidate to find riches. Treasure hunting, usually unproductive, can produce enormous rewards if successful.

The Moral: The bottom of the sea holds more riches -- and deductions -- than you and I will ever see.

Arne Christensen, Jr. worked for Northwest Natural Gas Co. In his spare time he built dune buggies, 700 pound king crab traps, the Pixie Car for carnival-amusement park rides and a self-propelled cable car look-alike used as a parade float or mobile restaurant.

Over four years he earned $1,278--with expenses of $81,971. In his pocket, the Newport, Ore., inventor had a $250,000 contract for the Pixie Car effective as soon as he found a way to transport the cars for Playland Amusement.

The IRS, unamused, labeled his activity a hobby.

Christensen appealed. The judge allowed the deduction saying the facts show this is a business. For the eight years before the IRS challenged Christensen, he worked full time on his projects and made a profit. He spent a great deal of effort coming up with inventions like the Pixie Car, all within the field of his mechanical and metal fabricating expertise. (More at Hobby vs. Business)

The Moral:  Fiddling around the workshop is a hobby, inventing is serious business.

A.J. Cook is a lawyer and CPA. His tax column appears weekly in numerous newspapers. Why isn't it published in your hometown newspaper? Ask its Business Editor to subscribe.

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Released 2-24-92