02/07/2026
File this under just because you create an LLC for your car/boat/motorhome/reaidnece doesnt mean its a business
Today’s Tax Court decision
Subject: Engaging in multiple activities for profit.
Memo. 2026-13
JAMES D. SULLIVAN AND COLLEEN M. SULLIVAN,
Petitioners v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
Docket No. 15625-22.
Filed February 5, 2026.
1. Facts
James D. Sullivan and Colleen M. Sullivan are seeking a redetermination of deficiencies in federal income tax for the years 2017 through 2019, as determined by the IRS. The Sullivans engaged in several activities under Traders Abacus, LLC, including software development, home construction on two different parcels of land, and a mulching business called Leaf-Cutter. They claimed expenses for these activities but faced disallowance and penalties due to questions regarding whether these activities were carried out for profit.
2. Issue
The central legal issues at hand are whether the Sullivans' activities associated with Traders Abacus were engaged in for profit under section 183 of the Internal Revenue Code, and whether they are liable for accuracy-related penalties under section 6662(a) for the tax years 2018 and 2019.
3. Rules
United States Tax Court Rules
Rule 142(a)(1): This rule establishes the general principle that the burden of proof lies with the taxpayer to prove the IRS's determinations are erroneous. The taxpayer must demonstrate entitlement to any deductions claimed.
Internal Revenue Code Sections
IRC Section 183: This section states that if an activity is not engaged in for profit, no deduction attributable to such activity shall be allowed, except as provided under section 162 or paragraphs (1) or (2) of section 212.
IRC Section 6662(a): This section pertains to accuracy-related penalties that may be imposed on taxpayers for underpayment of tax due to negligence or disregard of rules and regulations.
Major Cases
Welch v. Helvering, 290 U.S. 111 (1933): This case established the presumption of correctness of notices of deficiency issued by the IRS and the taxpayer's burden to prove them erroneous.
INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992): The case underscored that taxpayers must demonstrate that any deductions claimed are permitted by statute and maintain sufficient records.
Smith v. Commissioner, T.C. Memo. 1993-140: This case highlighted that the determination of whether an activity is engaged in for profit is based on all facts and circumstances.
4. Application
In this case, the Tax Court evaluated the Sullivans’ activities based on the IRS burden of proof as outlined in Rule 142(a)(1) and applicable IRS sections, particularly focusing on whether their engagements were for profit under Section 183. The court assessed various factors, including the manner in which the Sullivans conducted their business, their expertise, the time and effort expended, and their historical income or loss from the activities. The analysis established that the software development was profit-oriented, while the home construction activities on one parcel were also done with a profit motive. However, the activities on the second parcel and the Leaf-Cutter mulching business were not considered for profit.
5. Conclusion
The Tax Court concluded that the Sullivans engaged in their software development and home construction on the 47.71-acre property with a profit motive; thus, these deductions could be allowed. However, the court sustained the IRS's disallowance of deductions from the 3.89-acre parcel and the Leaf-Cutter business as not being engaged in for profit. Regarding tax penalties, the Sullivans could be liable for accuracy-related penalties under section 6662(a) for tax years 2018 and 2019, contingent on whether they can substantiate the expenses claimed. The final decision reflects a nuanced evaluation of profit motive across different activities.
