may please the court my name is bryce lennox i am here on behalf of santa for country club as this court knows this is a tax case and it involves a social club which is a kind of is going to special place in the tax code and the issue here your honour's is whether a tax payer must demonstrate profit motive to offset nonmember sales losses against its investment income as you know with social clubs there's a country clubs got member activities a nonmember activities the member activities are generally not taxable the tax code cards that out for them nonmember activities somebody throws a wedding at the country club or any social club those are taxable under under the code and under the code as well investment income is specifically taxable now there are circumstances in as this is what this case is about whether a  social club can offset its investment income from interest or whatever with its nonmembers losses so if they incur losses from these nonmember activities whether those can offset investment income and that's the core of this case and there's two things i don't think anybody disputes in this case either i or the or the commissioner and that is when we call it investment income all the club profitability from member events is kolob the effort was to deduct from investment income so that again i'm sorry you missed me as i understand the case the investment income is the where the deductions were improperly taken direct from nonmembers there's an investment account correct that's all i ask ok i'm sorry i misunderstood it's not a club profitability account it's an investment account correct got it correct so so there's two things i think everybody agree agrees upon and these are really the holding of the portland golf club case which we've obviously briefed on nauseum here and there's two things in the holding from portland was that any losses incurred as a result of a petitioners nonmember sales may be offset against its investment income only to if the nonmember sales were undertaken with an intent to profit so you have to try to intend you have to have a profit motive with respect to your nonmember sales for weddings everything else i don't know if you disagrees with that the other the second part of the holding of portland was that industry determining your profit motive if you were making going to tending to make a profit energy must employ the same method of allocating its fixed expenses as it uses in calculating its actual loss all that is saying your honour's you have to use the same accounting method so for whatever your you know whatever you're determining your tax liability and whatever you're using for your profit motive you've got to just you've got to compare apples to apples that's all that said iris got interested in your club because it consistently in  thirteen years lost money sufficiently to take to duck chins from investment income thirteen consistent years so the argument is of course that it was not intending to profit it was racking up losses well that's that is certainly the position the commissioner took that's the one you need to address that's exactly right your honor and our position is  portland golf club doesn't address it basically says just what we talked about but what portland doesn't address is how the methodology to determine the intent and intention to profit it's our position that you looked at you can look at multiple factors with respect to if a business intends to make a profit you don't just look at the you don't just look at the losses there's other factors the background question even if you look at those nine factors that would necessarily mean you win right you're just saying there's a broader universe of things you have to consider it's not just gross to gross and gross to gross you've got to consider all of these factors and so go ahead in and explain why you think the regulatory  regulatory factors apply here but i want to understand we would be in agreement that even if they apply you still have to work your way through them and show that you qualify right i agree with that your hon mean if you look at portland off part of the footnote twenty two important gulf seemed to open the door to look at other factors i think i think that's pretty clear and i also think that obviously judges justice kennedy's concurring opinion seems to open the door it seems like everybody says hey we can look at this stuff if we want to but the court just never got there and that arguably that's because the appellant in that case never bothered to make the arguments that were making and were making them for the first time in how are you ever going more of the expenses right proportionally because the nonmember income gross sales is going to be higher so i don't see how using this method you're ever going to turn a profit and so the evidence that you've never had a profit seems to me takes care of it how how are you intending to make money here do you have a consultant that has said there's a break even point where we need to charge this much for nonmember weddings and then at some point we're going to have enough money in the k t that we can make a profit well i can't predict tell are going to make a profit certainly that's that's for them  decide but you know as to going back to the factors and this goes you know what what what are you doing to try to make a profit they've got a board they've got managers they've got entire professional staff that's working you know working to try to  ors they've worked on trying to make a profit and they're not getting there and the end another aspect of back question is what efforts were made to show in the record efforts to get out of that same hole there doesn't seem to be changes in the business model there there is no evidence put forth to the tax court to support the idea that there was an intent to profit and it's shown by we did this we changed that we reduced that indirect expenses that we wanted to allocate to offset and thereby avoid paying tax country club and we had crystals club that actually merged in i believe it's two thousand and two so both thought there be synergies among this what they did is they operated jointly you know both clubs ran concurrently for about a year and they shut down crest hills and everybody basically moved over listen to bill they renamed it they called it the ridge club for several years and then they sold the property and so they made you know the depreciation on that property alone just the crest hills property was almost two point five million dollars by the time they put a contract on it and after it was sold to the city madeira it was four years of tied up litigation it had profited appreciated actually why didn't the appreciation of the property  itself to prove a profit and that is well that's a great question your honor but that that's one of the things under the treasury regs and one case law that people you look at if you're looking to see if there's a profit motive you can look to see if there's plenty you know a lot of the cases involve farming you know you have a farmer that's losing money losing and farmers lose money losing money losing money losing money he's got a piece of property that's still and that is being farmed and the that coupled you know the farming the farming may be losing but he's making he's appreciating the property case law and i've cited several in my in my brief says that hey he still got a profit motive kind of horse racing's a similar industry this is this is no different you know there's no question that members the nonmember sales nonmember activities and the member activities were all being you know the facilities are being used for all that the tennis courts the you know the clubhouse for weddings the golf course for all those things they were using these properties for purposes of development generating nonmember sales so there is a nexus between the appreciation of the property and the activities were going on there if you did this is i'm sorry you're entering a of the circumstances is that factor alone and struggle and i can understand the c f r nine factors i can understand that it's a broader analysis i guess what i'm struggling with are seven factors that you really don't address of the nine and i'm also struggling because any organization would need general accounting managers and people who kept up  tract funding so that's that doesn't really speak to me as a profit motive that speaks to me is that this is how you run the business and if so if that's your argument wouldn't anyone who has an appreciating piece of property then be able to always deduct their expenses because now you are in the fortuitous circumstance of having appreciating property i don't think that's always the case you line for thirteen years it's assume that's wrong work should have been done what should have been done is the tax court should have looked at all of you know what we submitted you know the appreciation it should have looked at some of the other evidence in assume the other evidence as it is i mean in the law what what is it's not a more fist factors they have to come from the regs i think that's a big i mean you know they look this is it says look at all factors i mean that's that certainly you know if you look at the regs it says hey look at these factors but you can look at stuff you can look at other facts to what are your best other factors besides land appreciation and even if if you can quickly do it jest us where in the record they are located sure let me get my factors if you wouldn't mind so you know didn't grace us with those response to those in your brief i think addressed but that is just to tranche mentioned you mentioned only two ok you know the expertise the tax payers advisors as we don't aren't we have an entire board of directors we have entire tax folks that are associated with that time and effort expended by the taxpayer in carrying on the activity i think that's what they do and this isn't this isn't a side deal where they're trying to you know they're there that's that's the core business if you will fortunately your time has expired i'm sorry if you these are factors that you were going to address the factors that you've failed to address in your brief i take it it please the court paula licit hearing on behalf of the commissioner of internal revenue your honors council conceded as he must that portland golf provides that w evaluating profit motive for purposes of unrelated business income tax application the taxpayer is required to use the same accounting method in calculating its profit motive or in showing its profit motive as it uses when reporting its taxable income and in this case the taxpayer is attempting to do the opposite of that in this case the taxpayer generated its report of taxable income allocating it s fixed expenses on a gross to gross basis and that was what it took into account for reporting its taxable income now for purposes of arguing about its profit motive it wishes to add into the mix other factors rather than simply it's fixed in indirect costs and it wishes to back out again those interact costs and that's the only way which it's able to arrive at its argument for profit motive here and the supreme court in portland off foreclosed exactly that type of argument but did it and that you would call that your strongest the failure to consistently book expenses yes you're right absolutely the failure to apply the same methodology in determining taxable income as in arguing for profit motive the court was very clear important in golf that the same methodology is must be used and here they're not doing that is that the grounding for your argument that and maybe you think portland golf forecloses drawn as to whether the activities of a corporation qualify as a trader business based upon the section one hundred three factors it is true that the supreme court left open in footnote twenty two the possibility that a tax payer could under some circumstances show an intent to profit notwithstanding that it showed a loss in the particular tax year is at issue and that's the distinction i think that is important here tax years stand on their own and simply because a particular tax payer generates a loss in any particular tax year does not necessarily answer the question whether it was seeking to profit from its activities in that tax year even general motors for the thirteen year span is what did get your attention here exactly your honor and not only did it get the attention of the commissioner here but it got the attention of the supreme court in the portland off case in that footnote portland off the supreme court goes on to say it's understandable why that why the taxpayer in this case did not seek to make any other argument about it profitability in light of the nine years of losses that it experienced in that case the supreme court essentially said under those circumstances in this context it is impossible to show an intent to profit here we have fourteen years of losses the entire what do you make of the fact that court through team lee use the word eighty three factors they do not routinely use the section one hundred three factors in the you get context your honor they use them in the context of differentiating the activities of an individual from a hobby or a business and that's why we make the point in our individual you're in a with a hobby as opposed to a business to say the the necessarily doesn't foreclose it possibly in an earlier footnote in the same opinion the court made the point that section one eighty three does not apply in the situation presented in portland off so i think at least there is there's an ambiguity there i believe your honor that the court was citing the those regulations as an example to support the preceding sentence that it was saying that you know a taxpayer doesn't always necessarily fail to demonstrate an intent to profit as a result of a loss in a particular year as an example it cited those those factors that are listed in the treasury regulation but the court again in an earlier footnote made clear that section one hundred three does not apply but issue a corporate tax on the analysis if if what the text court says is i'm going to count the number of years she didn't make any profit and that's it once you've missed five years of or seven years or whatever the number that i choose then there's no reason to look at a broader spectrum and i think it's pretty clear that that that portland is looking at a broader spectrum i mean take for example a business that that is not profitable and it's not been profitable for three years and i go out and i have our business specialist and i bring that person ian and that person says do this and they try that and they're not profitable for two more years then they have somebody different they bring them in they say do this they do that and in three more years you know they could have had seven eight nine whatever years of nonprofit ability and yet would have met all of the other factors and would have been making the effort would've been showing what is it issue not are you profitable or not but do you have an intent to make a profit so in that circumstance don't you have to look at factors beyond whether you succeeded in that over the course of a number of years or perhaps your honor such an argument could be made and i do i agree with the court that that is a possibility that the supreme court left open in its footnote twenty two in the portland awful case and what would you say to laos what if what factors could if not the if not the one hundred three factors that your stance what factors could be honor and this specific circumstance i don't think the court needs to right for any any broader case than the one that's currently before it and in this case there are no other factors present is that when it and as if they are our home for me is the standard for which you argue is that they were unprofitable for this length of time you can't look at anything else either you do gross to gross and gross to gross or you lose and i'm struggling in order to accept that you win under your argument your argument has a very narrow group of factors that are considered just because we chose to employ one eighty three factors doesn't mean that you lose correct just gives you the opportunity to review factors that are perhaps applicable whether a farmer has a hobby or a business looks to some of the same factors as to whether your purported business is really just a hobby or a help to nonmembers it seems to me that we have this crisscross here of practical reality what are the factors you look to and here are a list of nine that have some viability i think the footnote would even suggest that if there is a broader expanse of because the question is a practical one what are you doing to happen you show me your intention not your success but your intention so why wouldn't we look why wouldn't we say that it's a generally a totality of the circumstances test i think that your honor would be perfectly proper in in applying the totality the circumstances approach here in this case under the totality of the circumstances there is no evidence in the record to support a profit motive and in this unrelated business income context the cases that we cite in our brief make clear that courts have relied very heavily on the history of profits or losses as indicating what the entity intended and i think it's very important to distinguish in this case partly why the section one hundred three factors don't always make sense in this type of a context the section one hundred three factors are designed to differentiate between an activity than individual human being and gauges in for pleasure for fun for recreation for whatever personal drives may be there versus the drive to turn a profit and so many of those factors are are designed to tease out the difference between those two things and so for example some of the facts that that the country club references here the fact that they had a business structure the fact that they had trained employees who reviewed financial statements who did these things and made and made business type decisions it's not so informative when there's already a business structure in place that is that is running the membership activities it would be very surprising if they weren't using their already existing infrastructure to also engage in this activity of their nonmember sales but then they were quite a bit sorry i mean why wouldn't that cut in their favor because it's present in any situation as your trainers said earlier where you would have a sophisticated entity but doesn't that suggest that they are then taking in revenue and have expenses and they will kind of like a business and they will quite they have a profit motive having this infrastructure and poised as opposed to the guy that as a hobby or whatever no your honor i don't think it does in the case of an individual person typically someone that is not seeking a profit doesn't go through the trouble of  building a business infrastructure in order to simply run a recreational activity someone that does go through all the trouble of creating financial statements creating business plans doing all of these things in the  the case of an individual human being probably that does tend to indicate that maybe they're doing something other than just having fun but when you have an already existing tax exempt entity that has all of those things in place the fact that those things are already in place doesn't really inform the difference between those motivations here and we should understand i think your overarching point is that the those one eighty three factors are meant to examine the individual who's claiming a lot of deductions for hobby losses when the i r s is saying you're really a business ok you do need to pay tax tip well typically in those cases your honor what's happening is the disallowance of those deductions tax payers and councils correct these cases frequently come up in the farming context in the horse breeding context things like this which are very expensive pleasurable activities for which taxpayers often seek to deduct the expenses by claiming oh this is a business and therefore that's why i'm allowed to go ahead and deduct these losses and then those factors come into play to differentiate between the fact of that horse breeding activity as an example as keeps books but does the business have a business plan and is the business play and informed by expertise that would tell you how to increase your profitability all of  continuum matter to whether you want to gain not whether you actually made the profit but whether you intended to make the profit if losses are all that matters then you're looking at this one narrow factor of the group that's kind of the six factor raising it above all the other so i guess i'm struggling maybe the point like kind would be to say don't you think this is a totality test and don't you think it could be informed by the one ib three factors even if there is no mandatory requirement or even expectation that they should be applied in every case i think they could be your honor but in this case none of those factors actually point towards a profit motive yeah that's a different question correct and again yes on the vector's there they're relevant i think that they could be informative under under the right circumstances and again in the portland gough case in footnote twenty two the supreme court the supreme court itself focused on the history of losses and said given this history of losses trying to make out the case on other factors isn't going to get you there and that's the same thing here i would like to call you finish i know you have i have a question the accuracy penalty yes ok i wonder if you can explain there's a discrepancy in the briefing the two numbers the one nine forty one in some places and nine fifty one in your deficiency notice and it seems puny but the whole case is puny it's only five thousand dollars so what's the what's the deal on that discrepancy your honor that's the first that i've that issue has been raised with me so i don't know eye in your deficiency notice it seems like a small point but perhaps you could answer that in a letter yes your honor thank you were you able to finish i'm sorry i interrupted the last of your last i was i was simply wishing to address the the lack of connection between the holding of the land versus profitability and i think intent to profit on that point your honor  i think in a very poor very important point here even assuming that that the country club could demonstrate that there was this level of economic into a connection between the holding of the land and the nonmembers sales activity in this case the nonmember sales activity on the crest hills property which is the property that the that the tack that the country club sold for profit ceased there was no nonmember sales activity whatsoever on that property after october of two thousand and three and here we're talking about taxes two thousand and ten eleven and twelve so the notion that somehow there was a connection between the nonmember sales activity and the sale of the property for profit when they weren't even conducting number sales on that property for a number of years just makes no sense all right thank you thank you you it was good that we were able to get that out from council so that you had the benefit of responding to it there whether i wanted to comment on your honor in the judge since your point you asked if the with with the if there is a penalty of factors here and his were exact words to gross and not just gross exactly as another pretty significant of the evidence is in there all the evidence is nevertheless in the record it is in the record but they never even got to the right right so to your point judge because you asked me about the factors and what are some of the factors that you know that you didn't address in your brief well well yes but we dressed some of them for example though that because quite a few as judged ranch got you to admit that you didn't speak about it in the least  why you want to do it now but the brief was the place we would have looked for that well i think we highlighted the most important ones in the biggest the others didn't matter but i would say they didn't matter now you're going to tell us they do go ahead i'm  think you know some of them some of them admittedly are wrong or may not be completely accurate you know act applicable for example number nine the elements of personal pleasure recreation that doesn't really apply to a country club or it's a nonmember sales activities in  factors that's fine but worse the practical evidence that the club ever really wanted to make a quote unquote profit on the nonmember activities using this accounting method that you'd have to call in a consultant i don't know you have somebody this is thirteen years of losses if this were a real business it wouldn't exist anymore so you know it just looks to me why somebody decided hey you know we don't want to raise our member do so the  clubs vacant on a saturday night which is to have non members come in and do weddings or whatever and you charge them a fee as long as they cover their costs whatever's left over can go to offset the cost of maintaining the golf course or whatever but it's never going to be a profit i mean it's just it's a benefit to the club because they can they don't have to jack the dues up but i don't see how as a practical matter it's it's a profit when we talk about gross to gross an allocation i'm out of time your honor may i say that you know once again your honor i would i would argue you have to look at factors the fact that they may not you know get their i don't think is determin like i said we have a two point five million dollars in appreciation that's from a land sale that certainly you know they intended when they bought the land they intended for member services but you know i'm sure there was a secondary thought that hey if we can make some money on this in the long run  the take from the i r s is that you're avoiding paying taxes on that income because there was if you compare gross comparing gross to gross you made money the club made money every year but then they took all these deductions and managed to come up with losses again right that's what that's how it ended up there was a gross to gross profit that well no there was well there was nonmember revenue and then you took out the direct costs there was a there was a profit but then when you take the gross to growth message and you apply the indirect you're right there was a loss or your honor it was a profit before the indirect was deducted correct deductions are what it were cranky about correct all right thank you anna thank you all right we have your matter