Seventh Circuit Review


Megan Heinz


In the late 1990's and 2000's, Merrill C. Roberts of Indiana ventured into horse racing. Eventually he chose to deduct losses associated with his horse racing as "ordinary and necessary business expenses." The IRS issued a notice of deficiency to Roberts, contending that he was liable for taxes and penalties for those years because he was engaged in horseracing as a hobby rather than a business. He therefore could not deduct expenses associated with the activity under Section 183 of the Internal Revenue Code.

The Tax Court analyzed the case using factors set forth in Treasury Regulation Section 1.183-2, which provides guidance on activities not engaged in for profit. The analysis concluded Roberts did demonstrate profit objective for 2007 and 2008, but that he did owe tax for 2005 and 2006. Strangely not mentioned in the opinion is section (c) of the regulation, which contains demonstrative examples of its application. One of the examples matches the facts of Roberts' case almost to a T and seems incredibly likely that this example influenced the Tax Court's decision. Roberts appealed to the Seventh Circuit.

Deference issues in the federal tax context have been The controversial 1943 United States Supreme Court case Dobson v. Commissioner stands for the principle that appellate review of decisions of the United States Tax Court (then the Board of Tax Appeals) should be extremely limited and that they should only be reversed when the Court had made a clear-cut mistake of law. The decision drew strong criticism and eventually the United States Congress overturned the so-called "Dobson rule". In practice, however, the Dobson rule seems to have had a lingering effect. Several courts of appeals have made reference to the Tax Court's specialized knowledge of the Internal Revenue Code and have afforded its opinions more weight.

Chevron deference has also left its imprint on tax litigation. The Supreme Court's 1984 decision in Chevron U.S.A. Incorporated v. NRDC stands for the principle that courts should defer to agency interpretations of statutes where those interpretations are reasonable. In Mayo Foundation for Medical Research v. United States, the Supreme Court affirmed that Chevron deference should apply to interpretations of the Internal Revenue Code by the Department of the Treasury and the Internal Revenue Service.

Some scholars have argued that Chevron deference in federal tax is on the decline. Perhaps the Seventh Circuit's dismissive attitude toward both the Tax Court's reasoning and the Treasury's regulatory guidance is an indication that this is true. A stronger stance by the Department of the Treasury on the weight of its own regulations might grant tax litigators more clarity moving forward.

Streaming Media

Included in

Law Commons