Law practice was "for profit" despite consistent losses.

The "hobby loss" provisions of Internal Revenue Code section 183 limit deductions for expenses of activities not engaged in for profit. Whether the not-for-profit limitations come into play is determined by whether a taxpayer has a genuine profit-making intent, based on the facts of the case.

After graduation from law school in 1978, Marjorie Westphal worked at various law firms as an associate. In 1985, she started her own individual practice, renting office space where she spent 30 to 40 hours a week. Westphal listed her practice in the yellow pages, had stationery and business cards printed, met with clients, attended bar association functions and subscribed to legal journals. Despite Westphal's efforts, the practice consistently showed a net loss.

For 1989 and 1990 combined, Westphal's expenses (about $50,000) exceeded her gross income from the business of practicing law (about $7,000). Westphal and her husband deducted the schedule C net loss for both 1989 and 1990 on their joint returns. The IRS sought to disallow the loss under section 183.

Result: For the Westphals. According to the nine factors listed fit the regulations--including the way the practice was carried on, the taxpayer's expertise, the time and effort spent, the elements of personal recreation and the history of income or loss--Westphal showed she had a profit-making motive. With regard to the history of losses from the practice, the court noted it often takes time for lawyers to get a sole law practice going.

* Westphal, TC memo 1994-537.