## Facts

- Churchill Downs, Inc. and subsidiaries owned and operated multiple racetracks, including the Churchill Downs racetrack in Louisville, Kentucky, and hosted major racing events such as the Kentucky Derby.
- The business earned revenue from wagering, admissions, concessions, sponsorships, licensing, and broadcast-related fees, and competed with other entertainment and gaming options for customers.
- In connection with the Kentucky Derby and, on a rotating basis, the Breeders’ Cup, Churchill Downs sponsored hospitality and promotional functions, including a gala event, a brunch tied to race-related activities, a press hospitality tent offering refreshments, and a winner’s party.
- Attendees primarily included horsemen, sponsors, racing officials, VIPs, media personnel, and Churchill Downs employees.
- Some Breeders’ Cup-related functions were required by contract with the Breeders’ Cup organization.
- For tax years 1994 and 1995, Churchill Downs deducted 100% of the food and entertainment costs associated with these functions as ordinary and necessary business expenses under I.R.C. § 162.
- The Commissioner determined the costs were “entertainment” expenses subject to the 50% deduction limitation under I.R.C. § 274(n)(1) and issued deficiency notices.
- The dispute was presented to the Tax Court largely on stipulated facts, focusing on whether § 274(n)(1) limited otherwise deductible expenses.

## Issues

1. Whether expenses for Derby- and Breeders’ Cup-related hospitality events (e.g., parties, brunches, and a press tent with refreshments) constituted “entertainment” expenses within the meaning of I.R.C. § 274.
2. If the expenses were otherwise deductible under I.R.C. § 162, whether I.R.C. § 274(n)(1) limited the allowable deduction to 50% despite the events’ promotional purpose and, in some instances, contractual requirement.

## Decision

- The Tax Court held the disputed hospitality and promotional event costs were “entertainment” expenses for purposes of I.R.C. § 274.
- The court concluded that I.R.C. § 274(n)(1) limited the deduction to 50% of the amounts otherwise allowable.
- The court sustained the Commissioner’s deficiency determination to the extent based on applying the 50% limitation.

## Legal Principles

- I.R.C. § 162 allows deductions for ordinary and necessary business expenses, but I.R.C. § 274 imposes specific limitations on certain categories of expenses, including entertainment.
- Under I.R.C. § 274(n)(1) (as applicable to the years at issue), only 50% of an otherwise allowable deduction for “any expense for entertainment” is permitted.
- The classification of a cost as “entertainment” turns on the nature of the activity and what is provided (e.g., food, beverages, social functions, hospitality), not solely on the taxpayer’s asserted business or promotional purpose.
- A promotional or goodwill-generating objective does not remove hospitality and social-function expenditures from § 274’s entertainment limitation.
- Contractual obligations and industry practice may support that an expense is ordinary and necessary under § 162, but they do not override § 274(n)(1)’s specific limitation if the expense is entertainment.

## Conclusion

The Tax Court treated Churchill Downs’ Derby and Breeders’ Cup hospitality functions as entertainment expenses and applied the statutory 50% limitation, holding that promotional value and contractual requirements did not exempt the costs from I.R.C. § 274(n)(1).


Churchill Downs, Inc. v. Commissioner, 115 T.C. 279 (2000)