## Facts

- Churchill Downs, Inc. owned and operated multiple racetracks, generating revenue from wagering, admissions, concessions, sponsorships, licensing, and broadcast fees.
- To support marquee races, it hosted invitation-only events for dignitaries, industry participants, and media; tickets were not sold and the events were not open to the public.
- Kentucky Derby-related events included: (1) “Sport of Kings” gala (press reception/cocktail party, dinner, and entertainment), (2) a brunch after post-position drawing, (3) a week-long press hospitality tent providing refreshments, and (4) the Kentucky Derby Winner’s Party.
- Disputed Derby-related expenditures included: 1994 (gala $114,375; winner’s party $17,500; total $131,875) and 1995 (gala $85,571; hospitality tent $7,803; total $93,374).
- In 1994, Churchill Downs contracted to host the Breeders’ Cup and agreed to stage promotional events intended to increase the races’ national and international significance.
- The Commissioner agreed the expenditures were ordinary and necessary business expenses under I.R.C. § 162(a), but treated them as “entertainment” subject to the 50% deduction limit in I.R.C. § 274(n)(1)(B).
- The Tax Court held the challenged amounts were entertainment expenses subject to the 50% limitation; Churchill Downs appealed.

## Issues

1. Whether the challenged expenditures for Derby- and Breeders’ Cup-related social functions were “entertainment” under I.R.C. § 274 and Treas. Reg. § 1.274-2(b)(1)(ii), limiting deductibility to 50% under I.R.C. § 274(n)(1)(B).
2. Whether Treas. Reg. § 1.274-2(b)(1)(ii)’s broad, activity-based definition of “entertainment” is a valid interpretation of I.R.C. § 274 as applied to promotional or advertising-related events.

## Decision

- The Sixth Circuit affirmed the Tax Court.
- The court held the events were “entertainment” within the meaning of I.R.C. § 274 as interpreted by Treas. Reg. § 1.274-2(b)(1)(ii).
- Churchill Downs could deduct only 50% of the qualifying entertainment expenses under I.R.C. § 274(n)(1)(B), even if the events also served advertising or public relations objectives.
- The court upheld the validity and reasonableness of Treas. Reg. § 1.274-2(b)(1)(ii) and deferred to its activity-focused approach.

## Legal Principles

- I.R.C. § 162(a) allows deductions for ordinary and necessary business expenses, but I.R.C. § 274 limits deductions for “entertainment, amusement, or recreation” expenses.
- Under I.R.C. § 274(n)(1)(B), entertainment expenses otherwise deductible are generally limited to 50%.
- Treas. Reg. § 1.274-2(b)(1)(ii) defines “entertainment” broadly by the objective nature of the activity and whether it is generally considered entertainment, rather than by the taxpayer’s asserted business motive.
- There is no categorical exception from § 274’s limitation for expenditures described as advertising, promotion, or public relations; mixed-purpose events remain subject to § 274 if they are entertainment in nature.
- Courts will defer to a reasonable Treasury regulation interpreting statutory ambiguity in the Internal Revenue Code.

## Conclusion

The Sixth Circuit treated Churchill Downs’ invitation-only Derby- and Breeders’ Cup-related galas, parties, and press hospitality as entertainment under § 274, enforcing the 50% deduction cap despite the company’s promotional rationale and sustaining Treasury’s activity-based regulatory definition of entertainment.


Churchill Downs, Inc. v. Commissioner, 307 F.3d 423 (6th Cir. 2002)