## Facts

- Fred Misko, Jr. was an experienced trial lawyer. He practiced law through his professional corporation in Dallas, Texas; his spouse was a co-petitioner only because they filed joint returns.
- Misko purchased expensive video and related equipment used to create video presentations for use at trial.
- The equipment was used solely in connection with Misko’s law practice; he derived no personal pleasure or recreational benefit from owning or using it.
- Misko also taught other lawyers how to use video presentations effectively in trials.
- On his accountant’s advice, Misko structured the arrangement so that he personally owned the equipment and leased it to his law practice, receiving rental payments.
- Misko maintained records relating to the activity, including amounts invested in the equipment and rent received.
- On their 1998 and 1999 federal income tax returns, the petitioners claimed depreciation and related deductions associated with the video-equipment leasing activity.
- The Commissioner issued a notice of deficiency for 1998 and 1999, disallowing the claimed deductions on the ground that Misko was not engaged in the equipment-leasing activity for profit within the meaning of I.R.C. § 183.
- The petitioners challenged the deficiencies in the United States Tax Court.

## Issues

1. Whether Misko’s leasing of video equipment to his law practice was an activity engaged in for profit under I.R.C. § 183.
2. If the activity was engaged in for profit, whether the petitioners were entitled to depreciation and related deductions claimed for 1998 and 1999.

## Decision

- The court held that Misko engaged in the video-equipment leasing activity with an actual and honest objective of making an economic profit, so § 183 did not limit the deductions.
- The court allowed the depreciation and related deductions tied to the leasing activity for 1998 and 1999 to the extent consistent with its findings, and the deficiencies were to be recomputed accordingly.

## Legal Principles

- Under I.R.C. § 183, deductions attributable to an activity are limited if the activity is not engaged in for profit; the controlling inquiry is whether the taxpayer had an actual and honest objective to make a profit.
- Profit objective is determined from all facts and circumstances, commonly evaluated using the nonexclusive factors in Treas. Reg. § 1.183-2(b); no single factor is determinative.
- In the Fifth Circuit (the expected appellate venue), the taxpayer must show the activity was pursued with the primary purpose of making an economic profit independent of tax savings.
- Conducting the activity in a businesslike manner—such as keeping records that track investment, receipts, and results—and seeking and following professional advice are factors that support a finding of a profit objective.
- A lack of personal or recreational elements in the activity supports treatment as profit-motivated rather than a hobby, even if the activity produces losses in early years.

## Conclusion

The Tax Court concluded that Fred Misko’s ownership and leasing of trial-related video equipment to his law practice was carried on with a genuine profit objective under § 183, so the IRS could not deny depreciation and related deductions for 1998 and 1999 on the theory that the activity lacked a profit motive.


Misko v. Commissioner, 90 T.C.M. 15 (2005)