breeder cup tickets

Churchill Downs v. Commissioner
Facts: Churchill Downs owns and operates the Churchill Downs race track in Louisville, Kentucky and three other race tracks. Revenues are earned from wagering, admissions and seating charges, concession commissions, sponsorship revenues, licensing rights, and broadcast fees.[3] The biggest race held at Churchill Downs is the Kentucky Derby held the first Saturday in May. In connection with the race the track hosts the following events: 1) a "Sport of Kings" gala, 2) a brunch following the post position drawing for the race, 3) a week-long hospitality tent offering coffee, juice, and donuts to the press, and 4) the Kentucky Derby Winner’s Party. In 1994 and 1995 Churchill Downs spent $131,875 and $93,374 in connection with these events, respectively. In 1994, Churchill Downs further agreed to host the Breeder’s Cup and paid $131,875 for similar events in connection with the race. Churchill Downs deducted the full amount of these Kentucky Derby and Breeders’ Cup expenses on its 1994 and 1995 federal income tax returns as “ordinary and necessary business expenses” pursuant to 26 USC §162(a).[1] The Commissioner of the IRS, in a notice of tax deficiency, rejected this treatment and concluded that Churchill Downs was entitled to deduct only 50% of the claimed expenses. The Tax Court agreed with the Commissioner and Churchill Downs appeals.
Issue: Is Churchill Downs entitled to a full deduction under §162 for expenses related to the Kentucky Derby and Breeder’s Cup as “ordinary and necessary business expenses" or do the expenses qualify as entertainment under §274(n)(1)?”
Holding: The disputed expenses qualify as “entertainment” under §274(n)(1) of the IRC. Under the objective standard of §1.274-2(b)(1)(ii) of the Tax Regulations, the disputed expenses are considered entertainment. An item generally considered to be entertainment is subject to the 50% limitation even where it may be otherwise characterized as an advertising or public relations expense.
Rationale: While the expenses in dispute qualify as “ordinary and necessary” business expenses “directly related” to the “active conduct” of Churchill Downs’ business, §274(n)(1) limits deductions as items associated with activity generally considered entertainment.[8] Exceptions under §274(e) of the IRC do not exempt these expenses as available to the public or entertainment sold to customers. These events were not offered to the public at large, were invitation only and no tickets were sold to these events but were complimentary to dignitaries, press, and celebrities in order to advertise the upcoming races.