Tag: Regulation

Industrial Growth Zones Created

The City of Chicago and Cook County recently announced the creation of an “Industrial Growth Zone” initiative in order to encourage industrial development in seven designated Chicagoland neighborhoods.  These neighborhoods are principally located in existing industrial areas on the south and west sides of the City.  The program is intended to incentivize industrial development in these neighborhoods by removing barriers to further development and by providing services to support property owners and industrial developers in their development efforts.  Specifically, the services to be provided are aimed at two primary impediments to development: evaluation and remediation of environmental conditions and maneuvering complex governmental regulations.

Much of the land located within the Industrial Growth Zone program has been previously developed and used for industrial purposes.  Accordingly, to redevelop these properties, a developer will first need to conduct a Phase I environmental site assessment and, depending on the identification of recognized environmental conditions, to perform some level of environmental remediation.  This can constitute a significant barrier to development as the cost to conduct the required testing and the possible costs associated with remediating hazardous environmental conditions may be substantial both in terms of costs and delays in commencing construction.  The Industrial Growth Zone initiative will provide qualified developers up to $130,000 of financial assistance for environmental evaluation and remediation efforts.  Specifically, developers may be eligible for $5,000 to update an existing Phase I environmental report and up to $25,000 to conduct a Phase II report.  Additional funds in the amount of $100,000 may be available to remediate environmental conditions.

Additionally, the initiative will establish a “concierge” program.  The concierge will serve as a single point of contact for providing assistance to developers in conducting site evaluation and working their way through voluminous and complex layers of governmental regulations and requirements.  The concierge will assist in making available a broad range of site data and documentation required in connection with the development of properties.  This data includes, among other things, zoning maps, aerial photos, surveys, ownership and real estate tax history, analysis of utility availability, flood plain classification, and providing information regarding the presence of wetlands and endangered species.  Having access to this information at the early stages of the development process will save a developer time and effort in conducting its due diligence, evaluating the suitability of a property for development, and commencing the process of obtaining required governmental approvals.

For further information regarding Industrial Growth Zones, real estate development and related issues, please contact:

Jeffrey M. Galkin at:

jgalkin@lgattorneys.com or 312-368-0100.

Is It a Hobby or a Business and What Does the IRS Think?

A taxpayer may deduct “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.” But if the activity giving rise to the expenses “is not engaged in for profit,” these activities are not considered a “trade or business” and are commonly referred to as “hobbies”. Hobby expenses may only be deducted from hobby profits and not from any other income that the taxpayer may have.

In 2014 the Tax Court held that a taxpayer had deducted the expenses of his horse-racing enterprise on his federal income tax returns for 2005 and 2006 erroneously because the enterprise was a hobby rather than a business. The court assessed tax deficiencies.  But it also ruled that the business had ceased to be a hobby, and had become a bona fide business, in 2007. He challenged the assessments for 2005 and 2006.

The Tax Court’s ruling that the horse-racing enterprise was a hobby in 2005 and 2006 but became a business in 2007 and remained so in 2008, and every year thereafter (the IRS failed to challenge any deductions for any year after 2008) was held by the Seventh Circuit Court of Appeals to be “untenable; it amounts to saying that a business’s start-up costs are not deductible business expenses-that every business starts as a hobby and becomes a business only when it achieves a certain level of profitability.”

The Seventh Circuit then cited what it felt to be a “goofy regulation” (Treas.Reg. § 1.183-2) and addressed the various factors used to determine whether an activity is engaged in for profit:

(1)  Manner in which the taxpayer carries on the activity.
(2)  The expertise of the taxpayer or his advisors.
(3)  The time and effort expended by the taxpayer in carrying on the activity.
(4)  Expectation that assets used in activity may appreciate in value.
(5)  The success of the taxpayer in carrying on other similar or dissimilar activities.
(6)  The taxpayer’s history of income or losses with respect to the activity.
(7)  The amount of occasional profits, if any, which are earned.
(8)  The financial status of the taxpayer.
(9)  Elements of personal pleasure or recreation.

The Court went on to note, “a business will not be turned into a hobby merely because the owner finds it pleasurable; suffering has never been made a prerequisite to deductibility. Success in business is largely obtained by pleasurable interest therein.”

This case recognizes that every start-up business is not a hobby just because there is no profit at the beginning. Here that Tax Court seemed to take the position that the taxpayer started in the horse racing business as a hobby and then turned it into a business. The Appellate Court rejected this and held for the taxpayer.

If you have any questions regarding start-up businesses, please contact:

Morris R. Saunders at:

(312) 368-0100 or msaunders@lgattorneys.com

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