Tax Court allows §183 business deductions for software venture
James D. Sullivan v. Commissioner. U.S. Tax Court. No. 15625-22. T.C. Memo. 2026-13.
The Tax Court treated SelfChanger software work as a real profit-seeking venture, treated most Lincolnville land-development work as profit-motivated, and treated the “Leaf-Cutter” mulching Schedule C as a non-profit hobby loss.
Holding
The Court held that the Sullivans engaged in Traders Abacus’s software development activity for profit under §183 for 2017–2019. The Court also held they engaged in Traders Abacus’s home construction and land development activity for profit only as to the 47.71-acre parcel, not the 3.89-acre parcel. The Court held they did not engage in the Leaf-Cutter mulching activity for profit in 2019. The Court allowed deductions to the extent later substantiated, and it allocated 75% of home construction expenses to the profit-motivated parcel and 25% to the personal-use parcel.
Why It Matters
§183 profit motive fights often turn on boring facts. Books, records, business plans, and credible pivots still matter more than vibes.
Real estate development can qualify as profit-motivated even with years of losses, mainly where land appreciation drives the profit story.
Personal-use facts can compromise a project. Here, living on one parcel and permit documents aimed at a personal residence pushed that parcel into non-profit territory.
A second Schedule C with big expenses and zero revenue is an audit magnet. If it also lacks time logs and customer evidence, it is usually dead on arrival.
Timeline
1995: Mr. Sullivan forms Traders Abacus as a single-member LLC.
2013–2016: Traders Abacus develops early versions of a pornography addiction therapy app, later called SelfChanger. Development paused in 2016.
2017: SelfChanger development is largely inactive. Sullivans begin scouting Maine land for “passive homes.”
October 2017 to February 2018: Purchase of a Lincolnville, Maine, lot. Two parcels are held in personal ownership and by Traders Abacus.
2018–2019: Mr. Sullivan resumes SelfChanger development. Traders Abacus began paying wages to a helper in 2019. Sullivans' work primarily involves land clearing and road construction.
2019: Ms. Sullivan operates “Leaf-Cutter” mulching effort. No revenue reported. Activity ends after safety incidents.
January 2025: Sullivans sell the 47.71-acre parcel for $565,000.
Key Facts
The IRS issued deficiencies for 2017–2019. The remaining trial issue was profit motive under §183 for three activities: (1) Traders Abacus software development, (2) Traders Abacus home construction and development, and (3) Leaf-Cutter mulching in 2019.
Mr. Sullivan had a long career in cable and advertising technology and earned substantial wages during the years at issue.
Traders Abacus ran multiple projects over time. The relevant software project was SelfChanger, a paid-therapy style application aimed at pornography addiction.
Traders Abacus kept a ledger and separate bank account, but the Sullivans sometimes commingled funds and used personal cards.
The Lincolnville lot totaled about 51.6 acres. The 47.71-acre parcel was personally owned. Traders Abacus owned the 3.89-acre parcel.
The Sullivans moved to the property and lived in tents for years. Permitting and plans for the 3.89-acre parcel described a single-family residence and related structures.
The 47.71-acre parcel ultimately received access roads and the Traders Abacus office site and was later sold for a significant gain.
Leaf-Cutter was not a separate entity. It used Traders Abacus’s tax ID and accounts. The 2019 Leaf-Cutter Schedule C reported significant expenses and no income.
Statutory or Regulatory Framework
§183 limits deductions for activities “not engaged in for profit,” sometimes called the hobby loss rules.
An activity counts as profit-motivated if deductions would otherwise be allowable under §162, which covers ordinary and necessary expenses of carrying on a trade or business, or under §212, which covers expenses for producing income.
Treasury Regulation §1.183-2(b) lists nine nonexclusive factors used to evaluate profit motive. The Court weighs objective facts more than the taxpayer’s stated intent.
Arguments
Taxpayer argued:
SelfChanger was developed and marketed as a bona fide business. It involved research, surveys, hiring help, drafting a business plan, and advertising.
The Lincolnville project aimed to develop “passive homes” and required land work and upfront costs, with the expectation of long-term gain.
Losses reflected startup-stage realities, not a hobby.
Government argued:
The activities produced losses and no meaningful income during the years at issue.
The Lincolnville effort had substantial personal-use components, particularly the parcel used as the Sullivans’ primary residence.
Leaf-Cutter lacked credible evidence of customers, revenue intent, or businesslike operation.
Court’s Reasoning
The Court treated the software development, home construction, and development, and mulching as separate activities because they had minimal economic interrelationship beyond convenience and shared equipment.
The Court found the Sullivans generally credible witnesses. That helped them with close questions. It did not rescue Leaf-Cutter.
Software development profit motive (SelfChanger):
Businesslike conduct supported the profit motive. Mr. Sullivan created a business plan, conducted surveys, hired help, and bought advertising on pornography websites to drive traffic.
Loss control and rational pivots supported the profit motive. He paused development when the technology or business model did not work, simplified the product, and later reduced expenses to keep the app viable.
Time and effort supported the profit motive. He worked approximately 20 to 30 hours per week on the project while holding a demanding full-time job and retained assistance.
Expertise supported the profit motive. He had decades of experience in digital communications and marketing and demonstrated significant self-study and consultation, as well as the use of technical hires.
The weak points were the absence of profits and a long history of losses across multiple software attempts. Those factors favored the IRS. The Court still treated the years at issue as within a reasonable startup phase, given the scale and stop-start development.
Home construction and development profit motive (Lincolnville lot):
The Court split the analysis by parcel.
For the 47.71-acre parcel, objective facts supported a profit motive tied to land appreciation and development. The project required roads and clearing before any housing could exist. The parcel later sold for a large gain, which reinforced the expectation-of-appreciation story.
The Sullivans also showed serious effort. Ms. Sullivan operated equipment nearly daily; the couple hired labor; and they lived in austere conditions while working on the site.
For the 3.89-acre parcel, the Court found personal-use facts and documents indicating a primary residence. The permit and wastewater paperwork described a single-family home, not a commercial development. The Sullivans lived there and treated it as their base.
Those facts moved the 3.89-acre parcel away from a profit-motivated development activity and toward personal living arrangements characterized as a Schedule C.
Leaf-Cutter mulching profit motive:
The Court “readily” rejected the profit motive. The Schedule C showed big expenses and no income.
The account of paid clients lacked documentary evidence.
Ms. Sullivan did not track time. The Court also found her claim of 50 hours per week not credible, given the simultaneous heavy work on the Lincolnville development.
Result: the IRS disallowance of Leaf-Cutter deductions for 2019 stood.
Allocation of home construction expenses:
The Court refused a simple acreage-based allocation because expenses were not incurred proportionally to land area.
The Court also refused to treat the entire project as profit-motivated because the personal-use parcel predominated in the lived facts and documents.
With commingled costs and weak parcel-level records, the Court made a rough allocation. It assigned 25% of home construction expenses to the non-profit-motivated 3.89-acre parcel and 75% to the profit-motivated 47.71-acre parcel. The Court noted that poor recordkeeping weighed against the taxpayers in the allocation.
Result
The Court held that the SelfChanger software activity was for profit during 2017–2019. Lincolnville Development was for-profit only with respect to the 47.71-acre parcel and allowed 75% of related expenses, subject to later substantiation. Leaf-Cutter was not for profit and sustained the disallowance of the 2019 Leaf-Cutter Schedule C deductions. Substantiation and §6662 accuracy-related penalties for 2018–2019 remain for later proceedings if needed.
The Takeaway
The Sullivans won the part that looked and behaved like a business and lost the part that looked like a personal project with a Schedule C stapled to it. If you want §183 to go away, act like you want to make money, keep records that prove it, and do not run a second “business” that somehow has lots of expenses, no customers, no revenue, and no time logs.
List of Citations
§183. Limits deductions for activities not engaged in for profit.
§162(a). Allows deductions for ordinary and necessary trade or business expenses.
§212(1). Allows deductions for expenses incurred for the production or collection of income.
Treas. Reg. §1.183-2(b). Nine-factor framework for determining profit motive.
Welch v. Helvering, 290 U.S. 111 (1933). Presumption of correctness for deficiency determinations.
INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992). Taxpayer burden to show entitlement to deductions.
Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930). Court may estimate expenses, with inexactitude often charged to the taxpayer when records are poor.