Mr. Smith is a successful anesthesiologist in his late 50s. He owns his own practice, and works at the hospital in town 3 days per
week. Last year, Mr. Smith decided to start a car and struck restoration activity. His decision to start the restoration activity was
influenced by two factors. The first factor was the chip shortage due to shipping disruptions worldwide that caused a shortage of new
vehicles. Mr. Smith believed this would cause people to be more creative in their quest to find vehicles, and more accepting of older
vehicles. The second factor was Mr. Smith’s background. His father was a mechanic. He grew up learning how to work on cars and do
other things such as metal work and welding. While in medical school, he studied audio engineering and applications to integrated
circuitry which is helpful in working on electronic ignitions. Mr. Smith’s restoration work was performed on land owned by his father,
which is about a 5-hour drive from his home. Mr. Smith put the building utilized by the restoration activity up as collateral against rent
so that if the restoration activity failed the building went to his father. He paid his father no rent for the land. In the restoration activity,
Mr. Smith not only worked on cars that he owned but he also worked on cars owned by others. The amount of time he spent working in
the restoration activity varied from month to month. During a typical month he would spend approximately 3 weekends or possibly a
week and a weekend working in the restoration activity. A weekend of working in the restoration activity for him usually included work
on Friday, Saturday, and Sunday. On Sunday he would attend church with his parents. This year, he purchased an Audi and a Jeep for
use in the restoration activity. During certain periods, he employed workers to assist in the restoration activity. He reported the income
and expenses from the restoration activity on Schedule C (Profit or (Loss) From Business or Profession) of his income tax returns. For
the two years in business, he reported losses from the restoration activity, with occasional amounts of profit from vehicle sales. Mr.
Smith has just learned that his return has been selected for audit due to his schedule C activity. Petitioner is concerned, and comes to
you to find the issues the IRS might be considering, and the result you foresee from this audit.
Sample Solution
