If an activity does not generate a profit in three out of five consecutive years, is it automatically deemed to be a hobby? Why or why not?

A. No, it is not automatically deemed a hobby. The other factors mentioned in the Regulations can be relied upon to determine that the activity is, in fact, a business. The burden to prove it is not a hobby is generally on the taxpayer. However, meeting the three out of five year test shifts the burden of proof to the IRS.

B. Yes, it is automatically deemed a hobby. The Regulations state that to be deemed a profit motivated business, the business must generate a profit for five consecutive years.

C. Yes, it is automatically deemed a hobby. The Regulations state that to be deemed a profit motivated business the IRS has the authority to determine whether an activity is profit-motivated in at least three out of five years.

D. No, it is not automatically deemed a hobby. The other factors mentioned in the Regulations can be relied upon to determine that the activity is, in fact, a business. The burden to prove it is not a hobby is generally on the IRS. However, meeting the three out of five year test shifts the burden of proof to the taxpayer.