Churchill Downs, Inc. v. Commissioner

Churchill Downs, Inc. (CDI) (plaintiff) owned and operated four race tracks. CDI earned revenue from track admissions, concessions, betting, licensing rights, and broadcasting rights. To compete with other sports, entertainment, and gaming operators, CDI paid for invited dignitaries and journalists to attend events before major CDI races like the Kentucky Derby, such as receptions, parties, breakfasts, and dinners. CDI’s events were not open to race-track patrons or the general public, and tickets were not sold at the events. CDI did not expect event guests to attend the races, but CDI hoped that the guests would help CDI promote the races. CDI considered the money spent on its events to be akin to the money that a designer spends on fashion shows to promote the designer’s clothes. CDI deducted the full amount paid for its events as tax-deductible business expenses under § 162(a) of the federal tax code. The commissioner of internal revenue (commissioner) (defendant) determined that, although CDI’s event expenses were business expenditures, the expenses were paying for entertainment activities. The commissioner ruled that CDI could deduct only 50 percent of its expenditures on entertainment, amusement, or recreational activities under § 274(n)(1) of the tax code, as interpreted by its implementing regulation, 26 C.F.R. 1.274-2(b)(1)(ii). CDI petitioned the United States Tax Court for a redetermination. The tax court ruled for the commissioner, and CDI appealed.