IRC 183(d) creates a presumption that the taxpayer has a profit motive if the activity was profitable for three of the last five years (two of the last seven years for activities related to horses) ending with the current tax year. Nota bene: the special rule for activities relating to horses.
The government may rebut this presumption. A taxpayer may elect to delay a determination as to whether the presumption applies until after the close of the fourth tax year that follows the first the tax year in which the taxpayer engaged in the activity. If the presumption is found inapplicable, the taxpayer must establish a profit motive in order to avoid application of section 183. The rule is the sixth year for activities related to horses. Wadlow v. Commissioner, 112 T.C. 247, 250-251 (1999).