IRS Commissioner


Wouldn’t it be nice if the horse industry had an advocate in the White House?  Ann Romney, horsewoman, could be just such an advocate as First Lady.  Her horse competed in the Olympic event of dressage, and she has long been an advocate for the use of horses for physical therapy. . The President has substantial power to implement policy within the IRS, and the IRS is the enforcer of tax laws.  The IRS Commissioner is appointed by the President, with the consent of the Senate, for a five-year term.  The Commissioner administers, manages, enforces, and supervises the application of IRS laws and related statutes.  The term of the present IRS Commissioner, Douglas Schulman, expires in November, and a new appointee will be named by the President, subject to Senate confirmation.

Section 183 of the IRS Code pertains to activities “not engaged in for profit.”  This provision is used to disallow deductions for horse owners and all other farming-ranching activities as well as other ventures ranging from multi-level marketing to air charters.  How this provision is applied and interpreted is something that the IRS Commissioner can and does influence.

The recent trend in audits has been to regard horse activities as hobbies.  A document relied on by auditors, referred to as the Market Segment Specialization Audit Technique Program Guide (“MSSP”), encourages auditors to presume that taxpayers in the horse industry are motivated by personal pleasure and recreation.  

The document directs auditors to inquire about business plans:  “The taxpayer should have a formal written plan.  This plan should demonstrate the taxpayer’s financial and economic forecast for the activity.  The plan should show a short range and long range forecast for the activity.  The forecast should allow for changes due to potential unforeseen and fortuitous circumstances.”  Auditors are asked to be on alert for “canned” business plan documents.

The IRS document also advises revenue agents to be on alert for bogus appraisals that show how improvements such as barns, arenas, pastures, fencing, breeding sheds, stalls, storage facilities, and landscaping help to increase the value of the taxpayer’s farmland.

Revenue agents are also advised to challenge the taxpayer’s “material participation” in the horse activity.  Under this legal test, you are permitted to deduct losses relating to a horse partnership against your other income only if, among other things, you “materially participate” in the activity.  This is often a difficult standard to meet if professional trainers and other managers are hired to attend to important details such as training and development.

The IRS has a reputation for indifferent customer service, long wait times on calls, and abuse towards taxpayers who are supposed to be served.  In situations where taxpayers have a history of losses, revenue agents tend to view business records of such taxpayers with heightened scrutiny.  It is important is to keep hard copies of all evidence that shows your manner of keeping records and that might reflect your business motives.  For example, keep originals of magazine advertisement (including the entire magazines in which they appear).  If you update written business plans, it is important to retain the earlier versions (all of which should be dated) rather than superseding them in a computer generated update.  With respect to payment to vendors and trainers, it is often the case in the horse industry that some vendors and trainers do not issue formal invoices, but you should always insist on obtaining invoices from trainers and other personnel and vendors, and keep them as part of your permanent records.

You should maintain a dated customer list consisting of persons who have contacted you regarding horse sales.  It is helpful to also keep dated memoranda of telephone conversations to memorialize phone conversations with potential customers.  All sales of horses, leases, breeding agreements, and other contracts should always be in writing.  All contracts should be completely filled out with the parties’ names and the name of the horses, and the date of the contract.  You should keep signed and dated copies of all such documents rather than keeping computer generated forms of them.

Audits are the “lifeblood” of collecting additional revenue for the U.S. Treasury, but IRS philosophy has, for many years, made it difficult for taxpayers to defend themselves.  In the event you are audited by the IRS you should seek legal advice at the earliest stage and work with legal counsel and your accountant to convince the IRS of your intentions.

Audits are always a difficult experience for taxpayers.  Changes in IRS policy depend on who the next IRS Commissioner will be, and in turn who the next President will be.

John Alan Cohan is a lawyer who has served the horse, livestock and farming industries since l98l.  He serves clients in all 50 states, and can be reached by telephone at (3l0) 278-0203 or via e-mail at This e-mail address is being protected from spambots. You need JavaScript enabled to view it , or visit his website at

Share This Page!

Join Our Email List