Equine Tax Law

Taxpayers Successful in New Tax Court Case

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A new Tax Court case, Blackwell v. Commissioner IRS [T.C. Memo 2011-188] involved taxpayers who were reasonably well qualified to engage in a horse breeding activity, and who convinced the court that they had the opportunity or the potential to earn a profit in their venture.

Mark Blackwell prepared a detailed business plan relating to the purchase, breeding, training, showing, and sale of reining horses. The plan projected a profit after the third year, but they in fact never generated a profit.  The taxpayers maintained what the court called “reasonably good” books and records of income and expenses relating to their activity. .

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Tax Issue of Appreciation in Value of Farm Property

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Under the IRS hobby loss rule if you have losses in connection with any farming activity, horses, livestock or crops, the IRS may suspect that the activity is engaged in as a hobby rather than a business, particularly is there is a history of losses.

One of the elements in the IRS hobby loss rule is called “Expectation That Assets Will Appreciate in Value.”  The leading case on this point is Engdahl v. IRS. The taxpayer’s horse farm appreciated from $83,l46 to $225,000 over a several-year period.  The Tax Court held that this in itself was indicative of a profit motive.  There are many similar rulings in Tax Court cases.

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Advertising and Promotional Expenses

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Advertising and Promotional Expenses
By John Alan Cohan, Attorney at Law

In the horse industry, as in other sports such as car racing and Olympics sports, people will pay to have their business name advertised in connection with certain events.  For example, people will establish a new “classic” event, or “cup” to be an annual sporting event for a given sport.  There are many horse show events and races that are “funded” by business, individuals or companies that use this venue as a form of advertising. .

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New tax court case rules against horse owner

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A new Tax Court case ruled against a taxpayer with horses of impressive bloodlines, which she expected to sell for somewhere in the six figure amount.  In the case, Betts v. Commissioner, T.C. Memo 2010-164, the judge made a number of points that I am outlining below.  The taxpayer had been audited for earlier years with no changes, but did not have any luck in her second audit.

The U.S. Tax Court is a Federal court for taxpayers to adjudicate the validity of IRS tax deficiencies.  The judges are appointed for life by the President, and some of the judges are more (or less) sympathetic to the horse and livestock industries than others. .

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Farming Records and the IRS

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The accuracy and businesslike nature of records is something that the IRS has been scrutinizing more and more in recent years.  The IRS expects all taxpayers to maintain canceled checks, invoices, credit card statements and similar items needed to substantiate amounts claimed as business deductions and to help prepare one’s tax returns. 

In addition, people in the farming, ranching and horse industries are expected to maintain a variety of day-to-day business records to show the businesslike nature of their activities--in order to withstand scrutiny under the IRS hobby loss rule. The IRS will take the position that if you have a significant history of losses, you are not engaged in a trade or business, and that you are simply taking business deductions to reduce your taxable income from other sources. .

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