A recent, major tax court victory was won by attorney Paul Husband in a case that extended the prior limits for length and amounts of losses recognized as deductible as business losses in a profit motivated horse business, setting a valuable new precedent for horse owners!
The case involved the largest and longest losses of any published Section 183 “hobby loss” case, in which the horse owner won for an Arabian show horse operation operating as an S Corporation, which reported losses over 19 years.
Tax Court Judge Mark Holmes meticulously analyzed the nine regulatory factors, finding seven favorable to the taxpayers and two “neutral”, although Judge Holmes correctly pointed out that the test is not a numeric one, but a test of weighing all of the facts and circumstances.
The books and records (using “QuickBooks”) were found adequate to allow the taxpayers’ assessment of the operation’s economic performance and to identify strategies for reducing costs. The horse owners also made important modifications to their business operation, most notably selling their Florida farm and moving the entire operation to California where business conditions were better overall. They had also changed their operations to sell more horses for export to foreign markets.
The Court also found that where investment in a horse operation is substantial compared with a taxpayer’s other income, such a major investment may indicate profit motive. As to the personal pleasure element, the Court said that attendance at horse shows was to be expected from showhorse owners.
Two of most important findings of the Court were: first, cited with approval the precedent of Helmick v. Comm., T.C. Memo. 2009220, that a taxpayer needn't intend to recover all past losses, but must only show that they intended to eventually recoup losses sustained in “intervening years…between the current year and the hoped for profitable future.” In other words, only prospectively. Second, the Court reaffirmed the key concept that it would not substitute the Court’s business judgment for that of the taxpayers even though it may have considered some aspects of the taxpayers’ business judgment to be unwise.
All in all it was a major victory, especially for showhorse owners!
A complete copy of the opinion of U.S. Tax Court Judge Mark V. Holmes can be found at: http://www.ustaxcourt.gov/InOpHistoric/metzmemo.holmes.TCM.WPD.pdf