At the end of last year, a U.S. Tax Court examined a case where a couple had claimed business losses in their horse breeding activities. The IRS challenged the couple's claim that the horse breeding activities were a for-profit operation. Their company, American Paint Horse, had not generated a profit in ten years of operation.
The court's finding in the tax litigation was that the horse breeding was for profit, and found that the couple was not subject to accuracy penalties that the IRS had sought.
The petitioner demonstrated to the court that they were very knowledgeable on the business of horse breeding. They purchased a mare who produced a foal of high quality that the business was depending on for future revenue.
This male horse, "Special," was cared for at great expense when he was injured. On the other hand, a less valuable foal that was injured was put down because the cost of care outweighed the horse's value. These factors indicated to the court that the breeding operation was run as a for-profit business.
The breeders were intending their horse-breeding business to provide retirement income.
The court had to decide if the horse breeding activity was engaged in with an honest profit motive, even if the objective is unrealistic. The nine factors the court looked at were:
1. The manner of carrying out the activity
2. The expertise of the taxpayer or their advisers
3. Time and effort put into the activity
4. The expectation that the assets' value would increase
5. The success the taxpayer has had in similar activities
6. The history of income or loss from the activity
7. The amount of profits, if any
8. The financial status of the taxpayer
9. What elements of personal recreation were involved
Orange County tax attorneys who read the court's opinion saw that some of the factors were in the horse breeders' favor and some not, but looking at the circumstances overall, the court concluded that the business was conducted for profit, and that therefore the business losses could be claimed.
Source: U.S. Tax Court "Frimml, T.C. Summary Opinion 2010-176" 12/28/2010