11/2/2023 0 Comments Irs hobby farm definitionThe court went on to say that the intention of the taxpayer at the outset is the dominant factor in determining whether the taxpayer engaged in the venture for profit or merely for pleasure. 103 f2d 65 (Texas, 1939), the court held that, as in the case of other activities, the determination of whether a breeding stable is a business or a hobby is the intention to derive income therefrom, the expectation of a profit. All of these businesses involve a substantial risk factor and frequently occasion periods of continued losses. ![]() The existence of substantial financial risk in the conduct of such business does not necessarily convert it into a hobby any more than in the case of any other adventurous business such as oil drilling or stock trading. While horse breeding is indeed a hobby for some, it can nevertheless constitute a business for other taxpayers. The operation of a stable and breeding farm is in essence a risky business frequently generating consecutive loss years, and has given rise to considerable tax litigation over the years. Expenses represent actual cash outlays or expenses incurred during the tax year. ![]() Expenses were incurred in the conduct of business engaged in for profit.Losses were the result of the excess of “ordinary and necessary” expenses over revenues.My client was in compliance with all relevant internal revenue code sections and income tax regulations in all material respects, to wit: During the one year that he made profit he reported this profit to the government and paid the appropriate tax.Books of account are maintained on the horse operations.He employed professional horsemen and a veterinarian.He personally worked on the upkeep and maintenance of the stables.Client lived in close proximity to his stables. ![]() We forcefully and vigorously argued that he met all the tests and criteria mandated by the federal courts in the several circuits of the United States with regard to being “engaged in trade or business for gain or profit” and not engaged in a “hobby.” Specifically: We successfully argued that in the matter of losses deducted on the federal income tax returns pertaining to the operation of a horse farm, that he was in compliance with statutory law and case law. Expenses incurred in the operation of the stables include the ordinary and necessary expenses of veterinarian services services of professional trainer feed repair and maintenance of stables insurance property taxes and transportation for the horses. Tax losses in prior year audits had never been questioned or disallowed. My client attends to his stables on a daily basis and devotes his weekends almost exclusively to the care of the horses and stables. He is actively engaged in the care and maintenance of the horses, barns and stables. He devotes 20-25 hours a week to the work and business affairs of his stables. There is a separate checking account just for the horse operation. Financial books and records of the horse operation are maintained apart from the clients other financial activities. The client employs hired help at the stables and regularly consults with veterinarians, at considerable expense. ![]() My client is a lawyer who makes his home on his horse farm in Georgia and does indeed earn his living as a lawyer. I took strong issue with the government’s position and appealed the auditor’s decision. The greatest evidence that it was a hobby, said the auditor, was the fact that it had not turned a profit in recent years. The IRS argued that my client being a wealthy lawyer, was not engaged in the horse farm business as it was not his primary occupation, and that he was merely a “gentleman farmer” engaging in a “hobby” that gave him great personal pleasure. The IRS audited his return and declared his horse farm to be a “hobby” rather than a business and disallowed his farm losses. Several years ago I had a client who entered into the business of breeding horses for the purpose of sale at a profit.
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