In a new case involving Joyce Hastings, an attorney residing in Julian, California, the IRS prevailed in its claim that her horse related activity was not conducted for profit. In the case, Hastings v. IRS [T.C. Memo 2002-3l0], the Tax Court held that the petitioner did not have an actual and honest objective of making a profit in her horse breeding activity. She started the horse related activity in l989 and at the time of the audit she had losses for the years l989 to l995. The tax case involved only a single year, l993. Thus, she was audited for a year that was in the early startup phase of the horse related activity.
The positive facts of the case were that the petitioner had been involved with horses since she was 5 years old, she belongs to ll different organizations related to her horse activity. She maintained a library of books and video tapes concerning training and breeding of horses and related subjects. For several years she visited horse farms and farriers to determine ways to generate income from the horse industry. She started off by breeding a stallion, and determined that she could earn money by selling the stallion's stud services. She hired a well-qualified horse expert to help select her initial purchase. She made various efforts to advertise her horses at shows, in magazines and within various associations. She maintained separate records for each horse, with files containing information regarding pedigrees, picture and information about the sire and dam, medical history, breeding information, medical information, insurance information, and training records. She also maintained a file with forms, lists of horses for sale, health tips, boarding and training information, equipment information, horse-related articles, and association membership. The negative facts were that the petitioner did not prepare any profit projections prior to commencing her horse activity. She did not maintain a separate bank account for her horse activity, but kept bills underlying each check expenditure separately for each horse. Perhaps the most glaring piece of negative evidence was that the petitioner submitted into evidence a written business plan with the date "l993" handwritten on the cover sheet. The Court noted that this plan could not have been established in l993 because in one section it referred to a horse that was not even born until l994. The Court concluded that it was doubtful that the petitioner had any business plan in l993.
Another somewhat negative fact was that the petitioner had a previous Tax Court case, Hastings v. IRS [T.C. Memo l999-l67], in which the Court held that her horse activity was not engaged in for profit. In the new case the Court said that petitioner failed to show that she made any changes during l993 from the manner in which she maintained books and records in the earlier case. The Court also noted that the petitioner made no attempt to cut her overhead or losses by getting rid of unproductive horses or limiting her acquisitions to horses that furthered a profit-making objective. Rather, in l993, she purchased three broodmares and a gelding even though these horses could not produce stud fees, and her stated purpose of being engaged in the activity was to generate income from stud fees.
The Court also found that the petitioner was bereft of expertise in the economics of the horse industry and while she consulted experts on how to generate income from horse activities before she began the activity, she did not claim to have consulted with any economic or financial experts thereafter, even when faced with mounting losses.
In cases of this kind greater weight is given to objective evidence and circumstances than to the taxpayer's mere statement of intent. In the wake of this and other recent Tax Court cases, taxpayers should be aware that even in the early startup phase of horse activities, a clear and objective intention to be engaged in a profit making activity needs to be demonstrated by objective evidence.
John Alan Cohan is a lawyer who has served the horse industry since 1981. He serves clients in all 50 states, and can be reached for an appointment by telephone at (310) 557-9900 or via e-mail at email@example.com.