Professional Tax Research Solutions from the Founder of Kleinrock. tax research
Parker Tax Pro Library
Accounting News Expert Tax Analysts professional tax research software Like us on Facebook Follow us on Twitter View our profile on LinkedIn Find us on Pinterest
CPA software
Professional Tax Software
tax and accounting
Tax Research Articles Tax Research Parker's Tax Research Articles Accounting Research CPA Client Letters Tax Research Software Client Testimonials Tax Research Software tax research


Accounting Software for Accountants, CPA, Bookeepers, and Enrolled Agents

CPA Tax Software

        

 

Horse Owner Materially Participated in Horse Breeding and Racing Operation.
(Parker Tax Publishing April 25, 2014)

Because an attorney/racehorse owner established through corroborating evidence that he materially participated in his operation of a thoroughbred horse breeding and racing activity, the activity was not a passive activity, and he could deduct losses from the thoroughbred activity for each of the years in issue. Tolin v. Comm'r, T.C. Memo. 2014-65 (4/9/14).

Stefan Tolin was an attorney who maintained a general solo law practice. He became involved in thoroughbred horse breeding and racing in 1990 when he bought his first racehorse. In 2002, after doing research and contacting a thoroughbred consultant, Stefan decided to move his racehorse breeding operation to Louisiana, which had a number of laws that favored in-state ownership, breeding, and racing of thoroughbred horses. He contacted the Louisiana Thoroughbred Breeders Association (LTBA), which was involved in coordinating and developing the state's thoroughbred horse industry. Stefan entered into an arrangement with Sebastien Farms to board his stallion and three mares. Stefan also hired Bud Thibodaux, an experienced bloodstock agent, to provide assistance in marketing his stallion's breeding services.

To promote his breeding operation, Stefan personally contacted by telephone and in person a number of breeders in Louisiana and other states to interest them in choosing his stallion. He frequently consulted with the Sebastien Farms owner, Thibodaux, and LTBA officials regarding breeders who might be interested in his stallion. Stefan also mailed out promotional breeding packages with personalized letters to interested breeders and placed full-page print advertisements in horse breeding publications. Although the breeding took place at Sebastien Farms, Stefan monitored the activities through daily telephone conversations with the Sebastien Farms operators. In addition, Stefan performed the administrative and financial tasks related to the thoroughbred activity and directed the horse training and sales process.

Stefan filed his federal income tax returns for 2002, 2003, and 2004, and attached Schedules C, Profit or Loss From Business, for each year. He claimed deductions for advertising, board, insurance, nomination and registration fees, veterinary expenses, and travel. He also claimed losses from the thoroughbred activity for all three years. The IRS issued a deficiency notice disallowing the claimed losses as passive activity losses. Stefan took his case to the Tax Court.

OBSERVATION: The IRS challenged Stefan's loss deductions solely on the basis of the passive activity loss rules, apparently conceding that Stefan operated the thoroughbred activity with a profit motive. In many cases involving thoroughbred activities, the IRS challenges loss deductions under the Code Sec. 183 hobby-loss rules.

Code Sec. 469 disallows the passive activity loss of an individual taxpayer. A passive activity is generally the conduct of any trade or business in which the taxpayer does not materially participate. Under Reg. Sec. 1.469-5T, a taxpayer can meet the material participation requirement in a given year by satisfying one of several tests, including participation in the activity for more than 500 hours during the year.

Stefan contended that he participated in the thoroughbred activity for over 860 hours for each of the three years in issue. The IRS argued that Stefan's estimates of his time spent on the thoroughbred activity were unreliable and that a substantial amount of time was undertaken in his capacity of an investor.

The Tax Court held that Stefan presented sufficient corroborating evidence that he performed more than 500 hours of qualifying work done in connection with the thoroughbred activity in each of the three years in issue and should be treated as materially participating in the activity for each of those years. Stefan introduced as evidence a narrative summary describing the tasks he performed in connection with the thoroughbred activity and estimating the time he spent performing such tasks for each of the years at issue. He also introduced telephone records, credit card invoices, and other contemporaneous records of the work he performed in connection with the thoroughbred activity, along with a significant amount of credible third-party witness testimony and other objective evidence that gave an accurate depiction of his thoroughbred activity.

The court noted that Stefan was eager to learn about, and become personally involved in, thoroughbred breeding; he considered stallion promotion to be critical to the success of his thoroughbred activity; and enjoyed the activity and was determined to make it successful. The hours that he claimed he devoted to the activity were corroborated by telephone records and third-party witness testimony that was credible and reasonable. Moreover, Stefan's trips to Louisiana were devoted to his thoroughbred activity and did not have any recreational purpose.

In rejecting the IRS's argument that a great deal of the work Stefan performed was in his capacity as an investor, the court stated that Stefan was directly involved in the daily management and operations of the thoroughbred activity, and any "investor" work qualified as participation. Because Stefan materially participated in the thoroughbred activity, it was not a passive activity and Stefan was not prohibited from claiming loss deductions for the activity for any of the years in issue.

For a discussion of the passive activity loss rules, see Parker Tax ¶247,100. (Staff Editor Parker Tax Publishing)

Parker's Tax Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com


Professional tax research

We hope you find our professional tax research articles comprehensive and informative. Parker Tax Pro Library gives you unlimited online access all of our past Biweekly Tax Bulletins, 22 volumes of expert analysis, 250 Client Letters, Bob Jennings Practice Aids, time saving election statements and our comprehensive, fully updated primary source library.

Parker Tax Research

Try Our Easy, Powerful Search Engine

A Professional Tax Research Solution that gives you instant access to 22 volumes of expert analysis and 185,000 authoritative source documents. But having access won’t help if you can’t quickly and easily find the materials that answer your questions. That’s where Parker’s search engine – and it’s uncanny knack for finding the right documents – comes into play

Things that take half a dozen steps in other products take two steps in ours. Search results come up instantly and browsing them is a cinch. So is linking from Parker’s analysis to practice aids and cited primary source documents. Parker’s powerful, user-friendly search engine ensures that you quickly find what you need every time you visit Our Tax Research Library.

Parker Tax Research Library

Dear Tax Professional,

My name is James Levey, and a few years back I founded a company named Kleinrock Publishing. I started Kleinrock out of frustration with the prohibitively high prices and difficult search engines of BNA, CCH, and RIA tax research products ... kind of reminiscent of the situation practitioners face today.

Now that Kleinrock has disappeared into CCH, prices are soaring again and ease-of-use has fallen by the wayside. The needs of smaller firms and sole practitioners are simply not being met.

To address the problem, I’ve partnered with a group of highly talented tax writers to create Parker Tax Publishing ... a company dedicated to the idea that comprehensive, authoritative tax information service can be both easy-to-use and highly affordable.

Our product, the Parker Tax Pro Library, is breathtaking in its scope. Check out the contents listing to the left to get a sense of all the valuable material you'll have access to when you subscribe.

Or better yet, take a minute to sign yourself up for a free trial, so you can experience first-hand just how easy it is to get results with the Pro Library!

Sincerely,

James Levey

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com

    ®2012-2017 Parker Tax Publishing. Use of content subject to Website Terms and Conditions.

IRS Codes and Regs
Tax Court Cases IRS guidance