Federal Court Upholds Horse activity as “Business”
August 4, 2004
By Jim Harnsberger, Sr. Tax Analyst

SAN DIEGO – A United States Tax Court decision, issued in 1998 continues to be the leading authority for horse breeding and horse racing activities related to “business” deductions. This case is important for several reasons, not the least of which are the specific facts of the case and how such activities should be operated to stay within the code.

The case, (Dishal v. Commissioner, T.C. Memo 1998-397) sets out a clear objective standard by which such activities should be conducted if one desires to preserve the tax deductions as a business activity, thus avoiding classification as a “hobby” activity.

The court held that the taxpayer conducted the activity with the “objective” of making a profit within the meaning of Code Section §183. The importance of this distinction is that its focus is upon the “profit motive” objectives that provide the means by which such expenses are business versus hobby related.

Among the numerous findings made by the tax court, a significant element was with the fact that the taxpayers maintained extensive records and kept complete account of their expenses for the activities. Another significant fact determined by the court was that the taxpayers had, and maintained a business plan, and were able to demonstrate by evidence that they employed changes within the operations to improve profitability.

Essentially the tax court went through the “Nine-point” profit motive test and found in favor of the taxpayers as to their intent. It is the opinion of this writer that the court was impressed and swayed by the fact that a well organized business plan and the extensive record-keeping was such that there remained little question that the activity was anything less than a business within the meaning of Section §183. Substantiation requirements (records) and formality of business operations (business plans) are becoming increasingly more important in the determining factors used by the IRS and the courts to evaluate the activity as to whether it is a business or a “hobby”.

Tax Smart America, a San Diego based firm, utilizing its intellectual property Business Methods Patent, has developed an extensive business model for this and numerous other industry segments. The value of such a method of course is the integrity of preserving the tax deductions classified as “business” versus “hobby”. For more information contact Tax Smart America at (619) 469-5800 for a FREE business evaluation analysis.