Taxpayer's Lack of a Horse, Along with Other Issues, Found to Bar a Deduction for a Horse Business
In the case of McMillan v. Commissioner, TC Memo 2019-108,[1] the taxpayer was arguing that her loss from her horse business. The IRS had challenged Ms. McMillan regarding this business in five prior Tax Court cases, but this time, she faced a unique challenge—her last horse had died two years previously.[2] So she was arguing for the unique proposition that a horse breeding/showing business did not require a horse.
Unfortunately, the Tax Court did not accept this view.
The opinion notes that for an activity to be a trade or business, it must be regular and active. The opinion cites two cases to outline how to make the determination if the undertaking is regular and active:
For an activity to be a trade or business, the taxpayer has to regularly and actively be involved with it--“[a] sporadic activity, a hobby, or an amusement diversion does not qualify.” Groetzinger, 480 U.S. at 35; see also, e.g., McManus, 1987 Tax Ct. Memo LEXIS 454, at *20. In Groetzinger, 480 U.S. at 24, 36, for example, the Supreme Court held that gambling was the trade or business of a taxpayer who for nearly an entire year went to a greyhound track six times a week and spent 60-80 hours each week on gambling-related activities such as placing bets and studying racing forms. In Barker v. Commissioner, T.C. Memo. 2012-77, 2012 WL 947134, at *8, however, we found a taxpayer didn’t actively and regularly engage in the development of radio equipment for astronauts in a year when his only related activity was going to two conferences about Mars.[3]
The Court found that while she may very well have considered returning to a horse business in 2010, she did not regularly and actively participate in such an activity. First, the Court noted that she did not appear to have much time to engage in this activity. She had a job at which she worked 5-6 hours each day, and was involved in extensive litigation against her homeowner’s association.[4]
More importantly, she did not own a horse for this activity, nor did she participate in any dressage competitions for the year in question. These facts meant that she failed to regularly and actively participate in this activity.[5]
As well, she failed to show that she had begun again operating a horse business in 2010. Her lack of a horse was more than a minor issue that blocked her ability to claim losses from an operating business. The Court noted:
That’s why in Heinbockel, at *44, we found that a taxpayer who said he was running a vineyard but hadn’t yet planted any grape vines wasn’t entitled to section 162 deductions. In McKelvey v. Commissioner, T.C. Memo. 2002-63, 2002 WL 341044, at *3-*4, aff’d, 76 F. App’x 806 (9th Cir. 2003), we disallowed deductions by a taxpayer who bought land for a tree farm but didn’t yet farm any trees. Buying land and planning to develop it isn’t enough to make an activity a trade or business, see Christian v. Commissioner, T.C. Memo. 1995-12, 1995 WL 9151, at *4-*5, and neither is issuing stock, signing contracts, and buying components if actual manufacturing hasn’t yet begun, see McManus, 1987 Tax Ct. Memo LEXIS 454, at *24-*26.[6]
She did not own, breed or show any horses during the year, which barred a finding that she was operating a horse breeding/showing business in 2010. At best, she had start-up expenses that would be deductible under IRC §195 when the business actually began operations.[7]
The opinion also looked to see whether the hobby loss rules of §183 would also have barred a loss deduction. The Court determined that regardless of whether the court used the “more holistic” approach advocated by the Seventh Circuit in Roberts v. Commissioner, 820 F.3d 247, 250, 254 (7th Cir. 2016), rev’g T.C. Memo. 2014-74 or the rules found in Reg. §1.183-2(b) that the Ninth Circuit continues to follow despite the Seventh Circuit calling them “goofy,” the business was not operated with a profit motive and was subject to the hobby loss rules of §183.