Randy Miller is very successful in the business of retailing soft drinks and makes a good profit from the business.
Randy also raises dogs and horses. He began raising a particular breed of dogs many years ago in the belief that the breed was in danger of declining, and he has raised and sold the dogs in each year since. The taxpayer recently began raising and racing thoroughbred horses.
The losses from the taxpayer’s dog and horse activities have increased in magnitude over the years, and he has not made a profit on these operations during any of the last 15 years. The taxpayer generally sells the dogs only to friends, does not advertise the dogs for sale, and shows the dogs only infrequently. The taxpayer races his horses only at the “prestige” tracks at which he combines his racing activities with social and recreational activities. The horse and dog operations are conducted at a large residential property on which the taxpayer also lives, which includes substantial living quarters and attractive recreational facilities for the taxpayer and his family.
On his federal income tax return, Randy wants to deduct the losses he has made in dog and horse raising from the profits he has made from retailing soft drinks.
Research Issue
Is he a legit breeder or hobbyist?
proving the dog is used for business purposes?
Does Randy follow local zoning rules for dog breeding?
Relevant Authoritative Sources
IRC 183
REG
CASES
- FROM CHECKPOINT ( DATABASE) CITATIONS
Discussion
OF THE CITATIONS ABOVE
Conclusion
**see below for authoritative sources
INTERNAL REVENUE CODE
§ 167 Depreciation
(a) FTCPPCGeneral rule.
There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence)—
(1) FTCPPC
of property used in the trade or business, or
(2) FTCPPC
of property held for the production of income.
§199A Qualified business income.
(6) Qualified property.
For purposes of this section:(A) In general. The term “qualified property” means, with respect to any qualified trade or business for a taxable year, the tangible property of a character subject to the allowance for depreciation under section 167—
§ 183 Activities not engaged in for profit.
(a) FTCPPCGeneral rule.
In the case of an activity engaged in by an individual or an S corporation, if such activity is not engaged in for profit, no deduction attributable to such activity shall be allowed under this chapter except as provided in this section.
(b) FTCPPCDeductions allowable.
In the case of an activity not engaged in for-profit to which subsection (a) applies, there shall be allowed—
(1) FTC
the deductions which would be allowable under this chapter for the taxable year without regard to whether or not such activity is engaged in for profit, and
(2) FTC
a deduction equal to the amount of the deductions which would be allowable under this chapter for the taxable year only if such activity we’re engaged in for profit, but only to the extent that the gross income derived from such activity for the taxable year exceeds the deductions allowable by reason of paragraph (1).
INTERNAL REVENUE BULLETIN (REGULATION)
Ann ¶ 12,315.12(60). Racing horses.
Reg § 1.1231-2(c)provides that horse held for racing purposes is considered held for sporting purposes and rules for determining when a horse shall be considered as held for racing purposes. Reg. applies to open taxable years and cases involving the issue of whether a horse acquired before 1-1-70 is held for racing (and thus sporting) purposes and was disposed of under its provisions.
Reg § 1.1231-2. Livestock held for draft, breeding, dairy, or sporting purposes.
Document Title: Reg §1.1231-2 Livestock held for draft, breeding, dairy, or sporting purposes.
Reg § 1.183-2. Activity not engaged in for-profit defined.
Effective: Reg. §1.183-2 predates P.L. 99-514, 10/22/1986, the Tax Reform Act of 1986.
FTC (a) In general. For purposes of section 183 and the regulations thereunder, the term “activity not engaged in for-profit” means any activity other than one with respect to which deductions are allowable for the taxable year under section 162 or under paragraph (1) or (2) of section 212. Deductions are allowable under section 162 for expenses of carrying on activities which constitute a trade or business of the taxpayer and under section 212 for expenses incurred in connection with activities engaged in for the production or collection of income or for the management, conservation, or maintenance of property held for the production of income. Except as provided in section 183 and §1.183-1, no deductions are allowable for expenses incurred in connection with activities that are not engaged in for profit. Thus, for example, deductions are not allowable under section 162 or 212 for activities that are carried on primarily as a sport, hobby, or recreation. The determination of whether an activity is engaged in for profit is to be made by reference to objective standards, taking into account all of the facts and circumstances of each case. Although a reasonable expectation of profit is not required, the facts and circumstances must indicate that the taxpayer entered into the activity, or continued the activity, with the objective of making a profit. In determining whether such an objective exists, it may be sufficient that there is a small chance of making a large profit. Thus it may be found that an investor in a wildcat oil well who incurs very substantial expenditures is in the venture for profit even though the expectation of a profit might be considered unreasonable. In determining whether an activity is engaged in for profit, greater weight is given to objective facts than to the taxpayer’s mere statement of his intent.
CASES- UNITED STATES Reports
Joubert, Hubert, (1992) TC Memo 1992-184, RIA TC Memo ¶92184.
Bischoff, Jerome, (1995) TC Memo 1995-34, RIA TC Memo ¶95034, 69 CCH TCM 1741.
Engdahl, Theodore N., (1979) 72 TC 659.
Snyder, Alice Jane, (1987) TC Memo 1987-539, PH TC Memo ¶87539.
Pirnia, Abdolvahab S., (1989) TC Memo 1989-627, PH TC Memo ¶89627.
