The United States Tax Court recently sustained the IRS’s disallowance of loss deductions a Louisiana couple claimed were attributable to their Arabian horse activities. The IRS had audited the couple for the years 2004-2009 and determined that they were not engaged in their Arabian horse activity with the requisite profit motive to be entitled to the business loss deductions they claimed. The IRS determined deficiencies in the couple’s federal income tax payments totaling around $100,000.
According to the Tax Court, the husband had a degree in marketing and worked at his family’s office supply company. A horse enthusiast from childhood, he started showing horses in college and went on to get his horse show judge’s license. The wife was a dental hygienist who had also participated in the world of Arabian horse showing for decades. The couple married a few years after graduating college in the late 1970’s and began training, breeding, boarding and showing Arabian horses. In the early 1980’s they purchased a property on which they built a small residence and a large barn. Over time, they improved the barn to add stalls and a covered indoor arena.
Despite doing all the work to care for about 20 horses they kept on the property, both husband and wife maintained other employment that did not involve horses. Their combined annual household income from other sources for the years at issue hovered around $100,000, which according to the Tax Court’s decision, was roughly equivalent to the annual losses sustained by their horse activity.
The couple’s long and uninterrupted history of losses sustained by the horse activity proved to be an insurmountable hurdle to convincing the Tax Court that they were engaged in their horse activities with the requisite profit motive to claim “business expense” deductions for an activity the IRS was quick to label a “hobby.” That the couple was hard working, and not wealthy, did not outweigh the other “profit motive” determinative factors considered by the IRS and the Tax Court.
The Court criticized the couple for not having a written business plan, not tracking direct and indirect expenses for each individual horse, and not selling more than two horses in the history of their business. The couple’s failure to produce reliable evidence of the current fair market value of their horses proved fatal to their assertion that they expected the value of their stock to appreciate over time. Likewise, the fact that they had built their residence on the same property on which they operated their “business” meant that the Tax Court rejected their reliance on the property appreciating in value to support their expectation of realizing an overall profit.
The Tax Court pointed out that the goal “must be to realize a profit on the entire operation, which presupposes not only future net earnings, but also sufficient net earnings to recoup losses incurred in the intervening years. Plantation Arabians began in 1981 [but petitioners] have not reported a net profit since 1990 [and they] did not report a net profit for any of the years at issue.”
Himmel v. Comm’r, No. 30412-12 (United States Tax Court) (4/17/25)
