New Tax Court Case Rules Against Taxpayer

A new Tax Court case involving Sally and Michael Judah, residing in Louisville, Kentucky, involved a Saddlebred horse activity and real estate development activities of the taxpayers.  [Judah v. Commissioner, T.C. Memo 2015-243.]  The taxpayers claimed that the two activities should be considered a single activity for tax purposes, and that the horse activity, in any event, was conducted as a business.

The Tax Court ruled against them for reasons discussed below.

The taxpayers started the horse activity, organized as an LLC, after their daughter showed talent in exhibiting horses.  They maintained a separate checking account.
In 1998, they purchased their first horse in consultation with a horse trainer with 20 years’ experience, and claimed deductions for business expenses related to their Saddlebred activity since that time.

Their plan was to purchase young horses and increase the horses’ value through training and competing at shows.  They hoped to acquire horses at a relatively low cost and later sell them at a much higher value.

One problem was that their primary consideration in purchasing horses was their daughter’s personal preferences.  However, they consulted trainers before purchasing or selling horses, and relied on trainers for advice as to what shows to enter and what horse to exhibit at the shows.  Their daughter the rider in most horse shows.

The taxpayers prepared a brief “mission statement” a few years after starting the venture, stating they intended to “locate and acquire quality horses, which, through proper training, successful performance, and potential breeding will both enhance the value of the breed and return a substantial profit to the business.”  There was no written business plan.  The court noted that the taxpayers had no kind of market analysis, budget, or cashflow projections before commencing the activity, and they had nothing more “than a plan to sell horses for more than they paid for them.  This is not a business plan and is devoid of any meaningful financial analysis.”

Books and records did not separately account for expenses of each individual horse, and did not track income of each horse individually.  The taxpayers advertised through print sources, online publications and horse shows.

The court said that the taxpayers were unable to devote a significant amount of time to the activity because of full-time jobs and other responsibilities outside of the horse activity.

Several horses were sold at a significant profit, and several were sold at a significant loss.  The taxpayers never achieved a profit year.

The court noted that the substantial losses were due to high operating expenses, consisting mainly of boarding, training and showing.  (Of course, these costs are invariably the largest costs for anyone whether there is a profit or not.)

The taxpayers’ big argument was that their real estate and horse activities were a single undertaking and that the combined profits and losses of the two activities showed net profits in at least two out of the previous seven years.  They argued that this satisfied the presumption that their horse activity was conducted for profit under section 183 of the Code.

They argued that the Saddlebred activity was a “marketing and customer development platform” for their real estate venture, allowing them to network with horse owners who would be willing and able to purchase real estate.

The court said no, that the activities were not sufficiently interconnected, that there was little organizational and economic interrelationship between the undertakings, and the undertakings were dissimilar in nature.

The court distinguished this case from the facts in Topping v. Commissioner, T.C. Memo 2007-92, in which the taxpayer, an interior decorator specializing in high-end barns, convinced the Tax Court that her horse activity was sufficiently interrelated with her interior decorating business – one undertaking benefited the other, one was used to advertise the other (cross-advertising) — as to constitute a single venture.

Usually the IRS will accept a taxpayer’s characterization of two ventures as organizationally interrelated, unless the characterization is artificial or unreasonable.

Numerous occupations and professions might be reasonably interrelated with a horse activity, but the key is to plan this in advance, starting with an operating agreement and mission statement, and organizational documents that treat the ventures as a single undertaking.  The documents should indicate that these activities are to be operated as a single undertaking, and state how each activity benefits the other, and depends on each other e.g., by generating customers.  There should be shared books and records for the entities, with consolidated financials.

Examples of businesses that might qualify are:  an insurance broker who sells equine insurance, a vendor who sells equine art, a veterinarian, a real estate developer of horse farms, a boarding stable, a farm landscaper, a contractor who deals with arenas and barns, a horse-related publication, an equine videographer, and other businesses where the taxpayer can reasonably establish an economic relationship between the horse activity and the taxpayer’s other business.

John Alan Cohan is an attorney representing people in federal and state tax disputes, IRS appeals, and Tax Court litigation, and is a long-standing author of a legal advice column published in numerous sporting magazines.  In addition, he advises organizations on compliance with newly enacted laws and regulations.  John is also author of the book, Turn Your Hobby Into A Business — The Right Way.  He can be reached at:  (310) 278-0203, or email at  His website is