Tax Court Allows $11 Million Horse Loss to Stand
The US Tax Court in the Metz case released yesterday allowed taxpayers who had claimed over $11 million of losses related to a horse farm to stand. As we have previously discussed, the Tax Court reviews 9 tests in any case with possible hobby ramifications. If the “business” is deemed to be a hobby, then the losses are disallowed. If it is a business, then the losses are allowed in full. The nine key factors the Court considers are:
- Manner in which the taxpayers carry on the activity;
- Expertise of the taxpayers or their advisors;
- time and effort expended on the activity;
- Expectation that assets used in the activity may appreciate in value;
- Success of the taxpayers in carrying on other similar or dissimilar activities;
- History of income or losses with respect to the activity;
- Amount of occasional profits, if any, from the activity;
- Financial status of the taxpayers; and
- Any element of personal pleasure or recreation.
This is not a case of where 5 out of 9 factors wins for the taxpayers since the Court will weight some of the factors more than others. With the current case, the Metz’s family had owned a very successful bread business in the Omaha area that was finally sold a couple of different times. As a result of these sales, Mr. Metz received over $10 million which invested very well in the market until 2008. Income from interest, dividends and capital gains averaged more than a million dollars from 2004-2007. He also borrowed against the investments to “feed” his horse operation. When the market crashed in 2008, Mr. Metz was required to liquidate most of his holdings resulting a capital gain in excess of $5 million. The primary source for their horse-breeding activity had vanished.
Starting in 1991, the Metzes had started an Arabian horse-breeding activity called Silver Maple Farm, Inc. The farm was originally located in Iowa, then moved to Naples, Florida for a while and then finally ended up in California where many other Arabian breeders were located. I have personally history with Arabians since we had one located on our farm as a child and I have very fond memories of riding that horse.
From 1999 to 2009, the horse breeding operation averaged a loss of about $1 million or more each year. Even after the losses incurred in 2008 from the stock market, the Metzes borrowed over $2 million to keep their horse-breeding operation in business.
The Court reviewed the nine factors and although a couple of factors went against the Metzes, the bottom line conclusion by the Court was the horse-breeding operation is not a hobby and the s are allowed in full. Now, though this is a victory for the taxpayer in Tax Court, they are still out over $11 million in losses (or more). I am not sure if it really is an overall win for the taxpayers.
Paul Neiffer, CPA
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
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