LAW OFFICES OF JOHN ALAN COHAN
Attorney at Law
415 North Camden Drive, Suite 100
Beverly Hills, California 90210
TELEPHONE (310) 557-9900
FAX (310) 859-8656
E-mail:
[email protected]FALL 2001
FOR PUBLICATION: Missouri Arabian Horse Breeders Win Tax Court Case
By John Alan Cohan, Attorney at Law
Harvey and Patricia Davis of Springfield, Missouri, won a new Tax Court case regarding their Arabian show horse breeding activity. The new case, [reported at 2000 RIA TC Memo ¶2000-101] involved only three years of losses, from l994 to l996. However, the taxpayers started out many years earlier, in l97l, when they visited several Arabian horse farms and checked out prices.
That year they bought an Arabian gelding, which their children learned to ride and show in 4-H shows. In 1990 they got more serious and again visited some horse farms. They drafted a business plan for 1991 to 1997 outlining their intention to buy inexpensive horses and to try to increase their value by training and showing them. The business plan included horse pedigree listings and descriptions of horses they wanted to focus on. It also detailed their plans for breeding and showing the horses, and building facilities for them. Mr. and Mrs. Davis concluded that they would have to raise extraordinary horses in order to make a profit, and that it would take them 10-13 years before the activity would turn a profit.
The taxpayers studied the bloodlines and history of Arabian horses back 100 years. One of their mares had substantial breeding problems for three successive years, and the Tax Court said that this obviously set back their program through no fault of their own. The taxpayers made improvements to their residential property, turning it into a farm to accommodate their Arabian horse activity. They built a barn to store hay and equipment, a five-stall stable with a tack room, workshop, and storage area for hay and a horse trailer and a used pickup truck. They spent much of their free time training, showing and caring for their horses. The taxpayers had no other full-time employment during the years in issue. (Mr. Davis is a retired architect.)
They personally prepared their horses for the show ring and filmed each of their horses at the horse shows so they could critique their performance. They advertised their horses primarily by showing them at horse shows. They made baseball caps bearing their farm logo and gave away some of the caps. The mainly advertised horses for sale "by word of mouth," which the Tax Court commended.
They had an expert who appraised their horses as well as the value of the farm and the improvements made to the farm. The appraisals showed that the appreciation in their horses and farm property was substantial in relation to their losses, and that they reasonably expected appreciation to exceed their losses.
The judge concluded that they operated their show horse activity with an actual and honest profit objective, even though no profit had been made. The judge was impressed with their business records (even though they did not maintain a separate checking account for the horse activity). They kept detailed records on the horses and their training to monitor their successes and failures.
The court was also impressed by the efforts of the taxpayers to keep their expenses as low as possible. For instance, Mr. Davis built most of the barn, stable, and exercise arena himself. He sometimes negotiated reducing the purchase prices of horses by offering a foal for a reduction in the cash price.
The taxpayers relied on a nationally known trainer for advice about which horses to buy. The Tax Court also indicated that, while the taxpayers derived great pleasure form working with their horses, studying their bloodlines, and showing the horses in competition, that this did not imply, under the circumstances, that they lacked a profit objective. The judge noted that the taxpayers did not ride their horses for pleasure, and that they showed their horses at horse shows as their primary method of advertising. "There is a high correlation between success in horse shows and success in the marketplace," said the judge.
[John Alan Cohan is a lawyer who has served the horse industry since l98l. He serves clients in all 50 states, and can be reached by telephone at (3l0) 557-9900 or via e-mail at
[email protected] , or visit his web site at
www.legalalertnews.com .]
