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17 April 2018

A Stud in Tax Court: How a Retired Race Horse Beat the IRS

A Stud in Tax Court: How a Retired Race Horse Beat the IRS

If you’re a horse enthusiast, take note: The IRS may disagree with whether your affinity is a hobby or business, depending on what’s at stake. With a recent tax court win, a retired racehorse named Woody B. Tuff teaches us about the tax implications of what we do on our weekends.

Woody was a world-class cutting horse back in his day. And while he made plenty of money during his professional sports career, his tax troubles didn’t start until he retired from racing. At that point, he was purchased by Dr. Finis Welch, an agricultural economist, and business consultant, for breeding purposes. Horse breeding is high-stakes, and the payoff can take 6-10 years.

“After all, it takes years before a cutting horse stallion’s offspring show enough stuff so that Daddy can garner the big bucks,” Attorney Lew Taishoff explains.

To offset the cost of getting Woody established as a viable breeding stallion, Dr. Welch’s Center Ranch—which is also a thriving hay operation, cattle business, training facility, and equine veterinary center—reported three straight years of significant business losses. The IRS, however, didn’t like missing out on more than $3.5 million in tax revenue, asking the question: Is Center Ranch eligible for section 183 deductions if it loses so much so often? It didn’t help that Dr. Welch only worked in the business on the weekends and that he wasn’t necessarily qualified to breed horses.

The judge evaluated these arguments and others against the IRS 9-point “hobby test,” which we explain here, and found that Dr. Welch ran a legitimate business and did no wrong in deducting so much. But unless Dr. Welch starts showing positive returns, the IRS may question it again. As the court ruling states, “If Center Ranch’s future losses cannot be reined in, petitioner may again find his profit motives before this Court.”

“It is not the magnitude of the losses that matters,” Forbes Contributor Peter J. Reilly adds. “What matters is that if you are not profitable, you change your ways.  And if the new ways are not profitable, you find newer ways.”

Learn more about this case and its possible implications for your own business by reading Reilly’s Forbes article and Taishoff’s blog post. We offer further tips on handling taxes when you run a Texas ranch here. For specific questions, feel free to contact us

Image Copyright: burdyak / 123RF Stock Photo

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