Tax Update Blog: Permalink

« Previous · Tax Update Blog Home · Next »

BEATING A DEAD HORSE

February 17, 2005

The tax law frowns on subsidizing hobbies via tax deductions. Section 183, known as the "hobby loss" rule, prohibits taxpayers from deducting losses from activities "not engaged for profit." But how can you tell whether somebody really doesn't expect to make money from something?

Sometimes it's easy, actually. Consider the loss record from a dentist's horse breeding venture:

Tax Court Judge Laro was unsympathetic from the start of his opinion:

This is yet another case of a high-salaried taxpayer
claiming that she may reduce the income taxes payable on her
salary by deducting losses incurred in a pastime that is
allegedly engaged in for profit.

If the financial results weren't bad enough,

We also note that petitioner throughout her
testimony repeatedly referred to her horses as her “babies” and
opted not to dispose of her “babies” even when they were aged,
unable to breed, expensive to maintain, and/or unprofitable.

THE MORAL: If you are trying to avoid hobby loss treatment, don't lose money every year, and never call your horses your "babies" in front of the judge.

Cite: Giles v. Commissioner, T.C. Memo. 2005-28.

      Bookmark: del.icio.us • Digg • reddit