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Ex-Iowan wins six-figure hobby-loss case

October 03, 2008

Alan Miller became a successful entrepreneur while living in Van Meter, Iowa, about 20 miles west of Des Moines After making a success out of Electric Pump and Tool Services, he developed an interest in Paso Fino horses - an interest that led him to move to Florida and engage a prominent trainer to help him develop his herd.

Horses cost money, and Mr. Miller's schedule C's reflected that, according to a Tax Court opinion issued yesterday:

Beginning in 2002 and continuing in 2003, 2004, 2005, and 2006 Mr. Miller filed a Schedule C, Profit or Loss From Business, listing his principal business as "show horse breeding". In 2002 Mr. Miller reported losses of $95,571 on his Schedule C. In 2003 Mr. Miller reported losses of $126,377 on his Schedule C and losses of $9,223 on Form 4797, Sales of Business Property. In 2003 Mr. Miller sold three horses at a loss. In 2004 Mr. Miller reported Schedule C losses of $139,098 and losses of $13,742 on Form 4797. In 2004 Mr. Miller sold one horse at a loss

The IRS invoked the Section 183 "hobby loss" rules, saying that Mr. Miller wasn't really trying to make money. The court ruled for Mr. Miller and against the IRS. Mr. Miller had some important facts on his side:

- He kept good financial records
- He kept his business and personal horses separate, and did not deduct expenses for his personal mount.
- He kept logs of his business activity, recording 800-1000 hours per year on the horse breeding.
- He modified his business to fix bad results.
- He engaged experts to improve his busineses.
- He had a track record of success as an entrepreneur.
- He had a plausible plan to show a profit.

The more typical hobby loss facts feature a professional - a doctor, lawyer, dentist or accountant - who spends full time on his professional activity, keeps poor records, and has no hope of ever making money.

Congratulations to local attorney Ron Mountsier, who lawyered the winning case.

Cite: Miller, T.C. Memo 2008-224.

Related: Hobby losses dog IRS auditor

Tags: hobby loss.section 183.