Hobby Loss Rules Regarding Complete and Accurate Records

Post Date: 7/30/12
Last Updated: 8/1/12

Summary

Cross References
• Foster, T.C. Memo. 2012-207, July 23, 2012
• IRC §183

A recent hobby loss ruling illustrates that the requirement to maintain complete and accurate books and records involves more than preparing income and expense statements for purposes of filling out an income tax return. The taxpayer was a lawyer who had a profitable law practice. Since 1984, he also operated a horse racing, training, and breeding activity. He purchased approximately 12 acres of land and a barn for $375,000 to accommodate the horse activity. A number of improvements to the property were made, including stalls in the barn, adding fences, building an exercise track and a round pen for breaking and training horses, and installing a horse walker. A 2010 appraisal, which included the residential portion of the property, indicated that it had appreciated in value to $550,000.

The taxpayer spent more than 20 hours during the week and on weekends working with and caring for the horses. Through the years, the taxpayer continued to buy and race horses and consult with professional trainers and veterinarians regarding the horses. The taxpayer also bred horses, both for racing and to sell.

The taxpayer maintained a separate checking account for the horse activity and used QuickBooks software to track income and expenses. The IRS audited the taxpayer’s returns and contended that the taxpayer was not engaged in the activity for profit. One of the factors to be weighed when considering whether a taxpayer is engaged in an activity for profit is the manner in which the taxpayer carries on the activity. Carrying on the activity in a businesslike manner, such as by maintaining complete and accurate books and records is one factor that may indicate a profit objective [Reg. §1.183-2(b)(1)].

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