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Tax Blog

Is Your Ranching Activity for Profit?

Rebuffing the IRS, the Tax Court found that a taxpayers’ ranching activities was an endeavor to be engaged in for profit. The taxpayer persuaded the court that his actions in cattle raising, hay cultivation and horse breeding were one activity, and he held genuine motives to generate a profit, despite a history of losses. The court cautioned, however, that it was not declaring the taxpayer’s ranching as for-profit “ad infinitum.” The taxpayer’s failure to rein-in future loss could bring the taxpayer back before the court a second time. Meaning a continual loss claim would be suspicious to the court and review of the individual’s motive would be scrutinized.

The background of the taxpayer is that thirty years ago, the taxpayer purchased the ranch. The ranching activities involved cattle, hay and horses. The taxpayer reported significant losses for 2007, 2008, 2009, and 2010. The IRS determined that the taxpayer’s ranching activity was not engaged in for profit. The taxpayer disagreed and sought relief in the Tax Court. So how does this case pan out for the court?

The court first determined that the multiple activities are sufficiently interconnected to be treated as one activity. Stating that they are the degree of organizational and economic interrelationship of the undertakings separate or together. Here, the taxpayer was engaged in three activities on the ranch, these activities the court found were interconnected. The taxpayer had a genuine profit motive in the interconnected activities according to the court. The taxpayer conducted the ranching operations in a business-like manner, and he had been involved in agriculture for more than 50 years. Finally the taxpayer employed skilled workers to run the ranch.

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