A tax case, Mullins v. United States, decided in the United States District Court in Knoxville, Tenn., considered an individual who owned and operated a cattle-raising operation who claimed he was entitled to deduct losses over a period of years. The court issued an opinion which focused on the fact that the taxpayer had consulted industry and legal experts, and that the land used for the cattle operation had appreciated in value. The court held that these factors indicated the individual's profit motive.
The amount in issue was approximately $70,000 over a three-year period. The case was in the District Court instead of Tax Court because the taxpayer chose to pay the tax and then sue for a refund. With Tax Court you don't pay the deficiency in order to file a petition, but interest continues to accrue.
The case involved Benny Mullins, who was raised on a small farm in Clintwood, Va. As a child, he worked on the farm and dreamed of owning his own farm to raise cattle one day. He settled in Clinton, Tenn., with his wife and family, and worked as an aerospace and defense contractor, until he retired in 1999. His two sons took over the contractor business, and he continued to serve on the board of the company.
Prior to starting the cattle farm Mr. Mullins consulted with several individuals who owned cattle. In other words, he did not enter the business blindly; rather, he conducted much research in advance. In 1973, he purchased 110 acres of land for $40,000, and started to raise cattle on the property. He made extensive improvements, including fences, corals and water holes. He started out with 23 cows and one bull. He soon bought 100 more acres and made improvements on that as well. He purchased an additional 160 acres soon thereafter, and also purchased additional farm properties for raising cattle, making improvements as well. His cattle herd increased to about 100 head. He sold timber from one of the properties. He also purchased a livestock auction business in order to provide a better way to sell his cattle and to purchase replacement cattle, but soon discontinued that activity because it was too labor intensive.
While he was still working full time in the contracting business, Mr. Mullins put in time for the cattle activity in the evenings and on weekends. He did not have a written business plan and did not develop a budget for the cattle farm. He maintained one checking account for both personal and farming expenses. His accountants were able to keep his personal funds separate from his farming funds. During the course of 24 years, there was a small profit in one year.
Mr. Mullins occasionally hired day laborers to help on the cattle farm. He did not withhold and pay employment taxes on wages paid to them. The court said that it attaches little relevance to these facts, finding that they do not substantially affect the taxpayer's profit motive in this case.
Mr. Mullins continued to consult with a number of individuals who were experienced in proper industry practices. He read cattle farming publications and attended various seminars on raising cattle.
There were sales of farm parcels over the years, which were for a profit, and eventually Mr. Mullins retained one farm property consisting of 451 acres. The value of that acreage had appreciated significantly.
The evidence indicated that Mr. Mullins experimented with different farming methods in an effort to increase profitability. For instance, he employed a cow-calf operation, purchased the livestock auction business, and later tried backgrounding cattle, following which he reinstituted the cow-calf operation.
The court said that the taxpayer had acquired some expertise in cattle raising through self-education and that he relied upon the expertise of others through regular consultations.
The court said that the taxpayer's cattle activity was organized and economically interrelated with the land holdings.
The court said that any appreciation in the land may be considered in ascertaining the existence of an intent to profit from the cattle activity.
The court also said that evidence showed that during the years at issue the losses can be partially explained by a decline in cattle sales and that Mr. Mullins had setbacks with his health. And these losses, according to the court, became less significant in light of the substantial appreciation in value of the farm land over time.
The court concluded that the taxpayer was entitled to a refund on the taxes paid in response to the IRS disallowance of the deductions claimed, plus interest.
John Alan Cohan is a lawyer who has served the livestock horse and farming industries since 1981.
