Texas residents Anthony and Florence Jorgenson, owners of three cattle ranches and one farm, failed to persuade the Tax Court that their activity was a trade or business engaged in for profit [TC Memo 2000-038]. The Jorgensons, both of whom are full-time physicians with substantial wages from their medical practices, were audited in connection with their ranches, and then went to Tax Court.
The taxpayers claimed losses totaling $1,284,349. They raised crossbred cattle at first, then decided to breed purebred cattle. They purchased a registered Black Brangus herd consisting of 110 head of cattle.
They then decided again to raise crossbred cattle and acquired 51 head. However, their new ranch manager was killed in a propane explosion, and they could not tend to the herd with their full time medical practices, so they sold the steers.
One ranch they operated was in Colorado, which served as a summer steer or heifer operation due to the short grazing season. They experienced severe rains and flooding that damaged the hay meadows. They participated in a Government-sponsored conservation program to replant the hay. They bought adjacent acreage, increasing the size of this ranch from 1,200 acres to 2,040 acres.
The Jorgensons also had a 100-acre farm in Texas where they intended to retire and harvest pecans.
Unfortunately, the taxpayers had poor business records, no budgets, operating statements, written business plans or financial projections on the four properties.
The court said that the Jorgensons had not engaged in the ranching activity with an actual and honest objective of making a profit. The court said that they conducted their activities unaware of the amount of revenue they could reasonably generate, and had no credible estimate of the costs associated with the four properties.
One factor in their favor was that they hired ranch managers and sought advice from local Government conservation agencies.
One problem with their case was that they claimed their properties had appreciated in value more than enough to offset their historical losses, but they offered no documentary evidence or expert witness on that point. Proper evidence would be in the form of a written appraisal submitted into evidence according to procedural rules, or an expert witness report.
The court was also influenced by the long history of losses and the fact that the petitioners waited two years before planting pecan trees on their Texas farm, preferring to focus first on building their residence.
It is important to have periodic appraisals of ranch property to show appreciation in value. It is important to have written contracts with ranch managers, and it is equally important to maintain time logs of your own time devoted to ranch activities, specifying what you did and when you did it.
John Alan Cohan is a lawyer who has served the livestock and farming industry since l98l.
