The case was Garbini v. Commissioner IRS [T.C. Summary Opinion 2004-7]. Mr. Garbini, of Myrtle Creek, Ore., listed his occupation as a rancher, and his wife indicated she was a housewife. Both taxpayers were retired during the two taxable years in issue, and for Mr. Garbini this was a full time venture. They had a net loss of $127,341 in one year, and $124,584 for a second year at issue.
The court examined whether the taxpayers carried on the activity with the actual and honest objective of making a profit.
The court said that the taxpayers did not seek expert advice before entering the activity, and that was viewed with disfavor. They had no business plan to prove that their activity originated with the honest objective of making a profit.
In applying the factors to determine profit objective, the court focused on the manner in which Mr. Garbini carried on the activity. The fact that the taxpayer carries on the activity in a businesslike manner and maintains complete and accurate books and records indicates that the activity is engaged in for profit. In this case, the court said that there was little by way of books and records.
He never prepared budgets or market projections, which would outline strategies for ensuring a profitable business venture.
Mr. Garbini said that he made efforts to reduce expenses in order to operate the ranch in a profitable manner. Nothing in the record indicated what efforts he actually made to reduce expenses. Mr. Garbini never ascertained how or when he would make a profit or how he could change his operating methods to improve his profitability.
There were no sales during the years at issue.
One strength in this case that unfortunately was not set forth adequately in the evidence was that according to Mr. Garbini the ranch had increased in value as a result of improvements he had made. Mr. Garbini testified that he bought the property for $566,000 in its undeveloped condition, and its value at the time of trial was $15 million.
Mr. Garbini also argued that part of the ranch activity involved planting and harvesting trees. The court noted that no trees were harvested during the taxable years in issue.
Mr. Garbini did not provide a history of income or losses for the activity. During the taxable years in issue, losses exceeded $250,000, an average of $125,000 for each year.
Over a period of about 12 years, the losses were over $1,500,000. There was no evidence of any profit year.
The court noted that as a result of their other income, the taxpayers realized substantial tax benefits from the approximate $125,000 loss deduction for each taxable year in issue.
The court also said that there were elements of personal pleasure or recreation even though they did not ride the horses.
Taking the record as a whole, the court concluded that the taxpayers did not possess the actual and honest objective of making a profit from their operations. Because they had no gross income for the taxable years in issue, none of their claimed expenses were deductible.
John Alan Cohan is a lawyer who has served the horse, livestock and farming industries since l98l.
