Peter and Carolyn Bronson, California residents, lost their Tax Court case on the issue of whether their horse breeding activity was a business rather than a hobby, and their related expense deductions were disallowed.
Mrs. Bronson devoted substantial time to the horse activity, while Mr. Bronson practiced law full time and was much less involved in the horse activity.
They did not have a written business plan before starting the activity, but Mrs. Bronson testified that their original plan was to acquire, breed and train high-quality Welsh ponies and cobs and sell them. Later, they wrote a “five-year plan” and “mission statement” that retroactively summarized their goals, but the document was never updated.
The only breeding or training records offered into evidence were two undated “stock summaries” that listed general information about their horses, with a brief description of the discipline in which each horse had been trained.
In 1999, they decided it was necessary to control costs by acquiring their own facility, and they visited horse farms, but did not acquire land for their own facility until 2005. Meanwhile they continued to acquire horses, including two imported from Wales, and they produced three foals.
They had only one sale, a horse that was sold for $500 to a charitable organization, and they took a $5,000 charitable contribution deduction, claiming that the horse was worth $5,500 at the time of sale.
Mrs. Bronson was involved in breeders’ organizations and civic groups, and wrote an equine column for a local newspaper. She also sponsored a summer riding clinic for at-risk teenage girls.  The Bronson’s claimed the purpose of Mrs. Bronson’s involvement in these activities was to establish their farm brand and build credibility in the equestrian community.
The Bronson’s maintained expense records for the horse activity in spreadsheet form, categorizing expenditures for all five years at issue. Most expenditures were partly allocated to personal expenses. The full amount of each expenditure and the amount related to the horse activity were recorded. They had no other financial records.
The Court said that the taxpayers lacked a business-like operation in that they lacked a business plan, and failed to maintain a consistent and concentrated advertising program. The Court said they failed to change operating methods or adopt new techniques with an intent to improve profitability, and that they waited too long before buying their own facility.
Overall, the Court was also influenced by the fact there never had been a profit year. The Court also said that their involvement with various horse organizations suggested that the motivation behind the horse activity may have been personal rather than business.
It is hard to predict how a case will turn out in Tax Court. A different judge may well have ruled differently. Surely, had the Bronson’s implemented a business plan prior to entering the venture, and if they had evidence of more substantial advertising and promotional efforts coupled with additional horse sales, they would have had a better case. Moreover, it is always recommended to prepare extensive records above and beyond mere spreadsheets, to build credibility as to the taxpayers’ intentions to be engaged in a business. Also, whenever possible, it is important to present evidence of credentials of professional trainers employed in the activity, as well as evidence of the taxpayers’ ongoing efforts to develop their own expertise.
John Alan Cohan is a lawyer who has served the horse, livestock and farming industries since l98l.


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