Originally published on Forbes.com.
Automobiles and horses. There was a time, however, brief when the two were alternative forms of transportation. There were faint echoes of this when I was a kid. Whenever we saw a Model T Ford tooling along we would yell “Get a horse”. It is more than a little disturbing to reflect that any of the surviving new cars from that era are as old now as the Model T’s were then .
When Ray Price’s grandfather started a Ford dealership business in 1913, I imagine he was actually helping people transition from one form of transportation to another. Over the years the family maintained a certain affection for the living, breathing form of transportation.
Mr. Price grew up around horses. His family became involved with Arabian horses in 1964 when he was four years old. Mr. Price began training horses for his family’s clients at the age of 13, and by age 17 he was a member of the Pennsylvania State championship 4-H judging team. His mother, Margaret Price, was a very accomplished rider who was a member of the U.S. Equestrian Team and received the Pegasus Medal of Honor from the U.S. Equestrian Foundation in recognition of her work with horses. Margaret Price also was a bronze and silver medal winner while on the U.S. Equestrian Team. There are aspects of training and caring for horses that Mr. Price enjoys, and he takes pride in seeing his horses excel in competition. Petitioners’ daughter is an accomplished rider who rode during the years at issue although she has not ridden in three years. Both Mr. Price and his daughter competed in horse shows during the years at issue.
With that lead in, my regular readers will realize we have another hobby loss case on our hands. This one was pretty high stakes with deficiencies totaling over $200.000 for the years 2009, 2010 and 2011. It has an extra twist and also I learned something new about the horse business from this case, although the latter is not something that bears in-depth discussion.
Some Background
Mr. Price has several dealerships in the vicinity of Mt.Pocono Pennsylvania. They are all in S corporations and despite rough spots here and there are consistently profitable. Before considering the horse activities he showed gross income on his returns in the low seven figures for all three years. His horse operation is a different story. Rock Ledge Arabians is apparently a first class facility with many interesting features.
Rock Ledge maintains equipment to facilitate breeding services, including a phantom mare equipped with an artificial vagina for stallion semen collection, microscopes used to evaluate sperm motility, and cooled semen shipping containers. Additionally, Ray Price Motors Imports, Inc., accepts shipments of cooled stallion semen collected offsite for use at Rock Ledge. At the time of trial Rock Ledge maintained a Web site listing horses available for sale. Each listing contains information relating to a particular horse’s dam, sire, and type of performance and any accomplishments the horse might have achieved, such as major awards.
The “phantom mare” was new one on me. It turns out that the phrase only appears in the entire body of tax material, one other time and that was way back in 2002, when I was not yet reading every single hobby loss case.
The Other Angle
Mr. Price sought to avoid having to go through the nine factor Section 183 analysis, by a clever argument. He argued that his horse business was part and parcel of his car business. If you go to the Rock Ledge Arabians website, you will notice a yellow button inscribed “We Know Horsepower” which will transport you, as if by magic carpet, to Ray Price Cars. Apparently quite a few people who buy horses or horse related services from Rock Ledge, choose to buy cars and trucks from one of Ray Price’s dealerships
Petitioners’ business plan for Rock Ledge also calls for vehicle sales through what Mr. Price labels “relationship marketing”. Mr Price sought to market cars sold at his dealerships to “horse customers”, by which he meant not just Rock Ledge clients but also people he met at horse shows. Attendees of horse shows who knew that Mr. Price owns several dealerships ask him about various trucks or cars in “the same way doctors get asked when they’re out socially about what to fix”. Mr. Price realized that people who own horses also need trucks that are capable of pulling trailers. Further, Mr. Price needed to know the vehicle towing capacities to determine the best fit for a particular customer’s towing needs, depending on the type and size of the trailer to be pulled. “Horse customers” trust Mr. Price because of the “relationship” developed through the horses, which is why he terms the marketing of vehicles through horse-related activities “relationship marketing”.
It seemed like a pretty good story to me, but there is a subtle clue that it is not going to fly.
Petitioners assert that Rock Ledge has generated a significant number of customers for the dealerships. Petitioners submitted a two-page list of “horse customers” purporting to list the names of individuals and organizations who have purchased vehicles from the dealerships. (Emphasis added)
The occurrence of the word “purport” or any of its forms such as “purporting” is a pretty sure sign that things are not going to go well for the taxpayer.
The argument that the dealerships and Rocky Ledge were all one big business did not go that well. The judge was not impressed by the fact that “cooled stallion semen” was received at one of the Honda dealerships. The sale of vehicles to “horse customers” also did not make much of an impression.
The sample contracts submitted to corroborate the list include contracts of sales that were clearly not made to anyone involved in Rock Ledge. Moreover, some of the customers would likely have purchased vehicles regardless of any involvement with Rock Ledge through the dealerships’ advertising to target demographics, including those in the horse industry. Accordingly, this factor favors respondent.
Could This Case Have Been Won?
Two of the factors that were considered in the single business argument were shared accountant and shared books and records. Even though the same accountant prepared the dealership returns and the Rock Ledge Schedule F that was included on Mr. Price’s return, the IRS noted that he never prepared financial statements for Rock Ledge. And, of course, the activities did not share books and records.
All in it seems like the notion that the horse business was part and parcel of the dealership business was a bit too contrived for the Tax Court. It does strike one that it might have been more of a rationalization than a rationale.
Still, if the notion of the horse business being part of the dealership business had been better executed, it might have worked. An approach that occurred to me would have been to have the operation, but not the real estate, inside a single member LLC that was owned by one of the dealerships. With that approach rather than a big nasty negative number on a Schedule F, the transactions would have just made the positive number from one of the S corporations somewhat lower. Frankly, this borders on audit lottery advice, but it is really the filing position that is consistent with the unified business argument.
My exposure to dealership accounting is somewhat limited. At Joseph B Cohan and associates in the 1980s, my buddy Mikey handled the dealerships and I had the low income housing tax shelters, but I picked up a bit here and there. That makes me think that there might be practical issues that would foreclose running the horse business through the dealership books, since “the factory” can have specific requirements about how the dealership keeps it books. Still, it might have been worth looking at.
The Hobby Loss Analysis
Once the combining of activities was foreclosed, the case was pretty hopeless. The Tax Court found against Mr. Price on all the factors. To some extent it struck me as piling on, but the nearly two decades of consistent losses would be tough for even the most sanguine to overcome.