I was glad to learn that even Dogs Against Romney is rooting for Rafalca. They don’t hold it against Rafalca that she has probably never had to ride on the roof. Personally, my favorite Olympic sport is curling, which probably is not too expensive unless you are trying to play it in a warm climate. If you can find an icy surface all you need is some big rocks and a couple of brooms. I’m sure there is more to it than that. No curling in the Summer Olympics, though, so I’m not watching. I’d rather be reading tax cases, which I have been and note that there have been three Section 183 cases in the last couple of weeks. All were taxpayer losses. One of them was a horse case, which is a little unusual, because horse breeders frequently win in tax court. The others were somebody running a “cattery” and a couple driving around looking at real estate. The cat case has me wondering whether you would call a place where you were raising bats a battery and also why it would be fine to refer to a pet structure as a dog house (as long as you don’t strap it to the top of your car), but when it comes to cats, well I better not go there.
First the cattery case, which is DKD Enterprises a.k.a. DKD Enterprises, Inc., et al., v. Commissioner TC Memo. 2011-29.
Since at least 1989 Ms. Watkins, and since at least 1994 Ms. Dursky, each was engaged in the hobby of operating a cattery from which each derived significant personal pleasure. That cattery operation included breeding, raising, and offering for sale certain cats and certain kittens, attending certain cat shows, and entering in some of those shows some of those cats and kittens (cattery activity).
At a time not disclosed by the record before the years at issue, Ms. Dursky and Ms. Watkins created a Web site (cattery activity Web site) that they maintained for the cattery activity of Ms. Dursky and Ms. Watkins. At the time of the trial in these cases, the general public was able to access that Web site, although it had not been updated since 2002.
During each of the years at issue, DKD used, without purchasing, in DKD’s cattery activity the assets (e.g., cats, kittens, cat trees, feeding bowls, litter boxes) that Ms. Dursky and Ms. Watkins had used before those years in the cattery activity of Ms. Dursky and Ms. Watkins.
The Tax Court did not buy that DKD was trying to make money raising cats:
Based upon our examination of the entire record before us, we find that DKD has failed to carry its burden of establishing that during each of the years at issue it intended to make a profit from DKD’s cattery activity. On that record, we find that during each of the years at issue DKD expended substantial amounts in DKD’s cattery activity for the personal pleasure of Ms. Dursky, its sole stockholder, and with the expectation that it would be able to deduct those substantial amounts for each of those years.
Here is where the case gets uglier than most hobby loss cases. Usually a hobby loss will show up on an individual return as a big ugly negative number, which kind of sticks out. Ms. Dursky put her cattery deductions inside her computer consulting business, which apparently was a C corporation. So not only is there corporate tax, there is also a dividend for her to pick up for the disallowed deductions.
Then there is the riding around case – John Robert Walthall, Jr. and Lindsey Walthall v. Commissioner., T.C. Summary Opinion 2012-65
This one does not merit much comment. How about I let you be the judge ?
Petitioners met a real estate agent who explained how they could invest in “fixer-upper” homes with the goal of creating an income stream and ultimately of selling it at a value in excess of their cost. Petitioners claim to have viewed homes daily with the above-explained goals in mind but did nothing more than view possible homes in which to invest. There is no indication that petitioners made appointments with realtors or sellers to see the interior of any of the homes that they contend they viewed. In sum, petitioners claim to have traveled 30,000 miles in pursuit of their investment goal. Petitioners claim to have logged most of that mileage looking at homes during their daily commute to work. The homes that petitioners claim to have viewed on weekends were near petitioner husband’s mother’s home.
Finally there was the horse case – Logene L. Foster and Agnes M. Foster v. Commissioner., T.C. Memo. 2012-207.
There was a lot going on in this case, but it really boiled down to enough is enough already.
In 1996 petitioners’ returns were audited by the Internal Revenue Service (IRS) in relation to the horse activity for 1992, 1993, and 1994. The IRS contended that petitioners were not engaged in the horse activity for profit within the meaning of section 183. Petitioners requested review by the IRS Office of Appeals, and the IRS eventually conceded the section 183 issue.
This case was about 2004, 2005 and 2006. Apparently they also lost in 2007, 2008 and 2009. All in, there was 25 years of losses. The Tax Court cut them off at 20. There is some good discussion of the factors that demonstrate profit motive. For example, they did not have good records of the individual results of each horse. It is interesting to note though that they got by deducting the losses for the first eleven years even though they were audited and without having to go to Tax Court.
What about Rafalca ?
I’ll bet that the deductions are much more significant to the other owners than they are to the Romneys. The suspended horse losses were a small part of over a million dollars in suspended losses from several partnerships. I don’t know how they think at PWC, but if the Romneys had been doing the Rafalca activity on their own, I would have told them to forget about deducting it. With the loss coming through on a K-1, though, you are really required to report it, if you want the return to be accurate. Of course if it was from a dog breeding deal, then I would really have to give it some thought.
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