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Married Couple Suffers Losses - Essay Example

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A married couple consisting of a business manager and a nurse bred horses for profit within Code Section 183. While the couple had their losses, records declared that taxpayers made a profit. …
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Married Couple Suffers Losses
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Case Summary A married couple consisting of a business manager and a nurse bred horses for profit within Section 183. While the couple had their losses, records declared that taxpayers made a profit. Before the couple began horse breeding, they engaged in courses about horse breeding, and put together extensive business plans, which allowed them to conduct the horse breeding in a proper businesslike approach. Furthermore, the husband had a strong background in business practices and the wife holds a degree in horse management. All of these aspects enabled the couple to be rightfully qualified for horse breeding. The respondent of the case noted inadequacies in the petitioners’ Federal incomes taxes for 2005 and 2006 in the amounts of $46,504 and $34,500, respectively. As such, a trial was held on March 3, 2011, in St. Paul, Minnesota to determine whether or not the petitioners’ horse breeding enterprise was considered to be for profit. When the petition was filed, the petitioners, Mark and Patti Blackwell, lived in Minnesota. Mark Blackwell has an MBA degree and thirty years of experience in business management. After working as a motocross racer and instructor, he founded a motocross drivers’ school. Since then, Mark has had an astounding career as the manager and senior officer for motorcycle, snowmobile, ATV, and personal watercraft manufacturing companies. At these jobs, Mark worked over forty hours a week. Patti holds a college degree in nursing. She did not work between 2000-2002, though she was involved in horse breeding, but picked up thirty hours a week in 2003 as a rehabilitation nurse counselor, working out of the family residence. In 1993, the petitioners bought their first horse, and many after until 2000. They studied numerous horse magazines, especially those concerning horse management, breeding, and bloodlines. They also attended numerous national horse shows. It was in the mid-1990s that they formed an interest in purchasing, breeding, and training horses. To aid herself in the proper management of horse breeding as an activity, Patti enrolled in the Equine Industry Management degree program at the University of Minnesota, where she learned how to manage horses as a business, as well as the economic aspects of breeding and training. Patti and Mark also attended horse training classes and conversed with horsemen on many occasions. In 1991, Mark and Patti set out to create a detailed business plan in regard to horse purchasing, breeding, training, showing, and sale of reining horses. The business plan declared that Patti would be the barn and breeding manager, taking responsibility for health, care, nutrition, and the training of the horses, while Mark would be in charge of the business and marketing aspects. The business plan also estimated losses for 2000 and 2001 at a total of $31,000, but averaged profits from 2002-2005 with a total of $152,000. Starting in 2000, the petitioners operated their horse ranch, Fresh Horses Farm, on their family property in Delano, Minnesota. During the years in question, Patti and Mark did not hire anybody to manage their horse business, but opted to do so on their own, including training and medical. To manage the monetary aspects of the horse business, the Blackwells opened a back account under the name of FHF and used BarnPro, a software program that records FHF income and expenses. In 2006, the petitioners ceased reining horses and began cutting horses, since cutting horses were in higher demand in the horse industry. Furthermore, they started selling some of their horses as long yearlings so they would not have to pay the expenses involved in keeping the horses longer. Out of the fifteen horses that were purchased between 1998 and 2008, only eleven were sold, and were done so at a loss. Of the remaining four, three were sold at a minimal profit, and one died, resulting in an insurance payment to the petitioners. Between the years of 1999 and 2008, the petitioners obtained and sold an additional twenty-one horses, which they received by means of breeding with outside horses. The foals, after being raised and trained, were later sold. When the unexpected death of one of the more prized horses came about in 2007, the petitioners faced a drastic setback to the plans of profitable breeding. When 2009 came around, the petitioners came to the conclusion that their business was not sustainable, thus terminating their horse breeding business. On the petitioners’ Federal income tax returns dating from 2003 to 2009, the petitioners attached a Profit or Loss From Business for, where they reported gross income, total expenses, net operating losses, and gain from the sales of business property in relation to the FHF business. When audited for 2005 and 2006, the respondent concluded that the petitioners’ FHF business was not eligible to be an activity engaged in for profit, thus not allowing deductions for the reported business expenses. This decision was based on section 183a and b, which states that an activity to be considered as ‘engaged in for profit,’ the activity must be executed by the taxpayer with an honest profit objective. The manner in which the activity of horse breeding was carried on was looked into, and it was noted that the petitioners carried on their activity in a completely businesslike fashion. Prior to their horse breeding business, the petitioners were not recreational horse owners. When they considered starting their business, they took necessary steps to secure the knowledge to run a successful and profitable horse breeding business. The petitioners kept records of income and expenses and, when they determined that the business was no longer profitable, terminated it. The education and experience that went into tending to a horse breeding business by the petitioners was intense enough for the petitioners to have a horse breeding business for profit. Furthermore, the time, effort, and financial resources that went into the business were not suggestive of a hobby, but rather of a for-profit activity. Even though Patti held a lifelong interest in horses, there is nothing to suggest that the horse breeding business was done out of personal pleasure, but with the hopes of making a profit. Given the above information, as well as the fact that the income did not exceed the expenses, it has been determined that the horse breeding business hold a profit objective. 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