In Uncategorized on 04/13/2012 at 10:30

Robin S. Trupp was an Olympic equestrian prospect in his youth, but turned to practising law for a living. He never gave up his equestrian ambitions, developing a specialized practice in horse law. His son Austin carried on the dream, competing in equestrian events, at which Dad showed up to cheer on young Austin and incidentally promote his equestrian law practice, as the family cognomen blared from the loudspeakers.

Robin ran up $72K in equestrian-related expenses one year, didn’t file a return, and got a SFR and a SNOD. Robin sought redetermination, and Judge Goeke obliges, in Robin S. Trupp, 2012 T.C. Mem. 108, filed 4/12/12.

Robin loses his cellphone and travel deductions for the usual want-of-substantiation, but gets $2K for storing his files (his cheapskate firm won’t pay for that), and $78 for tax preparation services. Robin, don’t spend it all in one place. Now we come to the horses.

Robin claims that traditional advertising in the horsy set print media gets nothing, so he starts hanging around the horse shows when young Austin is saddled up, expecting the fans to hear the name “Trupp” and come at the gallop. He claims he got 35 clients that way, but produces no retainers and doesn’t show more than  $2K in horse-related income for that year. The rest of his hefty paycheck came from non-horse clients or from clients he picked up years before.

Now a taxpayer can combine horses (or any other hobby-type activity) with another real-live business activity, provided the combination is reasonable and not artificial. And getting business by showing up at equestrian events, without media advertising, can be reported as a combined business activity.  See Topping v. Com’r., 2007 T.C. Mem. 92.

Tracey L. Topping designed barns. Print advertising did nothing for her, so Tracey entered equestrian events, hired tables at events  at which she hobnobbed with potential customers, kept records and made money. And she beat IRS past the Tax Court finish line.

Judge Goeke: “Multiple undertakings of a taxpayer may be treated as one activity if the undertakings are sufficiently interconnected. Sec. 1.183-1(d)(1), Income Tax Regs. The most important factors in making this determination are the degree of organizational and economic interrelationship of the undertakings, the business purpose served by carrying on the undertakings separately or together, and the similarity of the undertakings. Id. The Commissioner generally accepts the taxpayer’s characterization of two or more undertakings as one activity unless the characterization is artificial or unreasonable. Id.

“Other factors considered in determining whether a taxpayer’s characterization is unreasonable include: (1) whether the undertakings are conducted at the same place; (2) whether the undertakings were part of the taxpayer’s efforts to find sources of revenue from his or her land; (3) whether the undertakings were formed as separate activities; (4) whether one undertaking benefited from the other; (5) whether the taxpayer used one undertaking to advertise the other; (6) the degree to which the undertakings shared management; (7) the degree to which one caretaker oversaw the assets of both undertakings; (8) whether the taxpayer used the same accountant for the undertakings; and (9) the degree to which the undertakings shared books and records.” (Citations omitted.)

And note the magic word “land” in item 2 on the Regulation laundry list; Robin argued his combined horse and legal experience was a capital asset that might increase in value, like land, but Judge Goeke wasn’t buying. The matrimonial judges around here seem to think a professional practice is a substantial capital asset.  For my part, I can only say that mine kept me and mine eating for 45 years–none too shabby, as they say.

But Robin’s horsey takings were a tiny fraction both of his overall income and of the expenses he wanted to deduct in furtherance of his horsing business. He produced no records, didn’t compete himself, and didn’t rent tables at events (Robin said that cost too much), so he didn’t show a sufficient profit motive and thus he can’t combine his law practice with anything equine.

Before heading for the barn, one more point. Robin didn’t represent himself (good move), but the marshalling of evidence wasn’t of the best. Trotting out some timesheets showing his weekend chat-ups with the dressage crowd at the show ring while Young Austin did his thing, and bringing in a few retainers he got during the year at issue (even if the billings didn’t show much that year, a few bills from the next ensuing years might show that mighty oaks from little acorns grow, and a lot of revenue doesn’t accrue to an attorney in Year One anyway; I’ll testify to that anywhere and everywhere), would have helped enormously. Judge Goeke dismissed Robin’s attempted Section 7491(a)(1) burden-of-proof shift with the usual “not enough, and anyway preponderance says you lose.” We see that story told again and again, so here’s a takeaway:

Beside wood-shedding the client, get the papers. And be a little outside-the-box when looking for evidence; remember that “And then what happened?” shouldn’t be relegated to bedtime stories.


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