In Uncategorized on 08/23/2018 at 16:41

Yes, racing fans, it’s ClassicStar again, the horse-breeding sham that has provided me with blogfodder and today provides Judge Mark V Holmes (Dissenter/Concurrer, Old China Hand and Master Silt Stirrer) with some lines which might earn him a diss from Judge Posner.

ClassicStar claimed to own and lease racehorses, which lessees supposedly bred for profit, but generated big losses based upon loans from a lender commonly-controlled by ClassicStar’s principals. But the horses weren’t all thoroughbreds, and one of them was a gelding, a fact Judge Holmes mentions five (count ‘em, five) times in the opinion.

Here’s Scott A. Householder and Debra A. Householder, 2018 T. C. Memo. 136, filed 8/23/18. It’s the usual post-event ballpark guestimates to get around Section 469’s “material participation” obstacle. To the extent Scott and Deb did anything horsey, they did so at ClassicStar’s direction to paper the transaction.

Speaking of Judge Posner, Judge Holmes quotes his famous “goofy regulation” remark about the Section 183 regulations.

“The regulations tell us to determine taxpayers’ subjective intent to make a profit ‘by reference to objective standards, taking into account all of the facts and circumstances.’  Sec. 1.183-2(a), Income Tax Regs.  They give us nine factors to consider, but tell us that ‘[n]o one factor is determinative,’ that we can consider factors not on the list, and that we shouldn’t simply compare the number of factors that suggest a profit motive to the number of factors that don’t.  Sec. 1.183-2(b), Income Tax Regs.  The Seventh Circuit has called this ‘a goofy regulation’ and has said we’d be better off if, instead of ‘wading through the nine factors,’ we took a more holistic approach to determining whether a taxpayer intended to turn a profit.  Roberts v. Commissioner, 820 F.3d 247, 250, 254 (7th Cir. 2016), rev’g T.C. Memo. 2014-74.  It did something like that in a recent opinion in a horse breeding case.  See Estate of Stuller v. United States, 811 F.3d 890, 896-98 (7th Cir. 2016).  But the cases before us are appealable to the Ninth Circuit, so we’ll screw in our calks and into the mud we go.” 2018 T. C. Memo. 136, at p. 37.

Of course, Scott and Deb fail the tests, and their evidence is dubious at best.

And it really doesn’t matter whether factors or holistics rule.

“This is not a case where slogging through the ‘goofy’ regulation would ever lead to a result different from taking a ‘holistic’ approach.  The regulatory factors together show that the Householders got involved with ClassicStar with the intent to generate losses, not profits.  The documents ClassicStar sent them before each breeding season showed them how to offset the income they expected from other sources.  They signed a 2002 contract not knowing what horses they were leasing, and they signed a 2003 schedule of horse pairings that included quarter horses and a gelding.  The activities they logged were largely recreational.  And from the beginning they knew they’d be able to convert their mare-leasing interests into stakes in related entities–some of which they later used to satisfy their [controlled corporation] loans.  Looked at all together, we find that what they wanted from their horse breeding activity was tax savings to offset their large income from other sources.” 2018 T. C. Memo. 136, at p. 45.

Scott and Deb raise a last-minute plea they were robbed, and no doubt the ClassicStar promoters were guilty of a lot. But their claim depends upon the value of the stock they swapped for their leases, and this was new matter, requiring new proof, so it gets bounced.

And the Section 6751(b) Boss Hoss was already decided. See my blogpost “Greenberg’s Express – Not the Last Stop,” 7/13/18.

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