For the backstory on Mitchel Skolnick and Leslie Skolnick, et al., 2021 T. C. Memo. 139, filed 12/16/21*, see my blogpost “Horsefeathers,” 6/3/19. And to my colleague, Peter Reilly CPA, here’s another “goofy regulation” case for your reading pleasure.

It’s Mitch’s case, as his former spouse and her successor are in it only because MFJ. Mitch, heir to a vitamin-pill fortune, was introduced to harness racing (that’s trotters and pacers, another horse-drawn Hoover for your loose cash) by Daddy. He retired from his successful software development company to run Daddy’s operation, but quit after a family feud. He and a Cornell grad (Eric, the al), who had made out selling insurance to Daddy and others, founded Bluestone Farms, a partnership-taxed LLC.

On the trial, Eric testified that Daddy “…warned Eric that, if he invested in the syndicate, he might lose all his money, but that he would meet interesting people he would otherwise not have met. Eric testified at trial that both predictions proved ‘prophetic.’” 2021 T. C. Memo. 139, at p. 5.

So Mitch and Eric bought the farm (literally, a NJ dairy farm) and started breeding Standardbreds. Mitch liked this because it was like computer programming, figuring which stallion to breed with which mare. But Mitch and Eric, and a passive investor they brought in, went through four (count ’em, four) business plans, each one losing more money than the last. Mitch, fortunately, had the trust fund Daddy set up for him.

Judge Albert G (“Scholar Al”) Lauber goes through Mitchel’s unsuccessful horsing around and his more successful drain of Bluestone cash for his personal expenses. Bluestone eventually racked up $7 million in losses over 12 (count ’em, 12) years. And Bluestone’s recordkeeping was not of the best. But the result comes out to between 150% and 300% of expenses to income, until one year (not at issue) when it did make a profit, finally breeding a winner.

That’s about the right ratio for winning to losing tickets, be it flat or sulky; believe me, I know.

Mitch and Eric used credentialed CPAs, each with his own. And Bluestone did survive one year’s audit with a “no change,” although Section 183 wasn’t considered.

Now comes the SNOD, the initial expert joust more particularly bounded and described in my blogpost hereinabove cited, and the trial, with five (count ’em, five) experts, four horsemen and one farmland appraiser. Before doing the usual mix-and-match Judge Scholar Al does some pruning of the experts’ testimony “… excluding portions of certain reports as irrelevant, outside the scope of their expertise, or invasive of the province of the Court.” 2021 T. C. Memo. 1390, at p. 27. Right on, Judge; give these guys a nose and they’ll take a furlong.

The Section 183(d) two-of-seven for horsing around is out for the years at issue; none showed a profit. So comes the trudge through the “goofy regulation.”

Some of the operating accounting and operations were professional grade, but the partners’ capital accounts, contributions, and distributions were a mess. There were business plans, but these were out of date for most of the years at issue, and. nothing was done to staunch the losses. Mitch and Wife Two lived on the farm rent-free, had the farmhouse disassembled nail by nail and rebuilt to their specifications, and prettied the place up to the extent of $35K for their wedding, all using Bluestone money and paying none of it back.

Though Mitch makes much of the horse-by-horse recordkeeping, that alone doesn’t evidence an intent to make a profit. And here Judge Scholar Al makes an observation close to my heart. “Wine enthusiasts may keep detailed records about every bottle of wine in their cellars, including date of purchase, acquisition price, tasting notes, and anticipated period of drinkability. * * * Maintaining such records does not mean that the person is engaging in the activity with the intent to make a profit. It just shows that he or she is a serious hobbyist as opposed to a careless amateur.” 2021 T. C. Memo. 139, at p. 38.

Judge, I have  written records, spanning forty-six years, of every wine, and almost every spirit, I’ve drunk, with extensive notes of provenance, cost, date, place, food (if any), and labels or copies thereof. I’ve never made a dime, nor intended to, but it’s been a great ride.

True, Mitch talked to experts, but never showed he asked about making money, only about running a top-class operation. Mitch and Eric were office types; they hired people to do the dirty work. And while the land did appreciate over the years, it was farmland, and Reg. Section 1.183-1(d)(1) requires farming activities, though separate from landholding, must offset the net cost of landholding. With telephone number losses from horsefarming, no way could that happen. Yes, the one horse who turned out to be a big winner finally came in after the years at issue, but Mitch had sold a piece of that horse to someone else. Both Mitch and Eric had heavy-duty other income, so they were using their horsing around to get us taxpayers to subsidize their horsestuff. They want to rely on the “no-change” audit from a single early year to prove an NOL, but that exam didn’t go into goofy regulationdom. Their records are only a statement of claim, not proof.

Finally, Mitch and Eric had fun, socialized with top-drawer Standardbreeders and owners, and lived the lives of the rich and famous.

Relying on their CPA, Mitch tries to get out of a late-filing add-on for one year. The return was a year late, but the CPA said, because he thought no tax was due, it could wait while he was busy with other matters. Except there’s a personal, non-delegable duty to file on time. But because both Mitch’s and Eric’s respective CPAs have a bushelbasketsful of credentials and years of experience in the horse game, no accuracy chops.

*Mitchel Skolnick 2021 T C Memo 139 12 16 21