Paging Peter Reilly

My colleague Peter Reilly, CPA,  and I have spent much time trudging through the “impenetrable morass, unintelligible alike to laymen and lawyers,” that encompasses the “goofy regulation,” Reg. Section 1.183-2(b) and its nine (count ’em, nine) factors. Full many a time have we seen the wealthy hobbyist unhorsed; but at odd whiles the wannabe, though beset by losses, wins through. See, for example, Lowell Den Besten’s story “Cutting Horses Gone to Seed,” 11/25/19.

Today we have rags-to-riches hedgefundie William R. Huff, and his lawyer wife Cathy Markey Huff, 2021 T. C. Memo. 140, filed 12/21/21,* applying their awe-inspiring business skills to try to set up a miniature donkey breeding business (no, I promise you I’m not making this up; I haven’t touched a drop yet today) to supplement daughter Jenny’s income from her dog-grooming gig (which also loses money).

Wm. R. started in Hell’s Kitchen on our Minor Outlying Island, went through City U’s B School, and ended up with his own hedge fund, a brigade of researchers, and AGI north of $21 million. He bought Jenny a NJ farmstead for her doggery, and after his friend Mr P suggested miniature donkey breeding, bought the next-door farm, signed up for the NJ farmers’ relief program (the Garden State, remember), and ran a tight ship and a bunch five-figure losses (Merry Christmas, Judge Holmes).

Judge Patrick J (“Scholar Pat”) Urda finds Wm. R. really truly wanted to make the business profitable, so as to hand it over to Jenny. He relied on Mr P, apparently a seasoned miniaturist, and questioned his advice when it didn’t work. He consulted with every agricultural extensionist he could find, including but without limiting in any way the generality of the foregoing those On The Hill Far Above. He kept good records. When Mr P tried to craft too sweet a deal to sell him some mokes, Cathy intervened to make it fair.

Wm. R. took jackets off the donkeys when it got too cold, changed their feed, electrified their barn, and kept on top of his manager. While busy making millions elsewhere, he was more than a passive investor.

You can read for yourselves Judge Scholar Pat’s dissertation, but, as always, Taishoff has the real story.

Miniature donkeys aren’t fun. “At trial Mr. Huff credibly testified that he derived ‘zero personal pleasure’ from the miniature donkeys. As he explained: ‘It’s a lot of work. * * * I don’t cuddle them. I don’t pet them. * * * [T]here is no satisfaction of having these. These are not pets. This is like livestock.’ In fact, Mr. Huff testified that miniature donkeys are ‘quite ugly’ and look like a ‘gigantic hairball’. Mr. Huff also pointed out that, unlike horses, miniature donkeys could not make up for the hard work with the joys of the saddle. Jennifer echoed this point, explaining that her ‘dad’s kind of a business guy * * * not the cuddly animal type’. Finding Mr. Huff’s cool personal feelings toward the miniature donkeys believable, we conclude that this factor favors the Huffs.” 2021 T. C. Memo. 140, at p. 41.

Wm. R. wasn’t burying telephone numbers of income in donkey droppings. His losses went down during the years at issue;  loss-leader sales were to show farm income to justify the NJ benefits. And if he wanted to give Jenny money, “there were other, significantly easier ways to do it.” 2021 T. C. Memo. 140, at p. 39.

Ultimately, when you show eight figures of AGI and a three-quarter billion-with-a-B net worth, $30K of write-off isn’t much of a shelter. Note that the donkey business was the only thing for which IRS nailed Wm. R. and Cathy for years at issue.

So, as we remember the late great Brig. Gen. Jimmy Stewart, USAF, in “It’s a Wonderful Life,” let’s repeat the immortal greeting “Hee Haw!”

*William R Huff 2021 T C Memo 140 12 21 21