In Uncategorized on 05/18/2023 at 18:42

Judge Morrison issues a puzzling off-the-bencher in Leslyn Jo Carson & Craig Carson, Docket No. 23086-21S, filed 5/18/23. This small-claimer involved the six-figure deductions for what IRS claimed was Leslyn Jo’s kids’ rodeo activities, wherein said kids made appropriately small money. IRS says this is a Section 183 hobby loss case.

But Leslyn Jo shows the deal she had with her Mom’s revocable trust, which owned an actual ranch, whereat the kids did rodeo somewhat. The deal was that Mom sold cattle, took gross proceeds and paid tax thereon, while Leslyn Jo paid the expenses and deducted same.

IRS wants to allocate expense between Leslyn Jo’s Mom’s cattle and the kids’ rodeoing, but Judge Morrison isn’t wearing it.

“The Court declines to refocus the Commissioner’s challenge to the Schedules F deductions by determining what relatively small part of the activities reported on the Schedules F consisted of rodeo activities rather than ranch activities. To do so would be difficult in this case. Although Mrs. Carson kept meticulous details of the expenses that were deducted on the Schedules F, and although these records would have allowed the Court to more precisely sort the expenses between ranching and rodeo, Mrs. Carson did not bring the records to trial.  She believed–correctly–that the Commissioner did not challenge the substantiation behind the deductions. Without the substantiation, the Court cannot sort the deductions between ranch and rodeo without resorting to rough justice. Under these unique circumstances, I hold that the Commissioner has waived the right to refocus his challenge on the relatively narrow rodeo activities. I further hold that the activity or activities reported on the Schedules F for 2017 and 2018 were engaged in for profit.”  Transcript, at pp. 9-10.

OK, none of this merits the description “puzzling.” But this does.

“I recognize that the Commissioner contends that there is a mismatch of income and expenses in that the revenue from the ranch, which consisted primarily of proceeds of selling cattle, was reported on the returns of Mrs. Carson’s mother, while expenses of the ranch were reported on the Carsons’ Schedules F. This mismatch appears to be primarily attributable to the business arrangement between Mrs. Carson and her mother, whereby Mrs. Carson paid expenses of the ranch and her mother received the revenues from the ranch, rather than the hobby-loss distinction made by section 183. A mismatch of income and deductions is not prohibited under the Code per se, but may be relevant in determining the appropriateness of accounting methods and in determining the appropriate allocation of income and deductions between partners. However, these legal issues are not before the Court.” Transcript, at p. 10.

What’s puzzling is that IRS’ counsel never picked up on Subchapter K after hearing Leslyn Jo’s account of the deal with Mom. This is a partnership with special allocations; whether this split-up would survive a Section 482 reallocation is another story.

Leslyn Jo objected to IRS putting in evidence as to years not at issue, but in a Section 183 hobby loss out-years are relevant whether engaged in for profit (e.g., did the activity ever make money; did taxpayer change operations or amend business plan after losses).

And Craig sat this one out, but he gets whatever deficiency the Rule 155 beancount comes up with, at no extra charge.

Footnote- I mention Cardiovascular Center, LLC, T. C. Memo. 2023-64, filed 5/18/23 just for the record. It’s a classic Section 7436 classification of all employees and the boss’ girlfriend. Not a single factor in favor of IC, and an EE landslide. SSA Section 530 avails naught: no long-standing industry practice, and no Forms 1099-MISC nonemployee compensation anywhere.

  1. Best headline yet this year. What wasn’t mentioned in the opinion was the age of the kids, whose rodeo winnings and pay from neighboring ranchers were being reported by the parents. How would you go about doing a Rule 155 computation on this case?


  2. Mr Kamman, a good question. True, as we don’t know the ages of the children, we don’t know if Section 1(g) applies. However, maybe Section 73 applies in any event, and forms the basis upon which Leslyn Jo included the rodeo and chore income in the Sched Fs to her 1040 MFJs. Judge Morrison doesn’t go there. He makes no reference to chops, so we cannot tell if Leslyn Jo relied upon a paid preparer or other experts. Perhaps determination of any chops will abide the results of the Rule 155 beancount for the five-and-ten determination. Judge Morrison refers to Leslyn Jo’s “meticulous details of the expenses that were deducted on the Schedules F.” Transcript, at p. 9. But none of these made it into the record, as IRS seems not to have challenged substantiation in pleadings or on trial. So perhaps these will assist clearing up the Rule 155, albeit not in the trial record. Objections to substantiation waived by IRS? All in all, I wish we had more details.


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