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a commercial farm in New Jersey, which donkey purchases and sales, veterinarian
would entitle it to valuable protections visits, and costs such as equipment, sup-
under state law. The Tax Court plies, maintenance, and services. It had
After completing extensive pre- held that the its own bank account and credit card,
liminary research, Huff decided to give Huffs’ losses and it maintained business filings as a
breeding miniature donkeys a try. Al- separate entity. Ecotone also maintained
though he had been a city boy who grew from Ecotone’s a registry of miniature donkeys and
up in the Hell’s Kitchen neighborhood donkey-breeding registered each one with the Miniature
of Manhattan, Huff thought himself Donkey Registry.
well positioned for success, given his activity were On its returns for the years 2010
allowable because
unused farmland, his deep research into through 2017, Ecotone reported a
husbandry, and the expertise of Papetti, they engaged in net loss each year ($21,594 for 2010;
who had agreed to help him with his $69,272 for 2011; $65,304 for 2012;
the activity with an
venture. The breeding operation was to $87,236 for 2013; $47,039 for 2014;
be conducted through Ecotone. actual and honest $48,926 for 2015; $24,058 for 2016; and
However, according to the Tax Court, $35,656 for 2017). These losses passed
Huff’s main objective for going into objective of making through to Huff and his wife.
the miniature donkey breeding business a profit. The IRS audited Huff’s returns for
was not his own profit. Instead, it was 2013 and 2014. It disallowed the losses
for Jennifer, who, although independent from Ecotone, claiming that Ecotone
from her parents, had only modest earn- the ones it purchased and receiving only was not carrying on a trade or business
ings. Although Jennifer had at that time $23,500 for the ones it sold. and was an activity not engaged in for
no real experience with miniature don- Initially, Huff relied on Papetti’s ad- profit. Huff challenged the IRS’s deter-
key breeding, Huff believed that once vice almost exclusively for breeding his mination in Tax Court.
he had the breeding operation properly miniature donkeys. The original plan was
established, he could turn it over to her to breed each female donkey as often as The Tax Court’s decision
and it would provide her a stream of possible, which was generally once a year. The Tax Court held that the Huffs’
income in future years. After experiencing problems early on losses from Ecotone’s donkey-breeding
The Huffs dedicated 25% of their with stillborn and genetically defective activity were allowable because they
farmland to Ecotone for the miniature foals, Huff changed the breeding strat- engaged in the activity with an actual
donkey breeding operation. The land egy, limiting Ecotone’s female donkeys and honest objective of making a profit.
used, the location of buildings and to breeding once every two years. He The court found that while the approach
fencing, and the materials used for the believed that this would overall increase Huff used through Ecotone may have
buildings and fencing were all care- Ecotone’s returns over the breeding life of been misguided and its operation may
fully chosen by Huff, based on Huff its female miniature donkeys by produc- have never achieved profitability, it did
Asset Management employees’ previous ing fewer but superior quality foals. not mean Huff did not have an honest
research, Papetti’s personal experience, In response to the deaths in the early profit motive for the breeding activity.
research conducted personally by Huff, years of a number of donkeys from cold The Tax Court employed an analysis
and the advice of other experts. winter temperatures, Huff made changes of the nine factors set out in Regs. Sec.
Ecotone bought five miniature don- to their sheds, changed their feeding 1.183-2(b).
keys between May and August 2010 schedules (in hopes of raising their As the court explained, under the
and bought another 20 over the next metabolism to keep them warmer), and hobby-loss rules of Sec. 183, a taxpayer
eight years. The miniature donkeys quit making them wear jackets (because may not deduct expenses associated with
that Ecotone purchased were largely the jackets may have made them less an activity not engaged in for profit. To
chosen on Papetti’s advice, which Huff resistant to the cold). To prevent disease, escape this rule, a taxpayer must engage
did not always take. Ecotone also sold he began rotating the animals’ paddocks in an activity primarily with the hope
20 miniature donkeys during that time. and, believing that their feed might be and intent of making a profit. The ex-
Throughout the years, one thing re- causing problems, he experimented with pectation of a profit does not have to be
mained constant: Ecotone paid substan- supplemental feeds. reasonable, but it must be genuine. The
tially more to acquire miniature donkeys During the years at issue, Ecotone determination of whether the requisite
than it sold them for, paying $92,985 for maintained books and records detailing profit motive exists is based on all the

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