Page 167 - TaxAdviser_2022

TAX TRENDS

facts and circumstances, and evidence contrary if a taxpayer employed com- startup phase of an activity do not. In
from outside the particular tax years at petent and qualified people to work in the court’s view, Huff was still in the
issue may be considered. the activity. Here, although Huff only startup phase of the activity in 2013
Regs. Sec. 1.183-2(b): This regula- had a small amount of time to devote and 2014, so the losses he had incurred
tion provides nine objective factors that to the activity, he employed Papetti to in those years did not show a lack of
should be considered in deciding if a give operational advice and had another profit motive.
taxpayer has a profit motive for an activ- person who maintained the farm and Occasional profits from the ac-
ity: (1) the manner in which the taxpayer the donkeys, so the court found that this tivity: As the Huffs had not made any
carries on the activity; (2) the expertise factor favored the Huffs. profit, occasional or otherwise, from the
of the taxpayer or his or her advisers; Expectation that assets may miniature donkey activity, the Tax Court
(3) the time and effort expended by appreciate in value: The court deter- found this factor favored the IRS.
the taxpayer in carrying on the activity; mined that this factor favored the IRS. Financial status of the Huffs: The
(4) the expectation that assets used in While Huff asserted that he expected regulations state if a taxpayer has sub-
the activity may appreciate in value; (5) his miniature donkeys and his farmland stantial income from sources other than
the success of the taxpayer in carrying to appreciate in value, he offered no evi- the activity in question, this may indi-
on other similar or dissimilar activities; dence to show either would appreciate, cate there is not a profit motive for the
(6) the taxpayer’s history of income or and the way he had conducted the oper- activity, particularly if the activity has
losses with respect to the activity; (7) ations indicated that an increase in value a recreational or personal element. Al-
the amount of occasional profits, if any, of his miniature donkeys was unlikely. though Huff and his wife were rich, the
from the activity; (8) the financial status Success in other activities: Regs. court still found that this factor favored
of the taxpayer; and (9) elements of Sec. 1.183-2(b)(5) states that “[t]he fact the Huffs. It first noted that although
personal pleasure or recreation. Neither a that the taxpayer has engaged in similar the Huffs had substantial assets, the
single factor nor the existence of even a activities in the past and converted them miniature donkey activity was eventually
majority of the factors is controlling but from unprofitable to profitable enter- to be turned over to their daughter as a
rather an evaluation of all the facts and prises may indicate that he is engaged source of income, and Huff had credibly
circumstances is necessary. in the present activity for profit, even testified that he would not give her a
Manner of carrying on the ac- though the activity is presently unprofit- business that was losing money. Thus,
tivity: A taxpayer must carry on the able.” The Tax Court found that the it was reasonable to believe that they
activity in a businesslike manner. The miniature donkey activity was simply were sensitive as to whether the business
court found that this factor favored a smaller-scale version of the activities made a profit.
the Huffs because Huff had a business that Huff did at Huff Asset Manage- In addition, the court found that
plan for Ecotone, albeit unwritten, and ment, researching the operations of a based on what Huff knew when he
when confronted with problems with company and its respective industry, ana- started the activity, he could reason-
its breeding operations, made changes lyzing that information, and using it to ably have believed that he could turn
that were intended to improve the activ- “decide how to best pursue a profit.” The a profit on it. Furthermore, the court
ity’s profitability. court observed that in his past business was persuaded that during the years at
Expertise of Huff and his advis- history with Huff Asset Management, issue, 2013 and 2014, Huff believed he
ers: Preparation for an activity by exten- Huff had seen situations where “initial was close to turning the corner. Thus,
sive study or consultation with experts losses gave way to strong returns,” and while the Huffs’ considerable fortune
also may indicate a profit motive when thus it was not unreasonable for Huff to allowed them to plow ahead, it did not
the taxpayer carries on the activity as believe that the miniature donkey activ- alter their end goal of making a profit on
advised. The court found this factor fa- ity would likewise one day turn a profit. the activity.
vored the Huffs, as Huff had conducted Thus, the court found this factor favored Elements of personal pleasure
extensive research into miniature donkey the Huffs. or recreation: While many people may
breeding and enlisted the aid of Papetti, History of income or losses for consider miniature donkeys cute and
who had expertise in the field. the activity: Despite the fact that the adorable creatures, Huff was the person
Time and effort expended: The miniature donkey activity had seen doing the work in the activity, and, based
Tax Court stated that devoting personal nothing but losses, the court concluded on his testimony to the court, he derived
time to an activity indicated a profit mo- that this factor also favored the Huffs. no satisfaction from owning the donkeys
tive, but only devoting a limited amount While consistent losses indicate a lack and considered them to be nothing
of personal time did not indicate the of profit motive, losses in the initial or more than livestock. Taking Huff at

58 March 2022 The Tax Adviser