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INDIVIDUALS

Sec. 172: Net operating loss agricultural law if he bred minia- objective and that the loss deduc-
deduction ture donkeys. tions were allowable.
In Villanueva, the court considered Seeking to build a profit-making
whether the taxpayer was entitled to a business for his daughter, he moved Sec. 212: Expenses for the
net operating loss (NOL) deduction.55 forward with such a plan in 2010. production of income
The taxpayer initially reported a loss Despite the taxpayer’s having AGI In Olsen, the Tenth Circuit affirmed
from the disposition of a condominium from his other business pursuits of a Tax Court holding that investors
in California on Form 4797, Sales of $21 million and $29 million in 2013 in a solar power tax shelter scheme
Business Property, attached to his 2013 and 2014, respectively, his miniature were not entitled to depreciation
tax return. Upon examination, it was donkey–breeding activity produced deductions or credits for the solar
determined that a mortgage lender had losses of $87,236 and $47,039. The equipment, as no profit motive was
foreclosed on the property in 2009, and IRS denied these deductions upon established for the purchases.57
the taxpayer lost possession of it then. audit on the grounds that the activity In Luna, the taxpayer made
The taxpayer then prepared amended was not carried on as a trade or busi- numerous miscellaneous itemized de-
returns for 2009 through 2013 during ness but instead as a hobby. However, ductions for unreimbursed employee
the audit. The 2009 amended return in applying the nine factors provided expenses.58 The IRS disallowed the
reported the disposition of the condo at by Regs. Sec. 1.183-2, the Tax Court full amounts claimed on the return,
a loss, but the amended return was not concluded that the taxpayer “entered concluding that the deductions were
filed. The taxpayer contended that he into the breeding activity with the not allowed due to lack of substan-
was allowed an NOL for 2009, which dominant hope and intent of making tiation and that the taxpayer failed
would then carry forward to 2013. The a profit.” to establish that the expenses were
court found that even if he had a loss Despite the taxpayer’s not hav- ordinary and necessary in connection
on the foreclosure in 2009, he did not ing a written business plan for the with a trade or business.
establish that the carryover amount activity, the court determined that his
was still available in 2013. Therefore, overall actions presented evidence of Sec. 213: Medical, dental,
the court concluded that the taxpayer his profit objective. This was further etc., expenses
was not entitled to an NOL deduction demonstrated by the changes the In Salter59 (also discussed above
for 2013. taxpayer implemented through the under Sec. 72 and below under Sec.
years in response to problems such 274), the taxpayer made a distribu-
Sec. 183: Activities not as stillborn deaths of the animals. tion from a retirement plan. To
engaged in for profit While the taxpayer himself expended avoid the 10% additional tax on the

In Huff, a miniature donkey–breeding limited time and effort in the activity, withdrawal, the taxpayer claimed an
activity was deemed to have a profit he engaged the services of various exception due to medical expenses.
motive despite losses from 2010 experts for help with the operation But the taxpayer did not show he
through 2017, including the tax years of this specialized breeding busi- incurred any medical expenses, and
at issue, 2013 and 2014.56 In addition ness (some for vision and others for therefore the exception was rejected.
to the breeding activity, the taxpayer execution). In Patitz,60 deductions were de-
owned a successful investment man- Finally, regarding the elements of nied for medical expenses, as there
agement firm with a “research-driven personal pleasure and recreation from was no substantiation or evidence
investment philosophy.” After purchas- the activity, the taxpayer testified that about whether health insurance had
ing farmland in New Jersey in 1987, he derived “zero personal pleasure” covered them.
the taxpayer researched the best use of and stated, “These are not pets. This
the property through his investment is like livestock” and that the minia- Sec. 215: Alimony, etc.,
management firm. From this research, ture donkeys were “quite ugly” and payments (repealed)
the taxpayer determined that he would looked like a “gigantic hairball.” The In Rojas,61 deductions for pre-2019
receive benefits under New Jersey court concluded that he had a profit alimony were not allowed since the

55. Villanueva, T.C. Memo. 2022-27. 59. Salter, T.C. Memo. 2022-29.
56. Huff, T.C. Memo. 2021-140. 60. Patitz, T.C. Memo. 2022-99.
57. Olsen, No. 21-9005 (10th Cir. 11/4/22), aff’g T.C. Memo. 2021-41. 61. Rojas, T.C. Memo. 2022-77.
58. Luna, T.C. Summ. 2022-18.

40 March 2023 The Tax Adviser