Page 162 - JoFA_2022

TAX MATTERS

complicated calculation of the recapture began W.R. Huff Asset Management Co. could be entered into for profit, it had
amount on Form 8828, Recapture of in 1984. The business was successful, and often seen cases where a horse-breeding
Federal Mortgage Subsidy. in 2005 Forbes reported Huff’s net worth activity did not have a legitimate profit-
as $750 million. In 1987, Huff purchased making purpose. It quoted Helmick, T.C.
Don’t leave money on the table a farm in New Jersey where he and his Memo. 2009-220, in observing that the
Based on the potential tax credits and wife lived and purchased additional land “stereotypical abusive scenario ... is the
the limited reach of the recapture rules, adjacent to the farm in the late 1990s on wealthy businessman who runs a real
qualifying taxpayers should take ad- which their daughter lived. business during the week ... and owns a
vantage of the mortgage interest credit. In 2004, Huff and his wife formed ‘gentleman’s farm’ as a weekend retreat
As the example shows, a taxpayer who Ecotone Farm LLC, of which they were where he keeps horses for the recreation
qualifies but does not apply for the credit the sole owners. Ecotone’s operating of himself and his family and friends.”
could be leaving a significant amount of agreement said it was organized for Such a taxpayer “dabbles in breeding
money on the table. “agricultural and equestrian or equine horses, with no expectation of ever
To find out more about the mortgage purposes including ... breeding and making a profit, so that he can deduct the
interest credit and how it is admin- raising animals.” By 2010, the Huffs had expenses of his horses and thereby have
istered, homebuyers should contact settled on Ecotone’s activity as breeding Uncle Sam subsidize the weekend farm”
their state or local government housing miniature donkeys, after conducting (Helmick, slip op. at 7).
agency authorized to issue MCCs. research assisted by Huff’s staff at his as- Because the Huffs were the sole mem-
set management company. Huff also ob- bers of Ecotone, the Tax Court looked to
— Travis Wheeler, CPA, M. Acc., is tained advice from a friend with extensive their actions in running it to determine
a manager at Rudd & Co. PLLC in experience in the field, who continued to whether there was a profit motive for
Rexburg, Idaho. serve as an adviser after Ecotone began the donkey-breeding activity. The court
the donkey-breeding activity. applied the nine objective factors in Regs.
Huff intended to develop the min- Sec. 1.183-2(b) for determining whether
iature donkey business into profitability a profit motive exists: (1) the manner in
and then turn it over to his daughter. In which the taxpayer carries on the activity;
2010 through 2018, Ecotone purchased (2) the expertise of the taxpayer or his
25 donkeys and sold 20 of them. or her advisers; (3) the time and effort
Ecotone reported a net loss on its expended by the taxpayer in carrying
partnership returns each tax year for 2010 on the activity; (4) the expectation that
through 2017 of between $21,594 (2010) assets used in the activity may appreciate
and $87,236 (2013). To that extent, the in value; (5) the success of the taxpayer
losses offset the Huffs’ adjusted gross in carrying on other similar or dissimilar
Losses from millionaire’s income, which in 2013 and 2014, the activities; (6) the taxpayer’s history of
donkey breeding allowed years at issue, was approximately $21.5 income or losses with respect to the activ-
million and $29.8 million, respectively. ity; (7) the amount of occasional profits,
A taxpayer convinces the Tax Court The IRS disallowed the partnership if any, from the activity; (8) the financial
he entered into the activity for losses and issued deficiencies of $37,022 status of the taxpayer; and (9) elements of
profit despite not making one and for 2013 and $19,615 for 2014 as well personal pleasure or recreation.
having substantial other income. as accuracy-related penalties under Sec. Holding: The Tax Court concluded
6662(a) totaling $11,327 for the two that although Ecotone was not profit-
By Paul Bonner years combined. able, the taxpayers nonetheless evinced
Issues: The IRS contended that under an objective of a profit in the years at
The Tax Court held that a wealthy Sec. 183(a), Ecotone could not deduct the issue by attempting to build a founda-
taxpayer’s activity of breeding miniature losses from Ecotone’s miniature donkey tion for breeding donkeys that would
donkeys was entered into for profit, al- activity because it was not engaged in eventually be profitable in the long
lowing him to deduct net losses from the for profit. term. The court concluded that only two
activity for the two tax years at issue. Noting that it has often been called of the nine factors favored the IRS. It
Facts: After starting at a young age upon to determine whether “an activity found with regard to the fourth factor IMAGE BY YURIY ALTUKHOV/ISTOCK
in the accounting department of a New involving equines” was entered into for that no evidence was presented that the
York asset management company and profit, the Tax Court stated that while, Huffs expected their assets to appreciate
rising through its ranks, William R. Huff as a general proposition, such an activity and under the seventh factor that the

30 | Journal of Accountancy April 2022