VOLUME 1 - 2008-2009 - ISSUE 1
1 Ky. J. Equine, Agric. & Nat. Resources L. 97 (2009).
TOPPING v. COMMISSIONER: AN EXAMPLE OF HOW AN EQUESTRIAN TAXPAYER CAN UTILIZE "SINGLE ACTIVITY" TO PRECLUDE THE IRS "HOBBY LOSS" CHALLENGE
Comment Written By: Anna I. Garcia
As stated by Russian novelist, Maxim Gorky, "When work is a pleasure, life is a joy!"' For this precise reason many individuals try to mix business and pleasure. While there is nothing wrong with this attractive combination, the Internal Revenue Service ("IRS") can quickly turn joy into tears. The most frequent IRS challenge to a taxpayer's return is a claim under Internal Revenue Code ("IRC") § 183. This section allows the IRS to claim that a taxpayer did not engage in a particular activity primarily for profit. This commonly used tactic of the IRS is referred to as the hobby loss challenge. Professionals in the equine industry are especially prone to this attack by the IRS, since activities such as racing, showing, boarding, and breeding horses are often viewed as hobbies. Unfortunately, the IRS usually wins attacks on horse-based hobbies, resulting in non-deductible losses for the taxpayer. On the contrary, if a taxpayer wins, then the result is deductible business expenses that will reduce the taxpayer's taxable income and income tax.
To gain the upper hand over the IRS, a taxpayer must claim that the activity is not really a hobby, but a business activity. The IRS, however, will not give up easily when money is involved. According to IRS estimates, the incorrect deductions of hobby expenses add up to thirty billion dollars per year in unpaid taxes. There is, however, another option for the taxpayer: when the taxpayer's equestrian activities are closely connected to their main business, deductions and income from each activity can be aggregated into a single for-profit activity. This combination allows the taxpayer to bypass the hobby loss challenge and to claim victory, against the IRS in the form of a deduction.
Tracey Topping of Wellington, Florida is a proud equestrian who effectively utilized the "single activity" principle in an IRS hobby loss challenge. Topping successfully argued in the U.S. Tax Court that her equestrian activities were an integral part of her design business. This Comment analyzes Topping v. Commissioner and delineates the implications of this decision for taxpayers in the equestrian industry.