Winning in Tax Court with Thoroughbreds

Peter J. Reilly, writing in Forbes, tells of a recent tax court case won by a taxpayer claiming horse business losses, despite the taxpayer’s failure to satisfy all the classic IRS tests.

The taxpayer was a successful businessman whose annual salary averaged around one million dollars from his concrete business. He suffered losses, however, from his other business—owning and racing Thoroughbreds—from which he obviously derived much pleasure. He passed some of the IRS tests, but was weak in others. However, he worked very closely with his trainer, and it was that relationship upon which the case turned.

The IRS questioned, with good reason, the intensity of the taxpayer’s profit motive. However, because the taxpayer worked so closely with his trainer, the court decided that the two were essentially embarked on a joint venture, and that the trainer certainly had a strong profit motive, in that training and racing Thoroughbreds was his primary business. The court concluded that the taxpayers motive was, therefore, the same.

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