Monday, January 23, 2012

The 'who killed your chances to deduct these losses' Case


Taxpayers were denied six-figure losses from a ranch they owned because they were not active participants in the business venture. They had spent some minimal time on phone calls and had visited the ranch a number of times throughout the year. These visits were deemed to be recreational in nature.(I.e bringing the children, hosting clients/employees of his primary business, etc.) The ranch was in Colorado and they lived in Minnesota. The ranching operation employed a full-time, onsite ranch manager and the court had a copy of the job description which stated he was in charge of all ranch operations.

Take aways:

• Taxpayers needed to establish through meeting one of several tests to prove that they were actively involved in the business in order for the loss to be an ordinary loss which could be used to offset ordinary income. Passive losses can only offset passive income. Passive activities would include rentals and businesses in which the taxpayer does not participate.

• Taxpayer failed to prove that they had spent 500 hours on Stirrup Ranch activities, they engaged in regular, continuous, and substantial activities relating to Stirrup Ranch, or that they materially participated in the activities of Stirrup Ranch.

• Despite claiming to make all the decisions, spend countless hours on phone calls with the ranch manager, and work ‘dawn to dusk’ while at the ranch they did not enter into evidence a log, diary, calendar, or any other record.

• Activities such as (1) studying and reviewing financial statements or reports on operations; (2) preparing or compiling summaries or analysis of the finances or operations of the activity for the individual’s own use; and (3) monitoring the finances or operations of the activity in a nonmanagerial capacity would not count toward time participating in running the business. Those are activities of an investor.

• Taxpayer owned a successful company at which he earned about 6mil/yr. The case made administrative note of the fact that he used that company’s private plane to fly to the ranch. (One wonders if he properly accounted for this personal use!) This served as further evidence that while on trips to the ranch he was conducting his primary business and not ranch business.

• The tax preparer was an attorney, a CPA, and a former IRS agent. The court noted that ‘he should have known better, particularly if he was shown no more evidence and documentation than was shown to us.’ Because of their reliance on his advice they were not hit with the accuracy related penalty. (He also should have known better than to let them go to tax court with no evidence!)

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