IRS Has New Ammunition in Hobby Loss Case Win

Published on: 16:11PM Jun 20, 2018

The Tax Court just release the Robison case yesterday.  This case is likely to provide additional ammunition for the IRS to go after farmers and ranchers who have a large amount of non-farm income and incur losses year-after-year on their farm/ranch operations.

Here the brief facts of the case:

  • Shane and Robin Robison lived in Utah.  Mr. Robinson had a very successful career working for a number of technology companies in Silicon Valley.  During the years at issue (2010-2014), his wages/salaries ranged between $1.4 million and $10.5 million.
  • in 1999, they purchased a 410 acre ranch in a remote area of Southern Utah at an elevation of approximately 6,700 fee.  The cost of the ranch was about $2 million.  In 2000 and 2009, they acquired additional acreage bringing total acres to more than 500 acres.
  • The ranch was run down and they spent money to fix up the ranch.  They first operated as a horse breeding and training operation, but shifted to a small cattle herd to reduce the losses.
  • From 2000 to 2015, the ranch never made a profit and the average annual loss during this period exceeded $500,000.
  • They had hired a full-time manager to operate the ranch, however, they did spend a fair amount of time dealing with the ranch operations.
  • As a result of the tax court case, they prepared logs showing that they exceeded 500 hours of time spent on the ranch each year.

As  expected the IRS did not like seeing all of these losses; audited the returns; argued that the losses should be disallowed due to hobby loss rules or that the taxpayers were not material participants in the ranch operation.

Over the last couple of years, the IRS has brought several ranch and farm hobby loss cases to the tax court and has lost several of those cases.  This case was a little different in that they asserted the taxpayers were also not material participants.  If the IRS would win on hobby loss issue, then the taxpayers would not be able to deduct any of the losses.  If they lost on that, but won on material participation, the IRS would have a partial victory.  The taxpayers would not be allowed to deduct the losses currently, but could deduct all carryover losses when the ranch is sold.

The Tax Court finally ruled that the taxpayers were not operating the ranch as a hobby (but just barely).  However, the Tax Court did rule that since the time logs were retroactively created and there was a manager on the ranch doing most of the ranch operations, these hours were primarily as an investor.  Investor hours do not count toward material participation hours.  Typically, a taxpayer needs to work at least 500 hours to be considered a material participant and logs should be done on a contemporaneous basis.

As a result of this case being a partial win for the IRS, I would expect all future Tax Court cases by the IRS to assert both the hobby loss rules and the passive activity rules.  This can be a high hurdle for many of these taxpayers to meet as the Robison's found out.