Remuzzi v. Commissione T.C.M.

Facts

REMUZZI V. COMMISSIONER

T.C.M. 1988-8 (1988)

NATURE OF THE CASE: Remuzzi (P) challenged deficiencies in that IRS (D) disallowed expenses incurred from P's farm based on the determination that it was not an 'activity not engaged in for profit' pursuant to I.R.C. § 183.

FACTS: P is an orthopedic surgeon. His wife is a housewife. Presently, they and their five children live in Leesburg on a 74-acre farm. In early 1976, P began to treat Payne, who was then a tenant on a farm. P told Payne of his desire to buy a farm and discussed the possibility of Payne's being a tenant on the farm. P loaned Payne $15,000, and Payne agreed to become a tenant on P's farm if P purchased a suitable property. P purchased property that consisted of about 35 acres of pasture and 40 acres of woods. A main house, tenant house, and various farm buildings were situated on five acres. The property was in complete disrepair and had not been operated as a farm for about ten years. Payne agreed to move to the property, repair it, and maintain it, in return for the right to live in the tenant house rent free and the right to graze his small herd of cattle on the property. Payne was to repay his loan by giving P half of the calves born to the herd until the fair market value of the calves equaled the amount of the loan. Thereafter Payne was to split his profits from raising cattle with P. Payne brought to the property his cattle herd, which numbered thirty head, and his farm equipment, which consisted of a tractor, a bushhog, and a small combine. Payne repaired fences and bushhogged pasture land. Payne removed his herd from the property because there was not enough fenced land with pasturage on the property to support the herd and returned it when the fences were repaired. Payne was no longer living up to his agreement, and P required him to begin paying rent on the tenant house. P had him sign a note for the $15,000 loan. Payne became mentally unable to function, and the local sheriff began repossessing his property, including his cattle. After Payne was committed, P obtained a default judgment against him for the $13,800 balance of the loan. P's oldest son, who was ten at the time, assumed responsibility for feeding the few cattle that P owned. P hired college students to perform other necessary maintenance work. Revenues for 5 years were virtually nonexistent. Losses amounted do almost$160K. D determined that their farm losses were incurred in an activity not entered into for profit. P petitioned. 

ISSUE: In determining if an activity is engaged in for profit are the objective facts of the taxpayer’s efforts given more weight than the taxpayer’s stated intent?

RULE OF LAW: In determining if an activity is engaged in for profit, the objective facts of the taxpayer’s efforts are given more weight than the taxpayer’s stated intent.

HOLDING AND DECISION: (Korner, J.) In determining if an activity is engaged in for profit are the objective facts of the taxpayer’s efforts given more weight than the taxpayer’s stated intent? Yes. Whether P was engaged in for profit turns on whether P had a bona fide objective of making a profit when entering into and continuing the activity. The regulations under section 183 list the following nine factors that should normally be taken into account in determining whether an activity is engaged in for profit: (1) The manner in which the taxpayer carries on the activity; (2) the expertise of the taxpayer or his advisors; (3) the time and effort expended by the taxpayer in carrying on the activity; (4) the expectation that the assets used in the activity may appreciate in value; (5) the success of the taxpayer in carrying on other similar or dissimilar activities; (6) the taxpayer's history of income or losses with respect to the activity; (7) the amount of occasional profits, if any, that are earned; (8) the financial status of the taxpayer; and (9) the elements of personal pleasure or recreation involved in the activity. These factors are not exclusive. The record indicates that P, who had substantial nonfarm income in each of the years at issue, simply preferred to live on a farm and attempted to deduct their personal expenses of maintaining and improving their domicile as business expenses. There is no evidence that P made any efforts to monitor its profitability or significantly reduce its expenses, which dwarfed its income during the years at issue. The financial records show the minimum necessary to support their deductions for tax purposes. In short, the manner in which it was operated evidence a disregard for its profitability. The revenues received from the property were regularly dwarfed by the expenses they incurred. Ps blame their losses on Payne's disability and argue that the disability was an unforeseen circumstance that was beyond their control. The loss of an employee, whether through resignation, dismissal, or incapacitation, is a common event in the life of a business and is an occurrence that profit-oriented businessmen take into account before entering businesses. There is no evidence that P or his wife were so involved in the activities of the farm that someone developed an expertise in cattle raising. P was an active surgeon during the years at issue and had little time to devote to farm operations. There is no evidence that the wife or the young children devoted significant time and effort to farm work. The evidence indicates that P moved to the farm for personal reasons. P had decided to purchase a farm before he met Payne. It was only after he met Payne that he decided to raise cattle on the farm. The fact that P decided to purchase a farm before he decided what farm activity to engage in suggests that farming was not the reason he decided to move to a farm. P had the burden of proof, and P has failed. Judgment for D. 

LEGAL ANALYSIS: The large and consistent loses is a red flag for D. Where P went wrong is he did not have a plan for profit. Usually, when taxpayers play the farm game, they have breeding in mind because it takes about 10 years to get profits. This is why in the holding D and the court brought up the issue of one of them becoming experts in raising cattle. The other dead giveaway is that no one in the family really engaged in farming or a profit motive behind the farming.

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Holding and Decision

Legal Analysis

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