Intending to get back to his agrarian roots, a successful banker purchased a 156-acre tract of land which had been used as a timber farm and cattle operation. From 2004 to 2014, the taxpayer reported $1.5 million in losses from his farm, primarily in the form of noncash expenses. The IRS audited the taxpayer for tax years from 2004 to 2008, disallowing the farm’s deductions because the evidence showed that taxpayer’s did not engage in the farming activity for profit.
On appeal, the tax court affirmed. If an activity is not engaged in for profit, an individual cannot deduct the expenses related to the activity. 26 U.S.C. § 183. The court ruled that many factors weighed against the taxpayer. The taxpayer had very limited financial records, no business plan, and failed to implement any changes to the operation despite substantial yearly losses. Despite a family history of farming, the taxpayer lacked experience in managing a timber farm or cattle operation. Although the taxpayer did receive advice on the timber operation, it focused more on timber care rather than the timber business.
While there can be losses due to unforeseen circumstances, the farm’s history showed that the losses were not unexpected, but very consistent for a decade. Additionally, the taxpayer did not show any profit in those ten years. The taxpayer earned a substantial income as a banker and the losses from the farm activity resulted in significant tax savings. Finally, the court found that the taxpayer enjoyed farming as a retreat from his stressful job as a banker. This, coupled with the fact that the business was extremely unlikely to be possible, all weighed against the taxpayer.
Whatley v. Commissioner, T.C. Memo. 2021-11 (Jan. 28, 2021).