Saturday, September 6, 2014

Drag Racing And Horse Breeding In The Same Case - At Least They Didn't Try Amway

Originally Published on forbes.com on April 22nd,2012
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The recent tax court decision in the case of Mark and Martha Ryberg is something I haven’t run into before.  It is a his and her hobby loss case.  His was drag racing and hers was horse breeding.  It is somewhat instructive, because it was a split decision.  She won, mostly, on the horse breeding and he lost on the drag racing.
The IRS seems to have it in for horse breeders who lose money but the breeders do pretty well in Tax Court. The Service  had a recent win in a horse case, but that is not the norm. I have not studied the track record of drag racers in Tax Court.  The last drag racing case I noted was that of Richard Zenzen, who lost.  In my piece on that I reviewed some of the winners and losers in the hobby loss field like the people who used feng shui to play slot machines (they won).
The biggest hobby loss losers in Tax Court seem to be Amway distributors.  There is actually a significant piece of the blogosphere devoted to arguing about whether or not Amway is a good deal. My favorite Amway blog isMarried to An Ambot.  I remain agnostic on that issue of Amway as a good business idea, but can tell you for sure that you are unlikely to do well in Tax Court if you lose money doing Amway and the criticisms by the Tax Court judges are similar in substance to those of the Bride of the Ambot, though considerably less colorful.
Martha Ryberg’s win on her horse breeding losses illustrates the point that you must study the business aspects of whatever you are engaging in and modify your methods with a view to profitability.  It also illustrates the point that the business of horse breeding seems to be one goddamn thing after another, although it does have the appeal of having lots of sex in it, if you can imagine yourself being a stallion – :
Sometime before the start of operations in the horse breeding activity, Mrs. Ryberg conducted extensive research with respect to horse bloodlines and color genetics, paying particular attention to a dilution gene associated with a “champagne” horse color. Petitioners learned that the horse market exhibited greater demand for certain horse colors, such as the champagne color, and they planned to isolate the champagne dilution gene in their breeds to capitalize on that demand. In addition, petitioners believed that their stallions had very high stud prospects. Petitioners’ Tennessee Walker stallion in particular exhibited a high stud prospect as there were no other stallion breeds of that kind within a 100-mile radius of petitioners’ ranch.
Hey mares you want that champagne you need a visit from the Ryberg stud.  He’s got what you are looking for.
More importantly, however, petitioners researched and studied the business and economic aspects of horse breeding. Petitioners researched various methods of marketing the services they planned to provide. They also visited other stallion farms to determine what would differentiate their stud services from the stud services offered by their competitors. In addition, petitioners attended horse sales and auctions to determine what specific types of horses were in high demand. Furthermore, Mrs. Ryberg completed a law school course on breeding contracts and subsequently began drafting custom breeding contracts for horse breeding clients. She also learned the pricing system for stud services used by other stallion owners and received training regarding how to accurately determine and track feeding costs at different stages of the breeding process. Mrs. Ryberg later applied the knowledge and training she obtained to successfully reduce feed costs associated with petitioners’ horse breeding activity. Finally, petitioners consulted with other owners of breeding and boarding operations regarding the potential profitability of adding boarding services to their business plan.

They invested much time and effort in refining their expertise with respect to horse breeding, and they completed all of the exhausting work of delivering foals, cleaning horse stalls, spreading manure for compost, and transporting feed. Mrs. Ryberg even resigned from being a horse judge so that she could devote more time to performing these labor-intensive tasks.
“Spreading manure for compost” – That sounds like a fun weekend activity, if you are unable to get a Saturday root canal appointment.
Petitioners’ losses can also be explained by numerous events that occurred outside their control, including Mr. Ryberg’s back injury, an onset of the West Nile virus that infected petitioners’ horses, a downturn in the horse breeding industry, and Mrs. Ryberg’s illness. Thus, on the record before us, we do not view petitioners’ history of losses as an indication that they lacked an actual and honest profit objective. In contrast, the fact that petitioners shut down their horse breeding activity once they determined that it would not be profitable strongly indicates that they had an actual and honest profit objective.
It is really worth reading the whole case.
The drag racing, on the other hand, was done in a much less business-like manner:
Mr. Ryberg began drag racing in 1990 and has engaged in his drag racing activity for over 20 years. His race car, a 1968 ChevroletRally Sport Camaro, was purchased for $6,500 and is highly modified for racing. Mr. Ryberg saved his receipts in envelopes and tracked his drag racing expenses using a spreadsheet. Over the years, he sought advice from other drivers, racing mechanics, and technicians to improve his drag racing performance. He also subscribed to National Dragster magazine and is a member of the National Hot Rod Association. He reviewed trade magazines for information such as deals on car parts, track altitudes, and the standings of his competitors but did not consult with advisers regarding the business aspects of drag racing.
It is a sad condition of life that doing a thing well, anything, including practicing a profession such as public accounting, does not guarantee profitability.  Many of us like to spend all our time worrying about our clients problems and coming up with clever ideas for them.  We end up being tortured to send out bills and make collection calls by  a miserable bastard that we call the managing partner. (At Joseph B Cohan and Associates, when you were heading out to a client, Herb Cohan usually had one instruction - Bring back a check.) Of course, without him we would starve.  Mr. Ryberg had a day job, so he did not have to find that inner managing partner that allows people to make money from their passions or at least to deduct their losses when they are challenged as being hobbies by the IRS.
Mrs. Ryberg ended up losing some of her deductions, including those for a truck, due to substantiation issues.
I should note here that, though the Rybergs are the only his and her hobby loss case I have run into, there was another recent double hobby loss case with a split decision.  None other than the great F. Lee Bailey was engaged in both yacht leasing and airplane remanufacturing as side activities.  He lost on the former and won on the latter.  The case was a 143 page doorstopper which had a lot more going on in it than the hobby losses.  I was surprisedthat it did not break out of the tax blogosphere into the mainstream.
You can follow me on twitter @peterreillycpa.

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