Cattle Market & Farm Reports, Editorials
Dec 20, 2007
by WLJ

July 18, 200

An area of concern in IRS audits of farming, livestock and horse activities is the amount of time expended by the taxpayer in the activity.
A recurring problem is that taxpayers do not keep contemporaneous time records, but instead “reconstruct” time records in the face of an audit. This can always be a hurdle because it suggests that you did not really conduct the activity in a businesslike manner, but instead simply prepared self-serving records after the fact, and only because the IRS has indicated its intention to conduct an audit.
Another problem is that proper records of time should break down the time on a daily, or at least weekly basis, to be credible. The IRS and the Tax Court take the position that if your primary objective is to achieve profitability of your operation, you will demonstrate significant interest in monitoring and documenting the time expended.
In judging whether the taxpayer spends sufficient time on the activity, it is relevant to examine the relative importance of the activity compared with the taxpayer’s other activities. The fact that the taxpayer devotes a limited amount of time to the activity can be used as evidence that there is a lack of profit motive. In some cases, the fact that the taxpayer devoted an insufficient amount of time to the farm was a significant element in ruling that the activity was not conducted for profit.
For example, in Hambleton v. Commissioner, TC Memo 1982-234, the taxpayer was transferred to Washington, D.C. from New Jersey, where the farm was located, and he was able to work on the farm only weekends, holidays and vacations, which the court found to be insufficient time. In that case, the taxpayer’s activities on the farm during weekends, holidays and vacations, consisted of mending fences, cutting hay and operating cattle breeding. The taxpayer sought advice from local farmers, had soil classification tests performed on the property, and attended cattle meetings in an effort to obtain advice and information concerning cattle breeding. The farm was also used for recreational purposes: the taxpayer had a swimming pool, and maintained five Shetland ponies on the property, which were ridden by the taxpayer’s wife and children. After the taxpayer was transferred to Washington, he employed a farm manager to care for the farm during his absence.
The duties of the farm manager consisted of feeding the animals (including the ponies), cleaning their stalls, mowing and harvesting the hay, spreading manure, cutting firewood, keeping trespassers out of the property, repairing fences, cleaning the swimming pool, sweeping the patio area of the house, and general caretaking. The farm produced very little income, primarily from the sale of hay and pasture rental, and generated 8 years of significant losses. There was one profit year. The taxpayer had significant income from other sources, and the court said that the farm losses served to offset substantial amounts of his other income.
The court said that the enjoyment of the farm and its recreational aspects were contributing factors in the taxpayer’s decision to visit the property almost every weekend. His enjoyment of the farm environment itself is not inconsistent with a profit motive but, the court said that when viewed together with the economic output on the farm along with the effort expended to commute every weekend, “it appears that the enjoyment of being at the property and attending to it was more important to petitioners than the potential of supplementing their other income by realizing a profit from the farm operation.”
The court made much of the fact that the taxpayer was only able to devote time on the weekends and holidays after his job transfer to Washington, D.C. Yet the court acknowledged that the taxpayer “worked diligently at clearing the fields, harvesting hay, and mending fences and buildings.” Moreover, he hired a caretaker to attend to the property during his absence. The court said that “the employment of a experienced farmer would be a factor pointing to a operation engaged in for profit.” However, the caretakers hired by the taxpayer also had outside full-time jobs and had no particular expertise in farming. Thus, the court held that the taxpayer failed show that the time he devoted was consistent with a profit activity.
In another case, Pickren v. Commissioner, TC Memo 1981-52, the taxpayer spent only two or three weeks a year working on his new farm, and the court found no bona fide profit objective. In that case, the taxpayer purchased a 240-acre farm which he intended to work on during the summer months. For the first three years in question, he worked on the farm during the summers for a period of only 2-3 weeks. The farm was in poor shape and contained no habitable dwelling. He did such things as repairing fences and clearing land of underbrush. The farm contained mostly timberland. However, the taxpayer did not harvest any timber, nor did he raise or sell any crops, or did he buy any livestock to raise. During his absence, the farm was unattended. No income was earned from the farm. Rather, he claimed various business expenses for repairs, supplies, taxes, land clearing, depreciation, labor, and other items.
The court said that the manner in which the taxpayer operated the farm was not indicative of a bona fide intent to make a profit. The main reason for this conclusion was that the taxpayer spent very little time or money in trying to change the condition of the farm. The taxpayer did not indicate that he had any intention or prospects of spending more time on the farm in the future, and he must have known that the amount of time he could devote during the summer would be insufficient to make the farm profitable. Moreover, the taxpayer spent only limited amounts on things that would positively affect the farm’’s conditions--such as repairs, seed, and land clearing. — John Alan Cohan
(John Alan Cohan is a lawyer who has served the farming and livestock industry since l98l. He serves clients in all 50 states, and can be reached at: (3l0) 278-0203 or by e-mail at