![]() ![]() What was not anticipated is that the IRS would focus solely on the Schedule F income that resulted solely from the rodeo activity of the children. ![]() Note:It could be expected that the IRS would question the arrangement between the petitioner and her mother. Thus, the activity reported on Schedule F for 20 was deemed to be engaged in for profit. The Tax Court refused to allow the IRS to refocus its challenge to the Schedule F deductions on the ranching activity, holding that the IRS had waived its right to do so. As such, the losses related to the ranching activity and not the rodeo activity, and the IRS failed to challenge the profit motive of the ranching activity. The Tax Court determined that the IRS had focused improperly on the rodeo activity rather than the ranching activity, noting that the petitioner had credibly testified that the Schedule F activities primarily related to the ranch and not to rodeos. As a result, the IRS determined that the rodeo activity was not engaged in with the requisite profit motive and disallowed all Schedule F deductions for 20. IRS audited and determined that the Schedule F activity was rodeo and not ranching, ignoring the fact that the Schedule F expenses were predominantly from the ranching activity. From 2014-2019, the petitioner reported cumulative losses of $502,742 on Schedule F which far exceeded the cumulative Schedule F gross income and largely offset the ordinary income of the petitioner and her husband (primarily wage income). Expense deductions claimed on Schedule F were $133,929. For 2018, the petitioner’s Schedule F reported gross income of $8,063, including $1.867 of compensation for labor services performed by the children for local ranches and $6,196 for the childrens’ rodeo competition winnings. The petitioner’s children participated in rodeos, and the income from the rodeo activities were reported on the petitioner’s Schedule F under “livestock activities.” For 2017, the petitioner’s Schedule F reported gross income of $2,741 and deductions of $128,990 from the ranching activity. The petitioner did not receive any cash distributions from ranching activities and as a result did not report ranch income. From 2014 to 2019, the petitioner paid the ranch expenses, but the mother reported on her return the income from cattle sales. The petitioner and her mother executed two separate agreements in 20 whereby the petitioner agreed to contribute financially to the ranch and that the petitioner and her mother would jointly agree about the amount, if any, of cash distributions from ranch earnings would be made to the petitioner. If the petitioner’s stepfather were alive at the time of the mother’s death, the ranch would remain in trust for his life and then distribute equally to the petitioner and her brother upon the stepfather’s death. Under the trust’s terms, if the mother died and was predeceased by the petitioner’s stepfather, the ranch would pass equally to the petitioner and her brother. ![]() In 2009, as part of a family succession plan, the petitioner’s mother transferred the ranch to a revocable trust. The Oklahoma ranch at issue was originally owned by the petitioner’s grandmother and then inherited by petitioner’s mother. IRS Focuses on Wrong Issues – Loses Hobby Loss Argument. This page contains summaries of significant recent court opinions and IRS developments involving taxation, with a particular focus on tax issues that could impact agricultural producers, agricultural businesses and rural landowners. ![]()
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