[1] Under Internal Revenue Code Section 165, "losses of property not connected with a trade or business or a transaction entered into for profit" are not deductible except upon a casualty or theft.
[13] In addition, the general rule under Section 183(a) of the Internal Revenue Code does not allow a deduction for an activity that is not engaged in for profit.
[2] Before starting the horse activity, the Prietos spoke with veterinarians, trainers, and other owners, read periodicals, and attended seminars and clinics.
[2] The court found that the Prietos hired professionals to keep the books and care for the horses, but that the records were often incomplete.
[2] Furthermore, even though the taxpayers reported substantial losses, they never developed a written business plan or made a budget.
[2] The court concluded that the taxpayers spoke with a number of professionals before starting the horse activity but received no useful advice.
[2] Furthermore, the taxpayers provided no significant experience to the venture, and there was no evidence to support assertions of the amount of time and effort spent on the horse activity.
The taxpayer values the tax shelter precisely because it generates losses and deductions from gross income above the line.
This outcome contradicts the policies that underlie the deduction for Trade or Business Expenses pursuant to IRC § 62(a)(1).
Prieto provides an excellent example of the Tax Court's considerations and methods in balancing the factors listed in Treas.
The case reveals the ambiguity of many of the factors contained in this provision, as well as the importance of the treasury regulation in considering hobby activities.