Hobby Loss Case: Metz v. Commissioner

Focusing on subjective intent, the Tax Court held that because the taxpayers were genuinely optimistic their failing horse farm would eventually be profitable and were able to attribute poor results to weak economic conditions, millions in losses sustained over a six year period were not hobby losses. Metz v. Comm'r, T.C. Memo. 2015-54.

For over two decades, Henry and Christie Metz owned an Arabian horse farm, Silver Maple Farm, Inc. (SMF), an S corporation specializing in "Straight Egyptian" Arabian horses, prized for their elite genetics.

Despite great effort by the Metz’s, the venture was decidedly unprofitable. SMF had only one profitable year, and that was a result of the sale of a piece of real estate used in the business. SMF averaged annual losses in excess of $1,000,000 between 1999 and 2009. Undeterred, the Metz’s attempted to outrun these losses, moving the farm several times in the hopes of finding a better market and eventually settling in California.

During its lifespan, SMF lost over $14.5 million, leading the IRS to determine the business couldn't possibly be motivated by a desire to turn a profit. The IRS issued notices of deficiency for 2004 through 2009 disallowing the passthrough losses from SMF, as well as related net-operating-loss carry forwards.

Reg. Sec. 1.183-2(b) provides a nonexclusive list of nine factors relevant in ascertaining whether a taxpayer conducts an activity with the intent to earn a profit. The factors listed are: (1) the way the taxpayer conducts the activity; (2) expertise of the taxpayer or his advisers; (3) time and effort the taxpayer spends in carrying on the activity; (4) expectation that assets used in the activity may appreciate in value; (5) taxpayer's success in carrying on other similar or dissimilar activities; (6) taxpayer's history of income or losses with respect to the activity; (7) amount of occasional profits earned, if any; (8) taxpayer's financial status; and (9) elements of personal pleasure or recreation.

After analyzing the factors the court held that the losses were allowable. Practitioners with clients who have businesses at risk of being deemed a hobby may want to study this case.