JohnAlanCohan@aol.com 310.278.0203 Probate/Conservatorships IRS Audits IRS Collection IRS Appeals U.S. Tax Court IRS Criminal Investigation Tax Litigation Tax Opinion Letters Business Plans Aviation Law Tax Exempt/Nonprofit Organizations All aspects of equine and livestock law, particularly tax matters, syndications, business plans, tax opinion letters, and drafting of business documents.		Farmer’s Third Tax Case Goes Against Him by John Alan Cohan, Attorney at Law Some people are unlucky enough to get audited on multiple occasions. Austin Mitchell’s family has owned and operated a farm in Salem, Missouri, for over 100 years. Mr. Mitchell is also a lawyer and CPA. He grew up on the farm, and returned to live there in 1991 when his mother took ill. After her death, he inherited the farm and continued living there and managing it. The farm has had prodigious corn harvests, and trees in various stages of maturity that are sold for lumber. Mr. Mitchell also sought to make money with haying. The IRS determined that the activity was not conducted for profit, and denied Mr. Mitchell’s tax deductions. He brought his case to Tax Court. [Mitchell v. Commissioner, 92 TCM 17, T.C. Memo 2006-145.] This was his third case in Tax Court. The two other cases involved earlier years, which he lost. In the current situation, the farm made a profit in one year from the sale of mature timber. The court took this into consideration. Also, Mr. Mitchell made some change in the pasture land arrangement with another individual, which enabled him to sell hay to generate revenues. The court again decided against the Mr. Mitchell, apparently based on the fact that there were losses since 1991, albeit fairly small losses, except for one year. The court noted that Mr. Mitchell did not have a business plan for the farm, nor did he maintain much by way of records, nor a separate bank account for farming activities. The court said that “the lack of a separate bank account for petitioner’s farming activity, coupled with the lack of complete and accurate books and records, tends to show that petitioner did not carry on the farming activity in a businesslike manner.” The court noted that Mr. Mitchell did not advertise his farming activity in an attempt to increase its profitability. The court felt that he derived personal and recreational benefits from the farming activity, although he worked about 50 hours a week as a lawyer and accountant, and conducted most of the manual labor on the farm himself. The court also noted that he did not seek expert advice on how to operate his farm profitably. He discussed farming with his farmer clients and neighbors, but there was no evidence that he obtained advice about farming for profit. The IRS hobby loss rule in this case seems to have been applied unfairly. The losses were quite small, and Mr. Mitchell’s income from his law and accounting practice was fairly modest. There are different approaches taken by different revenue agents and different Tax Court judges, depending on a number of factors. Some judges, for instance, are strict adherents to the law, authoritative decision-makers who focus heavily on procedural and technical matters. They might scrutinize small or seemingly irrelevant details. They may become argumentative or impatient. Others may strive to listen carefully to what the taxpayer has to say, seeking to be charitable in construing the situation. The greatest number of Tax Court cases involves farming, livestock and horse activities. In the above case, it seems to me, there was evidence that Mr. Mitchell learned lessons from his two previous Tax Court cases, and made changes in the method of operation, but still he was unable to win his case. This is most unfortunate. Many individuals would be prudent to implement formal business plans, together with cost projections that will show how they expect to make a profit from the venture. Business plans mainly focus on the marketing aspect of the venture, and there are many elements that should go into it. Once a business plan is established, it should be updated to meet changing circumstances. Most people write their own business plans, and various resources are available in book stores to aid in that endeavor. More detailed business plans are usually prepared by professionals for a fee. Back to Top