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.		Older Tax Case Still Important Today by John Alan Cohan, Attorney at Law An older tax case is still important today involving Robert Montgomery, of New York, New York [Montgomery v. Commissioner, 37 BTA 232]. The taxpayer was a wealthy lawyer and accountant during the roaring ‘20s. His hobby was the study of trees. He collected rare varieties of evergreens. At one point he became convinced that there was a demand for rare and unusual types of evergreens, and he decided to develop a business growing and selling them. He established a corporate entity for that purpose. He used about six areas of cleared land on his estate in Greenwich, Connecticut. There was no written agreement between himself and the corporation regarding that arrangement. Another ten acres were also available for use if they were needed. He expected that it would take from two to three years to produce any saleable trees. Mr. Montgomery acquired trees and shrubs for the venture, and employed an experienced propagator to grow the trees from seeds and cuttings. He obtained permission from the Department of Agriculture to import evergreens from abroad. He obtained nursery inspection and registration certificates from the State of Connecticut. He advertised “rare conifers” for sale in various horticulture and landscape magazines. He accumulated over 16,000 trees, consisting of about 500 varieties. After about two years he obtained orders from numerous customers, but shortly afterwards, in the spring of 1933, practically all the orders were canceled because of the closing of the banks. The continuance of the Depression had a serious effect on the venture. Mr. Montgomery became discouraged with the venture, and lost a considerable amount of money, which he used to offset his very substantial income. He then decided to dissolve the tree venture. The IRS denied his tax deductions. The Tax Court reversed, holding that the activity was a business, not a hobby. The court said that Mr. Montgomery hired professionals to tend to the trees, he advertised in various publications, he obtained the legal permits required of this activity, and he started to get some customers before the Depression set in. And Mr. Montgomery was, himself, very knowledgeable about trees. The court said that Mr. Montgomery was engaged in a business despite the fact that the expected profit never came. “This is by no means an uncommon experience in the affairs of men. The casualties of business are fully as numerous as those which survive.” The key points of this case are as follows: 1. The taxpayer was seriously intent on raising evergreens for sale to customers. This was evidenced by forming a corporate entity to operate the venture, by hiring an experienced propagator to grow the trees, by obtaining proper permits and certificates of inspection, and by advertising in horticulture and trade magazines. 2. The overall businesslike manner of conducting the activity is the key to the hobby loss rule. The form of entity--whether a corporation, sole proprietorship, or LLC--is not really relevant, but regardless of the entity, the IRS will want to examine all aspects of how you operate the venture. In this case, the court held that the taxpayer’s overall manner of operating the venture was businesslike. 3. In this case, the tree sales did not go forward because of the closing of the banks and the ensuing Depression. Evidence of setbacks in the marketplace is helpful to show why losses occurred. Also, evidence of closing down a venture in the fact of losses, as in the above situation, points to a businesslike manner of operating the activity, whereas a hobbyist might continue a losing venture. Back to Top