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.		Tree Farmer Faced Three Tax Court Cases by John Alan Cohan, Attorney at Law Some people are unlucky enough to get audited on multiple occasions, as we see in the following case. The Tax Court ruled, for the third time, that the taxpayer’s tree farm was a hobby, not a business. Austin Mitchell’s family owned and operated a farm in Salem, Missouri, for over 100 years. Mr. Mitchell grew up on the farm, became a lawyer and an accountant, and returned to live there when his mother took ill. After her death, he inherited the farm and continued living there and managing it. Mr. Mitchell spent a huge amount of time working on the farm, in addition to his law practice. He converted 10 acres of uphill pasture to timber (white oak and black walnut). He worked on weed control. He cleared multiflora rose and native thistle, did things to facilitate tree growth, and other hard physical labor. The farm had trees in various stages of maturity that he sold for lumber. He made a profit in one year from the sale of mature timber. Mr. Mitchell also sought to make money selling hay. In Tax Court the evidence indicated that timber from the new walnut trees would take 30 years to harvest, and timber from his white oak trees would take 50 to 70 years to harvest. However, Mr. Mitchell testified that he had selectively harvested some white oak trees and generated $7,500 in revenue. He had consulted with a logging expert to advise him of trees he could cut. He also said that he could harvest walnuts from the trees in about five years, and that this could provide a cash crop. For the period covered by the current case [Mitchell v. Commissioner, T.C. Memo 2006-145], the court decided against Mr. Mitchell. The court said that he made a small profit in one year, and that the losses in the other years were fairly small, but that he had losses every year since 1991, and that was a long time to be generating losses, unless it is a hobby activity. The court also 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 also faulted Mr. Mitchell for not having a written business plan. The court said that Mr. Mitchell failed to advertise his farming activity in an attempt to increase its profitability. The court felt that he derived personal and recreational benefits from the farm, 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 Mr. Mitchell did not seek expert advice on how to operate his farm profitably, but only talked about farming with farmer acquaintances and neighbors. The court also noted that Mr. and Mrs. Mitchell resided on the farm, and that “they derived personal and recreational benefits from the situs of the farming activity. Petitioner devoted regular and substantial time and effort to the farming activity, although he continued to work an average of more than 50 hours per week as a lawyer and accountant. Petitioner did not explain how the work he performed on the family farm related to making it profitable.” The court apparently believed that the taxpayer’s primary motivation in the farming activity was pleasure and recreation, despite the fact that the taxpayer put in a lot of hard labor in the improvements he made. The court ruled that the taxpayer did not conduct the activity in a businesslike manner. It is important to have a separate checking account, a written business plan, and reasonably well organized overall records in conducting a tree farm. The court was also influenced by the fact that the taxpayer had a long history of losses, although there was one profit year. Back to Top