Another Horse Case, Pro Se Petitioner, and Reasonably Scaling Back Being Indicative of a Profit Motive

In a November 25, 2019 memorandum opinion by the Tax Court, a pro se taxpayer in the business of horse breeding for competitions and scaling down his business, was determined to be engaged in activities for profit within the meaning of Section 183 and thus allowed to deduct his expenses under Section 162.

Petitioner, Lowell G. Den Besten (“Besten”), started a seed business in 1964 with his father which he now operates in South Dakota as Dakota’s Best Seed, LLC. In 2002, Besten sold the seed business to his son for $4.3 million and reported the transaction on the installment method. Additionally, since 1986 Besten engaged in horse breeding activities, working with cutting horses. Following the sale of the seed business to his son, Besten intended to dedicate his time to his horse business. In 2005, Besten decided to scale back the horse business as one of his prized horses died. During this time, the seed business was suffering and Besten felt compelled to buy back the seed business from his son and resuscitate the struggling seed business, which was probably in his interest considering he seller-financed the sale.

Reviewing the Horse Cutting Activity under Section 183 (and its Regulations)

In typical fashion, as is the case with horse-related activities (we see a lot of these cases), the IRS argued the horse-related activities were not undertaken with a requisite profit motive and thus deductions related to those activities should be denied under Section 183. In reviewing the issue of whether the horse-related activities were undertaken with requisite profit motive, the Tax Court looked to Treas. Reg. § 1.183-2(b) in its analysis. The factors analyzed under the regulation are as follows:

  1. The manner in which the taxpayer carried on the activity;

For this prong, the Court reviewed Besten’s business plan, books and records, abandonment of unprofitable activities, and adaptation of new techniques. At its core, the Court wants to see if the actions are indicative of a profit motive. In the case of Besten, the Court noted the business plan of Besten as evidenced by his actions. Besten acted to build facilities to support his breeding, training, and showing activities. Besten purchased a facility and hosted regional and national events at his own facility. The Court looked favorably on Besten’s business plan, notwithstanding his lack of a formal written plan.

As to books and records, Besten did not keep the most in-depth of records. Among canceled checks, bank statements, and retention of assistance of a bookkeeper on occasion to help with such recordkeeping was indicative of his profit objective.

In scaling up operations, Besten sold the seed business to his son to acquire the new facility for his horse-related activities. The Court noted that this acquisition enabled Besten to expand into hosting events. The Court found these actions strongly indicative of a profit motive. However, when business slowed, Besten scaled down. The Court noted the scale-down and the realization of the need to scale down was indicative of a profit objective.

With respect to advertising, Besten displayed banners for both the seed and horse business at competitions. Additionally, Besten advertised in printed programs and sales catalogs, even marking his operations with a unique brand. Again, the Court found this factor favorable in determining whether Besten had a profit objective.

  1. The expertise of the taxpayer or his advisors;

Under the Regulations, preparation for the activity by extensive study of its accepted business, economic, and scientifit practices or consultation with industry exprets may indicate a profit objective where a taxpayer carries on the activity in accordance with such practices.1

Besten was able to show he maintained expertise in the horse breeding business. He had a high level of expertise in the care, training, and competing of cutting horses. The Court noted that Besten’s efforts even resulted in two champion cutting horses and at least eight futurity prospects. He was heavily involved in production sales on a national scale, assisted with consignment sales, and maintained a network of trainers to assist him. The Court found this indicative of his profit motive.

  1. The taxpayer’s time and effort expended in carrying on the activity;

The fact that a taxpayer invests a significant amount of time an effort in an activity is indicative of profit motive as well. In relevant years, Besten spent considerable time breeding 12 mares per season, delivered foals, and performed veterinary work on his horses as needed. In addition to the foregoing, Besten engaged in stallion service contracts which required significant work. Thus, the Court was persuaded that Besten’s dedication to the breeding program extended well beyond that of a mere hobbyist.

  1. The expectation that assets used in the activity may appreciate in value;

An expectation that assets used in the activity will appreciate in value and therefore may produce an overall profit indicates a profit motive even if the taxpayer derives no operational profit.2

In the case of horses, the opinion indicates horses appreciate in two ways. First, business owners can develop the skills to become better competitors in competitions. Second, they can be profitable in breeding. In the case of Besten, the Court believed he had a bona fide expectation that his horses, new foals, breeding fees, and ranch operations would all substantially increase in value over time, even citing the two championship wins.

The Court noted Besten’s success in 1997 and 1998 as well as the acquisition of the new facility supporting Besten’s belief that his horses, future foals, breeding fees would derive a profit. Besten also made improvements to the facility. The Court determined this factor to be neutral for the years at issue as the sale of the facility and death of Besten’s world champion cutting horse reduced the potential appreciation.

  1. The taxpayer’s success in carrying on other similar or dissimilar activities;

A taxpayer’s success in other business ventures may indicate that the taxpayer has the entrepreneurial skills and determination to succeed in subsequent endeavors. This in turn may help demonstrate that his present objective is profit.3 Success in other business ventures can indicate that the taxpayer has entrepreneurial skills and determination to succeed. Besten operated his seed business successfully. After selling the seed business to his son, the business faltered. After re-acquiring the business from his son, the seed business became successful again. The Court found this indicative of profit objectives.

  1. The taxpayer’s history of income or losses with respect to the activity;

A history of substantial losses may indicate that a taxpayer is not conducting an activity for profit.4 Unfortunately for the taxpayer, the history of losses in the horse cutting business, even considering Besten’s need to rescue the seed business, favored the IRS’ position that the activity was not undertaken for profit.

  1. The amount of occasional profits, if any, which are earned;

Unsurprisingly, making money is indicative of a profit motive.5 Noting the substantial opportunity for profit for Besten as a result of winning two world championships and purchasing a professional facility related to the horse operations in an effort to scale up and grow the business, profits were still not achieved. It was noticed however that losses were lower. Thus, with this factor, the Court believed the facts favored the IRS.

  1. The financial status of the taxpayer; and

Also unsurprisingly, not having other significant sources of income or capital from sources other than the activity in question can be indicative that the activities at issue are profit-motivated.6 Given the ups and downs related to the seed business and the low likelihood of repayment on the sale to his son, Besten needed to dedicate efforts to preserve the seed business in order to mitigate substantial losses. In short, if Besten wanted to get paid, the seed business needed to survive so the promissory note could be paid. The Court noted that it was not persuaded that Besten abandoned his profit motive as a result realizing that this factor was indicative of a profit motive.

  1. The presence of personal pleasure or recreation.

Pleasure or recreation being derived from an activity may suggest that a taxpayer may not be engaging in the activity for profit. However, the Court echoes a prior case stating that “[A] business will not be turned into a hobby merely because the owner finds it pleasurable; suffering has never been made a prerequisite to deductibility.”7

The Court noted that Besten’s cutting horse activities were physically demanding. Besten was 56 when he bought the new facility and 64 years old in 2006. Besten was not that young and he was highly involved hosting events, breeding, and riding horses. The Court’s opinion was that Besten’s efforts “went well beyond the leisurely aspects of horseback riding or the routine tasks of caring for horses.”

The Court’s Decision

After analysis of the pertinent factors outlined in regulation, the Court found that six factors favored petitioner’s profit objective, one factor neutral, and two favored the IRS’ position. So, as to the issue of whether the cutting horse activity was undertaken for profit in the years at issue, it was determined that the activities were undertaken for profit. Therefore, Besten should not be subject to the deduction limitations set out in Section 183.

A Lesson Learned: Reasonably Scaling Back Can Still be Probative of a Profit Objective

In the end, the Court decided that even though Besten scaled back his horse business during the time he was attempting to save his separate seed business, Besten still engaged in the horse cutting activities for profit. A major takeaway from this case is that scaling back to mitigate losses can indeed be a measure, notwithstanding profitability, of attempts to seek a still profit.


  1. See Treas. Reg. § 1.183-2(b)(2).
  2. See Treas. Reg. § 1.183-2(b)(4).
  3. See Treas. Reg. § 1.183-2(b)(5)
  4. See Golanty v. Comm’r, 72 T.C. at 427.
  5. See Treas. Reg. § 1.183-2(b)(6).
  6. See Treas. Reg. § 1.183-2(b)(7).
  7. See Jackson v. Comm’r, 59 T.C. 312, 317 (1972).


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