← FarmCPA Home

Another Cattle Tax Shelter Bites the Dust

By: | Trackback URL | No Comments

July 30th, 2014

We have previously done some posts on certain cattle or horse hobby loss casesThe Tax Court released the Gardner case on Monday July 28, 2014.  In this case, Mr. Gardner operated a very successful insurance business in North Carolina.  In 2001, he met John and David Pearl, who operated several businesses related to cattle and seems to have talked Mr. Gardner into starting a cattle operation to raise genetically superior livestock.

Over the next few years, Mr. Gardner issues numerous promissory notes to Mr. Pearl and various entities.  In the tax court memorandum, the listing the various promissory notes ran more than 20 pages (out of a total of 70 pages).  Essentially, Mr. Gardner would issue a promissory note to these entities for the purchase of cattle and/or operating expenses and equipment.  The promissory notes totaled more than a $1 million, however, it appears that Mr. Gardner effectively paid less than $100,000 on any of these promissory notes.  Also, in almost all cases, Mr. Gardner defaulted on all notes and no collection efforts were made to collect.

Mr. Gardner took a net deduction of about $700,000 during 2002-2004.  As you can expect, the IRS audited these returns and assessed taxes and penalties.  The tax court summarized all of the facts of the cattle operation and then examined whether the cattle operation met the 9 steps normally required under Section 183 (dealing with hobby losses).  In our previous posts, we reviewed some of the cases where taxpayers were allowed to deduct the losses since the tax court agreed they were a business and not a hobby.

In this case, I am not even going to list all of these reasons since the taxpayer was essentially found to not have any of the 9 steps be in his favor.  For example, the primary goal of Mr. Gardner was to raise genetically superior livestock.  This requires meticulous records to be maintained on the cattle being raised.  In this case, no records were maintained at all, therefore only commercial cattle values could be used.  This value was about $193,000.

The tax court did not view favorably that the cattle loss suddenly rose from about $30,000 or so in 2002 and 2003 to over $600,000 in 2004 when his insurance business netted more than $500,000.

All-in-all, this was not a good case for the taxpayer.  In many cases, a taxpayer may owe the tax, but get relief from the penalties which can be at least 20% of the tax owed.  In this case, the tax court found the taxpayer liable for the penalty.  All-in-all, this was not a good case for the taxpayer.

Paul Neiffer, CPA

Paul Neiffer

Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a partner with CliftonLarsonAllen in Yakima, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. In fact, Paul drives combine each summer for his cousins and that is what he considers a vacation. Leave a comment for Paul. If you would like to leave a comment for Paul, follow the link above, however, please make sure to include your email address so that he can reply to your comment (your email address will not automatically show up).

More Posts - Website

Follow Me:
Twitter

← FarmCPA Home

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

Subscribe to this blog by:

Previous Posts

Events

View upcoming speaking engagements and other networking events for Paul Neiffer and CliftonLarsonAllen’s agribusiness team.

See All

  • Twitter Feed

    If you have higher yields or go all corn for the 2014 crop year consider ARC-IC. It may more than offset base acre penalty 1 day ago

    Presenting two farm bill seminars today. Dayton and Walla Walla 2 days ago

    Netflix down $110 in after hours trading. Sign of momentum stocks going flat? 1 week ago

    Getting ready to go to LA to defend my son and I APU Alumni golf tournament victory last year. I may have to carry him again 1 week ago

    Everybody worried about bubble in land market. They should worry about stock market bubble 1 week ago

    77 degrees on October 8. Perfect. 2 weeks ago

    Somehow IRS listed several counties in Iowa as drought stricken. Hard to believe after all the rain this year 3 weeks ago

    Just saw a bighorn sheep eating grass in the bank next to the freeway. Less than 30' from my car. 1 month ago

    After 82 days in a rental car my wife has talked me into a cruise. We leave Thursday for Miami. Can't wait 1 month ago

    Will final ear weights set a new record. If so final corn yield will be going higher (unless we get an early hard freeze) 1 month ago