LLCs: Considerations when Doing Horse Business Out-of-State

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Doing horse business in other states?

In the highly mobile, transient equine industry, many create and utilize limited liability company entities in their home state.

So, what happens to the protections and advantages of your LLC, formed in one state, when you conduct business in another state?

Avoid Potential Equine Law Headaches in Florida

If you operate your horse business outside of Florida for most of the year but winter in Florida, like many equestrians running equine operations, this may apply to you. Commonly this scenario can cause equestrians a legal headache.

For example, a New Jersey LLC’s sole member comes to Florida and sells a horse to a Florida buyer in Florida on behalf of a New Jersey LLC. Later, the Florida buyer claims that the horse was not as represented or warranted by the New Jersey LLC seller. Buyer accuses the member of fraud, among other claims.

After negotiations prove fruitless, the Florida buyer commences suit in Florida, not against the New Jersey LLC entity, but against the individual member of the New Jersey LLC for the seller’s damages. Florida is the proper jurisdiction and venue because of where the events took place and other related reasons. Therefore, the New Jersey individual member cannot get the case dismissed in Florida.

Next, the New Jersey member attempts to dismiss the suit in Florida, claiming that the proper party defendant is the New Jersey LLC, not the LLC’s member. The problem for the individual member is that the member did not register the New Jersey LLC to do business in Florida before the equine purchase and sales transaction.

Consequently, that LLC’s member cannot intervene the New Jersey LLC as the defendant. That’s because the New Jersey LLC is not entitled to avail itself of the court system or laws of Florida for a dispute arising out of that equine sales transaction. So, the New Jersey individual member has lost the protection of its New Jersey LLC entity. That’s because the member undertook LLC business in Florida without first registering the New Jersey LLC to do business in Florida.

Now, the sole member of the foreign LLC is left defending personal liability to the Florida buyer.

 

Equine Limited Liability Company (LLC)

First, let’s look at the LLC or limited liability company. A limited liability company is a company structure that, when formed and operated correctly, in many cases, limits the liability of the individual members of the company to their membership interests in the LLC. It can prevent personal liability for the debts and liabilities of the LLC (although there are some exceptions, such as fraud or criminal acts).

In comparison, a partnership or unincorporated sole proprietorship doesn’t protect the owners. In fact, the business and owners are considered one and the same for liability exposure.

Further, an LLC is treated as a “pass-through entity.” That means that the revenue and expenses of the LLC are taxed only once. For a single-member LLC, the member’s tax return shows those figures.

In a multi-member LLC, members file a partnership return called a Form 1065. The LLC issues a Schedule K-1 to each member for their allocation of the profits and losses.

Every LLC is created under the law of the state in which it is formed. That means that an LLC formed in New Jersey is not an LLC that is recognized as having the right to do business in another state — like Florida. That is unless that New Jersey LLC registers to do business in Florida.

 

Foreign LLC Registration

Most states have a mechanism where an out-of-state or foreign LLC can register annually to do business, for a minimal fee, in another state. Why register and pay that fee?

Because if the foreign LLC or its members want to avail themselves of the protections and rights of the laws of the other state where that LLC is doing business as a foreign LLC, it must declare it is doing business there first. Finally, a registered foreign LLC will publically designate a registered agent who is entitled to receive notice of any lawsuit initiated against the LLC.

Confused? Don’t care? Let’s take a closer look at how this may apply to your LLC doing horse business across state lines.

 

Failure to register LLC

Worse yet, even if the foreign LLC failed to register and then was sued in a non-home state, that non-registered LLC is subject to process and could unknowingly be defaulted in a lawsuit because it is not notified.

Finally, the New Jersey LLC member cannot retroactively cure the problem by registering the New Jersey LLC to do business in Florida. It is the status of the Florida registration at the time of the event triggering liability that governs. This is distinguishable from a foreign LLC bringing a claim as a plaintiff in Florida courts and then assigning its claims to its own after-formed Florida LLC and moving to substitute a proper party.

So, unless you first register your LLC to do business in another state, your home-state LLC may not afford you the LLC protections and rights you expect.

Finally, you will not be able to invoke the laws and utilize the courts of that foreign state to place your home-state LLC structure between you and someone suing you.

 


 

Avery S. Chapman, Esq., is the founding member and inaugural Chairman of the Equine Law Committee of the Florida Bar. He is the principal of Equine Law Group in Wellington, FL. Click here to learn more

 

 

 

 

 

Decoding Horse Sales Fraud

 

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Victim of horse sales fraud?

The scenario is repeated all-too-often in the equine industry. A private individual or entity purchases one or more horses, only to find later the horse has some sort of veterinary or behavioral defect that was not disclosed, but known, by the seller.

The question left for the purchaser, if the matter is not worked out amicably, is how to proceed. Do you sue for breach of contract, for fraud in the inducement, for negligent misrepresentation or other non-contract theory of recovery? Do you sue the seller’s agent, and if so, under what theory of recovery?

That question then turns to further analysis as to whether the tortious conduct, such as deceptive representations or misrepresentations, occurred prior to entering into the contract for the purchase and sale of the horse, or as part of the breach of the contract.

If there was bad conduct by the seller, or seller’s agent, prior to the contract, to induce the buyer to enter into the contract to purchase the animals or upon which the buyer justifiably relied to enter into the contract, then the buyer may proceed in both contract and tort concurrently.

If the complaint is only that the horse’s defect was a breach of seller’s performance of the contract, such as the horse could not jump as high or run as long as represented, then a principle of law called the Economic Loss Doctrine may mean that you only can proceed with breach of contract against the party with whom you made the contract.

That Rule holds that if your only damages arise from the breach of the contract and the conduct surrounding the breach is the same as would support other tort claims, then you can only proceed for breach of contract against a party with whom you contracted.  However, if the conduct complained-of predated the formation of the contract, then you might also be able to proceed in tort against that party.

An example might be a breach of contract and fraud action against a seller who represented they had the right to sell a horse when that person did not have the legal right to do so. As well, the seller’s agent, while not being exposed to a breach of contract claim, because the agent is not the one entering into the contract, is still exposed the tort claims such as fraudulent inducement or negligent misrepresentation.

As one esteemed jurist put it: “When one party to the contract sits at the bargaining table with deceit in his heart, all bets are off.”

 

Economic Loss Rule

To appreciate the consideration to be given to choosing theories of recovery in horse purchase cases, first note that in 2013, the Economic Loss Rule was significantly contracted by the Florida Supreme Court and expressly limited only to products liability cases

Since 2013, state courts (Alabama, Florida, and Georgia) and federal courts of the 11th Circuit have focused on whether a tort claim alleging fraud or misrepresentation, when brought alongside a contract claim, was “independent” of that breach of contract claim.

In Georgia, for example, in a case about the ownership of two white-handed Gibbons, the Court stated “We cannot conclude that the district court erred in granting judgment as a matter of law in favor of defendants with respect to plaintiff’s tort claims…we readily conclude that there is no evidence of a pre-contractual misrepresentation.”

However, other courts have found that fraud in the inducement to form a contract occurs where a party’s ability “to negotiate or make informed decisions” is impaired by the pre-contractual fraudulent conduct of the other contracting party, then a party harmed may bring both a breach of contract and a fraud claim and not run afoul of the Economic Loss Doctrine.

If you are feeling confused you are not alone.  Many courts have the same problem discerning just what the Economic Loss Rule allows or does not allow in their state.  The good news is that courts tend to want to see claims tried on their merits.  Therefore, given the lack of clarity of the economic loss rule, many courts will defer addressing this doctrine at the early stage of court proceedings (such as in a motion to dismiss or motion for summary judgment) and will allow contract and tort claims to proceed concurrently against the breaching party.

This means the horse buyer can proceed on theories of torts of fraud and negligence tort as well as breach of contract and will survive a motion to dismiss, when the conduct complained of includes fraudulent or negligent misconduct before the breach of the contract which affects the ability of the non-breaching party to make an informed choice to contract.  That will expose the seller to multiple claims and may lead to a settlement or a verdict against the seller.

 


Avery S. Chapman, Esq., is the founding member and inaugural Chairman of the Equine Law Committee of the Florida Bar. He is the principal of Equine Law Group in Wellington, FL. Click here to learn more

 

 

Understanding Care, Custody or Control Insurance in Equine Industry

 

 

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All is well in the world. As an equine professional, you have care, custody, and control over others’ horses. As an owner, you have entrusted your horses to a professional. Each believes that in case of a misadventure, exposure or losses that they are adequately covered by an Excess Personal Liability Insurance (“EPL”) policy issued by your equine sport’s governing body.

Guess again.

A review of certain master policies reveals that care, custody or control (“CCC”) is expressly excluded from coverage. Further, CCC policies only cover damage to the horse and not damage to third parties.

The Care, Custody or Control Exclusion

Whoa. Full halt. What’s that? Let me explain. In almost all commercial general liability policies (“CGL”) and most EPL policies issued by equine governing organizations to their members, there is an exclusion for coverage of property in one’s “care, custody or control.”

This means that the policy with such an exclusion does not cover damage to or liability caused by the personal property of another that is in your care, custody or control. Remember, a horse is considered “personal property” in this context. So, putting it another way, if you have care, custody or control of a horse owned by another, and while you do, that horse is hurt or hurts someone or something, let’s say, by breaking out of its paddock and running down a busy street, you are responsible for the damage to the horse and may not be insured against that damage. As well, you are not covered for the harm to any third parties or their property by that errant horse. On the other side, if you are the owner of that errant horse, you may find your trainer to whom you entrusted the care, custody or control of the horse, does not have insurance for the mishap.

Wait you say, why would a CGL or EPL policy exclude such a possibility? To understand that, you have to think like an insurance company.

An insurance company is in the business of making money from premiums and sets those premiums from an understanding of what risks the insurance company is assuming. For example, this is why a 17-year old’s auto insurance is more expensive than a 47-year old’s auto insurance. The company understands the risk is decreased as a person matures and has more experience behind the wheel.

In the same vein, insurance companies typically exclude care, custody or control from CGL and EPL policies, only to include coverage back in after an insured specifically discloses in writing what activities the insured is undertaking. Once the insurance company has reviewed those disclosed activities, the company can price the premium according to the risk the company believes it is undertaking by insuring the activity. The company is weighing the likelihood of a mishap in a given activity against the profit to be gained by earning the premium by insuring the activity.

In the equine industry, this means disclosure of the type of equine discipline, sport, activity and whether it is commercial or personal. Insurance companies are reluctant to cover equine professionals and equine activities until the company understands the conditions of the care, custody, and control and hence the risk being assumed by the insurance company. Therefore, the broad CGL and EPL policies you may receive as a benefit for being a member of an equine organization likely do not include coverage for care, custody or control.

Now that you have that down, a word on the definition of care, custody or control. First, there is the scope of the definition. Care, custody or control applies to personal property, that is, movable property that is not real estate or buildings. It does not matter if the personal property is owned by an individual or a business, it is all personal property if you can move it. (For you deep thinkers, a fence is not considered personal property because once it is installed, it is considered a fixture of the real property on which it rests, even if you can relocate the fence line).

 

Care, Custody or Control Defined

The next question goes to the definition of the words care, custody or control. A leading insurance industry trade group, the International Risk Management Institute, notes that the definition of care, custody or control is dependent upon the jurisdiction and court giving the definition: “In some cases, CCC has been determined to entail physical possession of the property; in others, any party with a legal obligation to exercise care with respect to property has been deemed to have that property in its CCC.” The definition often turns on the facts of each particular case. American Family Mut. Ins. Co. v. William J. Bentley, 352 N.E.2d 860 (Ind. App. 1976).

One state supreme court has observed: “The care, custody and control clause in liability policies, so far as our research has extended, appears to be almost universally used, but its construction is, to a large extent, dependent upon circumstances of each case and we conclude that the phrase should be applied with common sense and practicality. Hardware Mut. Cas. Co. v. Crafton, 350 S.W.2d 506 (Ark. 1961).

For example in one case, liability for damage to a truck harmed by the collapse of a building while under the supervision of the dairy at the time of the collapse, was imputed to the dairy because the Court determined that supervising the truck meant that the truck was under the care, custody, or control of the dairy. Therefore, the Court applied the CCC exclusion. Paul Madden v. Vitamilk Dairy, Inc. & Continental Cas. Co., 367 P.2d 127 (Wash. 1961).

In contrast. Merely giving permission to park on a lot a trailer which is later destroyed by fire does not trigger the existence of “care” and therefore does not trigger the CCC exclusion. Rochester Woodcraft Shop, Inc. v. General Acc. Fire & Life Assur. Corp. Ltd., 35 A.D. 186, 187 (N.Y. App. Div., 3d Dept., 1970).

Turning, then, to the meanings of the CCC words:

“Care” may be defined as having temporary charge of the property. Hardware Mutual, supra.

“Custody” may be defined as a keeping or guarding and a necessity for an accounting Hardware Mutual, supra.

“Control” may be defined as having the ability or authority to affect the property. Vitamilk Dairy, supra.

Note also that the words are in the disjunctive, joined by the word “or” meaning that any one of them is sufficient to trigger liability and trigger the CCC exclusion.

 

So What Do I Do Now?

If you are a professional taking care, custody or control over others’ horses, you should first have your own CCC insurance to cover damage to those horses and to cover defense costs for such harm. Typically, such CCC policies are priced on a per-horse basis and cover accidents and sickness, but not mortality.

In addition, you should both: (a) insist the horses’ owner(s) obtain their own mortality policies (or specifically contract that right away); and (b) obtain your own umbrella policy to cover mishaps involving harm to third parties.

If you are an owner entrusting a horse to another, you should: (a) insist the other person has its own CCC policy and request to see it; (b) keep your mortality insurance in place while the horse is not with you; and (c) keep your own umbrella policy in place to guard against the failure of the other person to maintain the proper insurance.

In addition, whether professional or amateur, trainer or owner, there are various liability and asset protection strategies you should deploy as you conduct business in the equine community. Consult an equine attorney familiar with those constructs before a problem arises, because closing the barn doors after the horses get out is never useful.


 

Avery S. Chapman, Esq., is the founding member and inaugural Chairman of the Equine Law Committee of the Florida Bar. He is the principal of Equine Law Group in Wellington, FL. Click here to learn more

 

 

 

 
 

A Taxing Question: Your Horse Hobby and Business Deductions

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Horse Hobby Business Expenses

So you want to deduct some or all of your horse hobby expenses. Before taking those horse hobby expenses as deductions, you may want to consider the following factors, (since the Internal Revenue Service does) to determine whether your deductions will withstand scrutiny later.

Merely incurring expenses of a horse hobby as a “hobby”, even a hobby that you are passionate about and spend a considerable amount of money and even run in a very business-like way, does not mean you can claim the deduction. Section 183(a) of the Internal Revenue Code (the “Code”) provides that if an activity is not engaged in for profit, “no deduction to such activity shall be allowed” except for interest and State and local taxes. Therefore, if you want to take deductions for your horse hobby expenses, you must satisfy the IRS that you have an “actual and honest objective” (in the words of the Tax Court) to engage in a horse hobby to make a profit.

Now, that does not mean that at first, you need to make a profit. There a many business endeavors that sustain losses, particularly at start-up, which losses are not attributable to any fault of the taxpayer. The IRS (and then the Tax Court if you litigate) will consider losses, but will not determine merely because you sustained losses that your horse hobby activities were not engaged for a profit motive. Rather, the courts have focused on whether there is a “good faith objective of making a profit.”

To determine if there was a good faith profit objective by the taxpayer, the tax courts have examined a variety of objective facts, a non-exclusive list of which is also contained in the Code, and which includes:

– The manner in which the taxpayers carried on the activity;
– The expertise of the taxpayers or their advisors;
– The time and effort expended by the taxpayers in carrying on the activity;
– The expectation that the assets used in the activity will appreciate in value;
– The success of the taxpayers in carrying on other similar or dissimilar activities;
– The taxpayer history of income or losses with respect to the activity;
– The amount of occasional profit;
– The financial status of the taxpayer; and
– Elements of personal pleasure derived from the activity.

 

No single factor is controlling or dispositive, and the courts have also considered the relationship between the taxpayer’s horse hobby activities and his other businesses when the taxpayer claims that the horse hobby activity confers a benefit (i.e.: brings in clients or customers) for his other, non-horse hobby related business. However, the courts will give greater weight to these factors than to the taxpayer’s own statement of his or her intent.

Finally, it is the taxpayer that bears the burden of showing that she had a for-profit objective and not the IRS who must prove that she did not have that intent. In other words, if you take the deductions for horse hobby activities, you better be able to prove you are entitled to them.

Looking at each of these statutory factors, consider the following before taking your deductions:

1. What was the manner in which you carried on your horse hobby activity?

First and foremost, you must maintain separate, complete and accurate records of your horse hobby activities. If you commingle your accounts, funds, and transactions with non-horse hobby matters, you run the risk that there will arise a presumption, which you will be unable to rebut, that you were not serious enough about your horse hobby as a for-profit enterprise to keep separate books. Therefore, a horse hobby would be presumed to be a hobby for you.

Additionally, changing operating methods or training techniques or hiring qualified professionals to increase profits is an indicia of for-profit motive. In the case of a horse training business, this might mean changing where you buy your green horses, or who trains them, or where you market them. Drafting a business plan, and hiring expert advisors, discussed below, are particularly persuasive, and may help you avoid the issue of operating losses incurred beyond the start-up years.

For example, in a case from several years ago, careful receipts were kept by a horse owner who owned a hobby stable, but because the court concluded he did not formulate a business plan or take steps to make his operation profitable, merely taking steps to avoid losses was not sufficient, even though he kept separate books, to demonstrate a for-profit motive.

2.Your expertise or those of your advisors.

Not everyone, and in fact most horse business owners, do not have the resources to formally hire a stable of advisors. However, you can demonstrate a profit motive by establishing that you have either studied the business, economic and equine scientific practices of horse hobby activities or have consulted those with that knowledge. If you are buying and selling ponies, keep records of who trained them, who entered them as a result of seeing them in which competition, who provided veterinary or other assistance to you in your horse hobby sales endeavors.

Now obviously you cannot justify every action, and should not try if you are enjoying your horse hobby truly as a hobby – without a profit motive – but taking the time to learn the business and having competent barn managers and professionals assisting in the horse hobby business will support your claim of a profit motive. Indeed, hiring legal and tax professionals to structure your business may be an indicator of for-profit motive.


3. How much time and effort do you spend with your horse hobby?

I don’t just mean playing with the horses. Do you personally work on a plan to exhibit your horses at certain horse shows if you are trying to sell them? Are you involved in the physical labor of the horse hobby, e.g. mucking out, grooming, training, even though you can afford someone else to do it? Do you maintain another business that significantly detracts from your time spent with the horse hobby enterprise? If you have a limited amount of time to spend on your horse hobby, do you employ qualified employees to carry it on in your absence? Did you withdraw from some other occupation to devote your time to your horse hobby activities?

In one case, a court found that a woman who clearly had the means to hire help, yet nevertheless mucked stalls and worked at the barn and on horseback every day, clearly demonstrated that she had a profit motive in mind in running her stable.

4. Do you have a reasonable expectation of appreciation in value of your horse hobby assets?

Your horse hobby assets include not only your horses but your real estate, equipment and the like. Obviously, the equipment is unlikely to appreciate, so that leaves the ponies and the real estate. Purchasing real estate may, in fact, involve the expectation of appreciation. To demonstrate this, you should develop a business plan which articulates your expectation of appreciation of the real estate you purchase for your horse hobby operation. Getting a hold of similar property appraisals, studying and appraising the property you do purchase, and adding value to the land may demonstrate that appreciation expectancy.

With respect to the horses, developing and implementing a scheme, no matter how simple, to realize the appreciation in value of your horses is critical. For a small operation, do you buy young, train and show them to make them, and then sell them for more than you put into them, or at least try to? For the more complex operation, do you breed, raise, train, board and show your horses with an intent to realize the appreciation in value of the horses from the training you or your hired trainers put into them? Do you have a plan that accounts for the costs associated with this endeavor? What is the actual relationship between your profits and your losses?

In one case, an individual claimed appreciation of close to half a million dollars in horse hobby pony inventory was “dwarfed” by more than two and a quarter million dollars in losses. There was no business plan. The court was unconvinced a profit motive existed in that venture.

5. Have you been successful in other similar or even dissimilar activities?

If you have made money in successful horse hobby or horse ventures in the past, or are even doing so presently, this is strongly persuasive of an intent to do so with a horse hobby. An example would be the former professional horse shower who now is training and selling horses as his source of income. Compare this to the former or present investor in a thoroughbred syndicate who plays polo on the weekends. The former would be able to make a good case for his expenses as a trainer while the latter could not seek to recover his polo hobby expenses.

However, lack of experience does not mean that you do not have a profit motive in a horse hobby. Nor will diversion of income from one venture to your horse hobby or use of losses in a horse hobby to offset your other income. The courts have been somewhat unclear on this area in the horse hobby context, but I would suggest that there has to be a rational relationship between either the activities or the skills you utilized for each activity for the court to find a profit-motive. If that sounds fuzzy, remember, none of these factors alone determines for-profit intent.

6. What is your history of profit or loss in a horse hobby?

The old joke – How do you make a small fortune in a horse hobby? Start with a large one – somewhat applies here.
Start-up losses, or losses for unforeseen circumstances, even if well-beyond the time of start-up, do not demonstrate a lack of profit motive. The Code states that a record of substantial losses, year after year, coupled with an unlikelihood of profitability in the future, indicates a lack of profit motive. However, this is not always true.

For example, in one case, it took 3 years for a horse owner and breeder to determine that a fungus growing in his pastures was the cause of low birth weight and other breeding problems. A later drought further compounded his ability to board ponies and prevented successful replanting of the pastures. Significant losses occurred many years after start-up. Even though the owner could afford to operate the farm at a loss, the court determined that these events were beyond the owner’s control, and that merely experiencing these losses did not create the presumption that there was no profit motive.

Remember, if you are enjoying a horse hobby at a loss, you must demonstrate that you are attempting to make money, including implementing new breeding programs, hiring new management, experimenting with new sources of revenue for the horse hobby operation.

7. Have you made any occasional profit?

If you have, then you must still demonstrate that profit was as a direct result of for-profit intent. Using your horses for fun for 5 years and merely selling off your older horses do not demonstrate such intent. Training and selling horses consistently for 5 years at break-even levels or worse, but then selling a few for significant profit would tend to support a for-profit motive. Also, again the court will look at the relationship between your losses and your profits.

8. What is your financial status?

The court may consider whether you have other activities that provide substantial income and whether losses from a horse hobby produce tax benefits. However, the facts that you lose money in a horse hobby or can afford to operate your horse hobby operation at a loss does not mean you have no profit motive, because, as one court put it, “as long as tax rates are less than 100 %, there is no benefit in losing money.” Remember the woman who could afford all the help she needed, but still mucked and trained horses herself? Your conduct in running and participating in your horse hobby is significant in many ways.

9. Do you derive personal pleasure or recreation from a horse hobby?

We all do. But tax law does not prohibit a person from enjoying his or her work. The issue is whether these enjoyments are your sole motivation for conducting the horse hobby. Once again, your conduct and the business-like manner in which you conduct your horse hobby operation will be significant.

Some, after reviewing these factors, might conclude that they are too small or too unique in their horse hobby activities to satisfy all of these tests. That may be true. To those folks, I would suggest that you not abandon common sense altogether. If you plan to take a tax position that your horse hobby expenses are deductible, be sure to run your horse hobby as a business, develop a plan or be sure to keep evidence of a plan (e.g. copies of print advertisements for horse sales), and be able to trace profits made and losses incurred directly to that business.

To the others among you who say that you do not know if you meet these tests, it is time to take a look.

10. A tax court case that helps you.

In the case of Frimml v. Commissioner of Internal Revenue, Tax Court Opinion 2010-176, (December 28, 2010) the Tax Court decided in favor of the taxpayers, reversing the auditors’ conclusions, where it framed the issues as:
We must decide whether Paint horse owners engaged in breeding horses for profit within the meaning of section 183 when they allocated substantial funds and time to their horse activity over a period of 10 years (including the years at issue) yet failed to generate a profit. We also must decide whether petitioners are liable for the accuracy-related penalty for the years at issue.

The Frimmls had been audited after they failed to generate a profit for 10 years. In reversing the conclusion of the auditors, which assessed penalties and interest after finding the enterprise only a hobby and without profit objective, the Tax Court applied the 9 factors (set forth above) of I.R. Code § 1.183-2(b), explaining that “No factor or set of factors is controlling, nor is the existence of a majority of factors favoring or disfavoring a profit objective controlling.”

After noting that although the taxpayers had other full-time jobs and that they did not keep their business books in a formal manner, the Court nevertheless found in their favor. The Court discussed the factors and found that their “decade formulating a business plan”, though not reduced to writing, “businesslike descriptions of decisions regarding their Paint horses”, consultations with training and breeding experts, the amount of time spent in the activity (substantial), losses occurred within the startup-window of the business (which the Tax Court has already determined is 5-10 years for horse-breeding operations) was not a negative factor, that a substantial part of the taxpayers’ income from their other jobs was used towards the farm business and that the taxpayers did not ride or derive pleasure from the paint horses they bred militated in favor of the farm being run with a profit objective, concluded that “After considering all the facts and circumstances, we find that petitioners have shown that they engaged in their horse activity for profit.”

Therefore, in counseling equine industry clients, we take a critical eye towards examining exactly what you are doing with your horses and why. If at all possible, we encourage a restructuring of your activities, hiring, and horse hobby ventures to better meet these factors and otherwise demonstrate a profit objective, even if the business is not currently making a profit. It is better to look at these issues now rather than when an audit comes your way.

Avery S. Chapman, Esq., is the founding member and inaugural Chairman of the Equine Law Committee of the Florida Bar. He is the principal of Equine Law Group in Wellington, FL. Click here to learn more