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SARAH P. THAYER v. COMMISSIONER OF REVENUE

Docket No. C308533

Promulgated:
December 17, 2014

This is an appeal filed under the formal procedure pursuant to G.L. c. 58A, § 7 and G.L. c. 62C, § 39 from the refusal of the Commissioner of Revenue (“Commissioner” or “appellee”), to abate income taxes assessed against Sarah P. Thayer (“Dr. Thayer” or “appellant”) for tax years 2006, 2007, and 2008 (“tax years at issue”).

Chairman Hammond heard this appeal and was joined by Commissioners Scharaffa, Rose, Chmielinski and Good in a decision for the appellee.

These findings of fact and report are made pursuant to requests by both parties under G.L. c. 58A, § 13 and 831 CMR 1.32.

Stephen M. Politi, Esq. for the appellant.
Kevin M. Daly, Esq. and Keri Angus, Esq. for the appellee.

FINDINGS OF FACT AND REPORT

On the basis of the testimony and exhibits offered into evidence at the hearing of this appeal, the Appellate Tax Board (“Board”) made the following findings of fact.

 

I.INTRODUCTION AND JURISDICTIONAL BACKGROUND

The appellant, a resident of Massachusetts, is a cancer surgeon and assistant professor of surgery at Massachusetts General Hospital (“MGH”). She also serves as Director of the Pancreatic Biology Research Laboratory at MGH, where she managed a large staff and a budget of several million dollars. The appellant owned horses which were boarded in the Commonwealth. Over the tax years at issue, the number of horses owned by Dr. Thayer increased from one to three. Dr. Thayer claimed the expenses associated with the care of the animals, which ranged from $114,368 to $190,326 per year during the tax years at issue, as deductible business expenses for income tax purposes. The appellant argued that these expenses were incurred as part of a trade or business that she conducted to purchase and train horses for lease or sale, a business which she referred to in tax filings for the tax years at issue as “Simply the Best Baroch.”

The appellant timely filed income tax returns for each of the tax years at issue. Pursuant to an audit of the appellant’s tax returns for the 2006, 2007, and 2008 tax years, the Commissioner issued the appellant a Notice of Assessment on November 24, 2009, assessing additional income tax of $6,049 for the 2006 tax year, $9,966 for the 2007 tax year, and $8,704 for the tax year 2008, plus statutory interest of $2,574.30, resulting in a total assessment of $27,293.30.

On January 4, 2010, the appellant filed an application for abatement for the tax years at issue. On May 7, 2010, the Commissioner issued a Notice of Abatement Determination denying the appellant’s application. On July 6, 2010, the appellant timely filed this appeal with the Board. On the basis of these facts, the Board found and ruled that it had jurisdiction over this appeal.
The Board heard testimony over two days of hearings. The appellant presented her case-in-chief through her own testimony; the testimony of Lynn O’Connell, the owner and operator of Wadsworth Farm in Danvers, Massachusetts where Dr. Thayer’s horses were boarded during the tax years at issue; and the testimony of Nora Petralta, the Department of Revenue’s auditor who conducted the audit of the appellant’s tax filings. Ms. O’Connell has owned and operated Wadsworth Farms since 1996 and has extensive experience with buying, selling, training, and riding horses. The appellant also introduced exhibits including expense records, calendar logs, medical records for her horses, horse show records, profit projections for each horse, a written valuation of one of her horses done by Ms. O’Connell and a corresponding unexecuted contract for her to represent the appellant in a potential sale of that horse, and the appellant’s Internal Revenue Service audit file for the tax years at issue.
II.APPELLANT’S HORSE-RELATED ACTIVITIES
The appellant is a prize-winning dressage horse rider who testified that she has trained with highly acclaimed teachers, including Olympic level riders. Dressage horse riding is a sport where horses and their riders are judged on their abilities to execute a series of skills. The appellant testified that she could not “remember a time when [she] didn’t have an education as an equine person.” She began riding horses in her youth, eventually owning her own horse in high school that she subsequently took with her to college and medical school. After graduating from medical school, Dr. Thayer went on to earn a Ph.D. in New York. While a student in New York, she purchased a horse named “Baroch.” As she continued her studies, she testified that she taught riding lessons for money and allowed others to rent Baroch for lessons or training, even as she continued to ride and train. In 1998, the appellant began a surgery residency at MGH in Boston and boarded Baroch at Wadsworth Farm, the horse barn owned and operated by Lynn O’Connell. Baroch subsequently became ill and died prior to the tax years at issue.

“Simply the Best Baroch” Business

In February 2002, the appellant bought a young, unbroken stallion named “Simply the Best” (“Simply”) for $37,500. Dr. Thayer testified that she purchased the animal with the intent of training it as a dressage horse and re-selling it at a profit at a later date. She testified that while she had owned horses in the past, Simply was the first horse she purchased with the intent of entering into the business of selling horses. The appellant has filed a Schedule C reporting losses from equine activity since 1998, a business which she referred to as “Baroch” on her tax filings. She claimed that the prior activity with Baroch was a distinct business activity, as he was a hunter-jumper horse instead of a dressage horse. However, the Board found that there was no evidence to support that there was any meaningful distinction between “Baroch” and “Simply the Best Baroch,” and found that the purchase of Simply was merely a continuation of the equine activities which she had claimed on her Schedule C since 1998.
The appellant testified that there is a “very standard model” in the equine business, involving two occasions that present “real opportunities to make profit” selling a horse – either immediately after breaking and initial training, where value is largely based on the horse’s raw potential, or upon the horse’s successfully reaching the “Prix St. George,” a level of international competition. The appellant testified that there are many levels of competition for dressage horses through which a horse must pass as it develops. The appellant testified that the rise through the ranks contains several “tollgates,” or major watershed advancements. For example, the Prix St. George is considered such a tollgate, as it is the first of the international competition levels. Both the appellant and Ms. O’Connell testified that a dressage horse’s value is largely tied to its ability to meet these tollgates throughout its development.
Throughout the tax years at issue, the appellant was employed by MGH. She testified that she worked extremely long hours at MGH, including her duties as a surgeon, her duties at the laboratory, and her duties as a professor, in addition to times when she was “on-call.” Nevertheless, the appellant testified that she spent an average of 25 to 29 hours a week riding and training her horses at Wadsworth Farm or otherwise involved in their care. Dr. Thayer testified that she spent any vacation time she had from her practice working with her horses.
i.Simply the Best
The appellant’s purchase of Simply was made on the recommendation of Wadsworth Farm’s then head trainer, Roel Theunissen, who served as the agent for the sale. At the time, Simply was located in the Netherlands, where he received strong evaluations from European judges; the appellant testified that the judges ranked him among the forty best stallions in the Netherlands. Simply remained in the Netherlands for several months while he was broken and he was brought to Wadsworth Farm in 2002. When Simply arrived at Wadsworth Farm, the appellant engaged Mr. Theunissen to train him to perform as a dressage horse.
The appellant testified that an “unexplained lameness” was first noticed in Simply’s front leg around 2004. Dr. Thayer consulted with several veterinarians regarding the problem, including a number of specialists, but no satisfactory diagnosis was reached as to the nature of the lameness. Unexplained lameness would have been a significant barrier to a potential sale of the animal. The appellant testified that she sent Simply to Georgia in 2005, where Mr. Theunissen had relocated so that the horse could continue his training there. Dr. Thayer testified that she stayed in close communication with Mr. Theunissen regarding Simply’s training and made several trips to Georgia. Ultimately dissatisfied with Simply’s progress in Georgia, the appellant brought Simply back to Wadsworth Farm in early 2007 and began regularly riding the horse herself. Dr. Thayer testified that when Simply returned to Massachusetts, he had fundamental issues with his gait and was not developing as expected. At the time, Simply had failed to execute a “flying change,” an important developmental tollgate that would have been expected of him at his age. After the horse’s return to Massachusetts, the appellant requested that Lynn O’Connell prepare an assessment of Simply’s marketability in April 2007 as a prelude to a potential sale where Ms. O’Connell would act as the agent. If the appellant had agreed to put the horse on the market, Ms. O’Connell would have received a commission on the ultimate sale price. Ms. O’Connell valued the horse at a market value at $40,000, a disappointingly low figure for Dr. Thayer. Ms. O’Connell then drafted a contract offering to serve as the appellant’s agent in selling Simply, but recommended that Dr. Thayer try to address the major problems with the horse in order to attempt to secure a better sale price. The contract was never executed and the record does not contain any evidence that Ms. O’Connell was paid for the estimate.
Dr. Thayer testified that in June and July of 2007, as part of an effort to rebuild the horse’s confidence and restart his training, she began entering Simply in dressage shows where she participated as his rider. In late July, an influential judge at one of these shows commented on Simply’s performance in a written scorecard entered into evidence that read: “[b]eautiful horse, probably has soundness problems – possibly neurologic. [Please] check.” In August of 2007, the appellant testified that in response to the comment, she brought Simply to various specialists to diagnose his soundness issues. In 2008, a veterinary specialist was finally able to diagnose Simply with a structural foot problem which, once fixed, corrected his gait issues. Dr. Thayer resumed riding the horse at shows where he performed well. By the end of 2008, Simply reached level 4-3, the final level before the Prix St. George. Other than noting during her own testimony that Simply was “for sale” at the time of the hearing, the appellant did not introduce any evidence regarding whether Simply’s estimated sale price had increased since Ms. O’Connell’s 2007 assessment.
ii.Nautical
In 2006, the appellant purchased a second horse named “Nautical” for $29,000. Lynn O’Connell introduced the appellant to the seven-year-old horse, which had been trained by a student of Wadsworth Farm’s head trainer. Ms. O’Connell and Dr. Thayer both testified that Nautical had a reputation as a difficult and wild horse, which was reflected in the low selling price. Ms. O’Connell served as the agent for the sale and brought the horse to Dr. Thayer’s attention after another client of Ms. O’Connell considered buying the horse but lacked the appropriate skill necessary to ride him. Dr. Thayer testified that she had a talent for being able to ride difficult horses that proved too challenging for others, which Ms. O’Connell corroborated in her testimony. Dr. Thayer testified that, given the difficulty others had experienced trying to ride the horse, she intended to train Nautical for two to three years after purchase in order to make him suitable to be leased to another rider. She testified that Nautical showed well and progressed through all of his training tollgates in a timely fashion. The appellant testified that Nautical was successfully leased in 2009, but did not provide any evidence as to the amount of income he later generated.
iii.Charleston 26
In May of 2007, the appellant purchased a third horse named “Charleston 26” (“Charleston”) for $100,000. Lynn O’Connell was also the person that brought this horse, who was fifteen years old at the time of purchase, to the appellant’s notice and served as the agent for the sale. Dr. Thayer testified that Charleston had twice won the European championships. At the time of purchase, Ms. O’Connell testified that Dr. Cesar Parra, an Olympic-level rider, had made inquiries to the seller about leasing Charleston to ride the horse at the then-upcoming Pan American Games (“Pan Am Games” or “Games”)— a prospect which she testified would have considerably increased the horse’s value. Dr. Thayer testified that her intent was to purchase the horse and lease him to Dr. Parra. Her belief was that if Dr. Parra took the horse with him to the Pan Am Games, it would increase the horse’s value.
Dr. Thayer estimated that she could fetch a price of $500,000 for the horse if he performed well at the Games. That figure was derived in consultation with Lynn O’Connell, who based the conclusion on her knowledge of “what other horses that have gone to the Pan Am Games sell for.” However, no substantive market analysis was performed and the only support given for her estimate was her testimony regarding another horse that she was familiar with, who she opined was “not as good a horse as [Charleston],” that had gone to the Pan Am Games and was for sale at the time of the hearing for $750,000. Ms. O’Connell did not give any further testimony regarding the similarities or differences between the two horses. The appellant did not offer any testimony regarding the likelihood of Charleston’s success at the Games, apart from general statements regarding Dr. Parra’s skill. Ms. O’Connell testified that while the Pan Am Games offered no greater competition than the events in which Charleston was already competing, the increase in value would be due to “bragging rights” and an opportunity for greater exposure to potential buyers. Ultimately, Charleston never had the opportunity to attend the Pan Am Games. While the lease agreement was being negotiated between Dr. Thayer and Dr. Parra, Dr. Parra lost his main sponsor and was thus unable to attend the Games. Dr. Thayer testified that she consulted with an attorney regarding the lease agreement that was never executed. She testified that she received the attorney’s services in return for allowing the attorney use of her horses.
Shortly after, in August of 2007, Dr. Thayer testified that Charleston had a series of “devastating medical events” involving his eye. Dr. Thayer testified that she consulted with a number of veterinary specialists, including transporting Charleston to North Carolina in February 2008 to see an eminent ophthalmologist, who was able to diagnose the horse’s condition and operate using a special laser. However, Dr. Thayer testified that after the horse returned to Wadsworth Farm, there was a recurrence of issues with Charleston’s eye, resulting in consultations with a number of medical specialists – – those who treat humans as well as those treating horses – – including doctors from the Massachusetts Eye and Ear Hospital in Boston. However, the appellant did not introduce any evidence indicating whether she paid for these consultations with medical doctors. Charleston required surgery under general anesthesia in August 2008, after which he spent a month in a veterinary hospital to recover. Unfortunately, the horse then developed a recurrent infection and ultimately lost use of the eye. During a procedure at Tufts Veterinary Hospital in June 2009 to replace the compromised eye with a prosthetic eye, Charleston also injured his leg while being hoisted by the surgery team resulting in lameness.
2.Comparative Medical Consulting
On her 2008 tax return, the appellant characterized her business as a “comparative medical consultant.” Dr. Thayer testified that her experiences with her horses’ various medical treatments led her to realize that there was a gap between the medical knowledge and technology of veterinarians and medical doctors and specialists who treat humans. Recognizing, given her background as a surgeon, that doctors have insight that would be valuable to veterinarians, Dr. Thayer testified that she was able to connect veterinarians involved with the care of her horses to relevant specialists. The appellant did not offer any evidence as to whether she received any remuneration for these “consulting” services during the tax years at issue. The Board, therefore, found that these services did not constitute a different trade or business during the tax years at issue than the appellant’s Simply the Best Baroch activities, which continued throughout 2008.
III.Appellant’s Tax Filings and Business Records
On her Federal Form 1120, Dr. Thayer reported her income and Schedule C receipts and expenses as follows for the tax years at issue:
Tax YearSalarySchedule C Receipts Schedule C ExpensesSchedule C Net Income
2006$284,121$250$114,368($114,118)
2007$300,573$2,300$190,326($188,026)
2008$304,761$1,750$165,972($164,222)
Total$889,455$4,300$470,666($466,366)
The appellant has filed a Schedule C since 1998. During that time until the commencement of the tax years at issue, she reported total losses from business activities of $371,638, while she earned $1,178,559 from her employment with MGH.
In sum, from the beginning of her Schedule C activity in 1998 through the end of the audit period in 2008, the appellant reported total business receipts of $11,275 and total business expenses of $849,279, resulting in total losses amounting to $838,004, at the same time that she earned $2,077,015 in wages from MGH.
During the tax years at issue, Dr. Thayer testified that she maintained an Excel spreadsheet tracking her horse-related expenses and a journal, using her credit card statements and bank account records to prepare the list. However, she did not maintain separate bank accounts for Simply the Best Baroch, paying all expenses from her personal checking account. While she did maintain a separate credit card for business matters, Dr. Thayer testified that she often paid for personal items on her business card and paid for business items on her personal card. Dr. Thayer testified that she went over her expenses month by month, because “the expenses of the business were getting so large [that she] had to make sure that [she] could actually pay [her] mortgage” as her personal and equine expenses were all debited from the same account. The appellant testified that she maintained only one account in an effort to save on banking fees and that categorizing the expenses as equine or personal was more convenient than maintaining two accounts. The appellant provided expense records for only one of the three tax years at issue.
The appellant testified that when she purchased Simply, she prepared a job description for herself in consultation with Roel Theunissen. In that document, she described herself as “Chief Operation & Management Officer” of Simply the Best Baroch. Included among her responsibilities as laid out in the document were: (1) responsibility for overseeing the health and well-being of horses to maximize athletic performance, including overseeing the horses’ medical and dental care in consultation with veterinarians; (2) responsibility for daily training and physical development of the horses six days per week; and (3) responsibility for marketing and managing the horses by entering and riding the horses in dressage shows and coordinating any consultation with service providers. Dr. Thayer also was responsible for the purchase price and any fees incurred in connection with the horses.
Dr. Thayer created a profit projection for each of the horses that she purchased, reproduced below in simplified form. Simply and Charleston, due to their training and medical issues, did not perform according to the plans set out by Dr. Thayer. The appellant did not introduce any evidence of Nautical’s later performance with respect to the initial projections. The appellant did not introduce any evidence that she ever: revised future projections given changes in circumstances; adjusted the missed forecasts to reflect the actual expenses which had been incurred, or adjusted the market value of the animals. The Board also found that neither the business plans nor the projections were properly authenticated to establish that they were actually prepared, monitored, or analyzed during the years in question.

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