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    Entries in horse (2)


    The IRS’s misguided approach to “recoupment”

    By John Alan Cohan, Attorney at Law

    For any business, long-term profit potential may hinge, in some measure, on efforts to reduce costs, getting better prices for goods and services, consolidating operations, layoffs, or efforts to promote efficiency.

    For many people in the horse or livestock business, the operations have a history of losses, but the expectation is that future operations will be profitable.  The IRS will want to see evidence that the taxpayer has taken steps to correct or abandon unprofitable strategies, and to demonstrates steps taken to improve operations. 

    Often, the IRS will argue that a profit motive ultimately depends on whether the taxpayer expects future earnings and appreciation to be sufficient to recoup accumulated losses of prior years.  The IRS will want to see a meaningful plan for recouping losses sustained in prior years.

    This seems inherently unfair.  Other businesses are not asked to demonstrate a plan to recoup past losses.  In some industries past losses have been so great that the companies might never really end up recouping them.

    According to Terrence D. Miller, CPA, of Miller and Miller Accountancy Corporation  in Fresno, California, “In my experience with audits, quite often an auditor will be obsessed with the cumulative losses and they fixate on it.  And the losses might not ever be recoupable.  Luckily there is a Tax Court case on the subject and usually when you show auditors this case they move on.”

    He is referring to Helmick v. Commissioner IRS, T.C. Memo 2009-220, which involved a horse breeding and boarding operation with losses for a period of 17 years.  The Tax Court held in favor of the taxpayers, and rejected the IRS “recoupment” argument.

    The court said that the IRS “seems to assume that the requisite profit motive as of any given year must involve an expectation that even all past losses will be recouped, so that the activity will have generated a net profit over its entire course.  This position distorts the notion of profit motive for purposes of section 183.”

    The court cited a hypothetical example:  “If a natural disaster caused the death of 90 percent of a rancher’s herd and resulted in a catastrophic loss that could never be recouped, but the rancher thereafter expected to generate an overall prospective profit by breeding and selling the remaining 10 percent of his herd on a foregoing basis, then he could not be said to lack a profit objective after the disaster merely because he would never recoup the prior loss.”


    The court pointed out – and this is very important – that the “recoupment” concept is forward looking.  That is, the profit objective is shown where the taxpayer expects that the activity will generate an overall profit between the year being audited and the time at which future profits are expected.

    To some extent, taxpayers often can explain a poor history of profits due to circumstances beyond their control, including personal issues, casualties, stillborn foals, and the negative effect of the recession on horse sales.  The implication is that the activity, in a given year, would have been profitable if these events had not occurred.

    Whether an activity producing losses is a business or a hobby is a question that has generated substantial litigation in U.S. Tax Court.  If faced with an audit of horse or livestock activities, it can be frustrating when confronted with an IRS auditor who wheels out the “recoupment” argument.  Thankfully, there are Tax Court cases, such as that mentioned above, that provide a rational approach in determining whether the taxpayer has a bona fide profit motivation.

    [John Alan Cohan is a lawyer who has served the horse, livestock and farming industries since l98l.  He can be reached at: (3l0) 278-0203, by e-mail at, or you can see more at his website:]



    Preparing for Winter Feeding

    By Juliet M. Getty, Ph.D.

    Horses enjoy cold weather and the relaxation that winter brings, but it takes more than hay to keep them healthy during the colder months. Optimal nutritional planning will help them enjoy the season and emerge in good condition when spring arrives.

    Hay is not enough
    Hay cannot compare in nutritive value to fresh grass. Once grass is cut, dried, and stored, it begins to lose vitamins C, D and E, beta carotene (for vitamin A production), and omega-3 fatty acids. Normally, your horse produces vitamin D when he is exposed to sunlight. But spending more time indoors, combined with shorter daylight hours, can induce a vitamin D deficiency leaving bones, joints, and muscles unprotected. Therefore, a vitamin supplement, along with flaxseed meal (to provide omega 3s), will fill in the nutritional gaps created by hay-only diets.

    Consider alfalfa
    Contrary to popular opinion, alfalfa it is not higher in sugar than grass hay. It is high in protein, but this is a good thing. At moderate intake (approximately 10 to 30 percent of the total hay ration), it boosts the overall protein quality of the diet to keep your horse’s muscles, joints, feet, skin, hair, and bones fed, as well as protects his blood and immune function. Alfalfa also serves as a stomach buffer against developing an ulcer, a common occurrence when a horse is stalled during the winter after being used to full-time turnout.

    Offer hay free-choice
    Cold weather increases the metabolic rate, which means that horses need to burn more calories to maintain a normal internal body temperature and a consistent weight. When provided free-choice, you will notice that your horse naturally consumes more to help stay warm and account for his higher energy need. Free-choice is always best (regardless of the season or condition of your horse) because it allows your horse to self-regulate his intake and eat only what his body needs.

    For more calories, add concentrates
    For many horses, hay will not provide enough calories to maintain normal body condition. A high fat commercial feed is fine for healthy horses. For the easy keeper or insulin-resistant horse, avoid sweet feeds and those that contain oats or corn. Beet pulp, alfalfa pellets, or low starch commercial feeds are excellent alternatives. Fatty feeds such as rice bran, flaxseed meal, or chia seeds offer the most concentrated source of calories. Avoid corn or soybean oils, since they promote inflammation due to their high omega-6 fatty acid content.

    Older horses need special attention
    Your older horse may need a joint supplement along with vitamin C for collagen production (the protein found in bones and joints), since less vitamin C is produces as horses age.

    For the hard keeper, be sure there is no competition from younger, more aggressive horses for hay. Feed a senior feed, along with added flaxseed meal. And be sure to check your horse’s teeth. Poor dental health is the number one reason for weight loss in older horses.

    Other tips
    •    Use a prebiotic (fermentation product, not live microbes) or a potent probiotic (one that contains billions – 109 – colony forming units) to keep the hindgut microbial population healthy.
    •    When feeding bran mashes, or any added feed, feed it every day. Consistency will prevent colic. Keep in mind, however, that bran (rice or wheat are most common) is very high in phosphorus in relation to calcium. Therefore, use a commercial product with added calcium or feed alfalfa to counteract the elevated phosphorus content.
    •    Do not rely on snow to meet your horse’s water needs. Water should be kept at a palatable temperature to encourage drinking and prevent dehydration.
    •    Don’t forget salt. Salt blocks, free choice granulated salt, or adding two tablespoons of table salt to your horse’s meals per day (divided between meals), will keep his body in proper water balance.