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Case Summaries Federal Income Tax

Tax Deductions at the Ranch

March 31, 2017
Photo of a night sky at a ranch by John Moore via Unsplash

A Virginia woman is not responsible for a $30,467 tax deficiency assessed by the IRS according to a U.S. Tax Court Opinion summary opinion filed on Thursday.

The case involves a Texas couple who moved to Purcellville, Virginia (an ex-urb of D.C.) in 2005 and built a home on a 5.5 acre plot of land.

In addition to building their house, the couple also built a “run-in shed” for their four Peruvian Paso horses, which they brought from Texas.

In 2008, the husband bought a 14.8-acre plot of land next to the marital property, which he wanted to use for cattle ranching. Then, in 2011, he switched to a part-time work schedule so he could pursue his cattle ranching activity.

The cattle ranching activity included research into the different types of livestock and their profitability, cultivating the land, constructing a fence, and building a 6,000-square-foot barn on the 14.8 acre add-on land. At no time did the barn house the Peruvian horses, which remained at the run-in shed on the couple’s first property.

The tax return

In 2011, the couple filed a joint tax return in which included two Schedules C.

  1. A Schedule C related to the wife’s realtor business (which she solely owned) which showed gross receipts of $163,007, expenses of $58,509, and a net profit of $95,686.
  2. A Schedule C related to the cattle ranching activities of the husband which showed a gross income of $1,598, and a net loss of $133,277.

The net loss on the second Schedule C was due to a variety of deductions, namely $123,681 of depreciation on the 6,000-square-foot barn and related expenses.

The divorce and audit

The next year, in 2012, the couple split up. The wife received the original marital property, including the horses and run-in shed. The husband received the unprofitable cattle ranch on the 14.8 acre add-on land, including the barn.

The large deduction for the barn raised a flag during a 2013 audit and the wife filed for Innocent Spouse Relief in 2014. Theย IRS then issued a notice of deficiency for $30,467.

The Tax Court ruling

Ultimately the wife was held not liable for the debt by the U.S. Tax Court under Section 6015(c) of the Internal Revenue Code.

Section 6015(c) limits the tax liability of former spouses to the portion allocable to them if they had filed separate returns. In this case, the debt was attributable to a deduction taken for the cattle ranch, which was solely the husband’s project.

Furthermore, there was no evidence that the wife was aware of the facts that caused the IRS to disallow the deduction.

The IRS disallowed the deduction because it believed that the cattle ranching activity was not engaged in for profit. However, there was insufficient evidence that the wife knew that her husband did not have the primary object of making a profit, so she was entitled to relief on the $30,467 tax debt.

More: Harris v. Commissioner, T.C. Summary Opinion 2017-21, Docket No. 30959-15S, March 30, 2017. (PDF)

Photo: John Moore.

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