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Engdahl v. Commissioner

Tax Court of the United States
72 T.C. 659 (1979)


After Dr. Engdahl retired, he and his wife (plaintiffs) looked for a way to supplement his retirement income. They asked veterinarians, a horse trainer, and other horse breeders about the business of horse breeding and decided to start breeding horses. The Engdahls kept complete financial records of their horse operations. They deposited any income derived from horse breeding into a separate savings account. Their accountant reviewed their horse breeding ledgers and created a financial summary each quarter. After three years, the Engdahls sold their house and bought a ranch so they could house their horses on site as opposed to at a stable. The Engdahls spent 35 to 55 hours per week maintaining the horses and ranch. They did not ride the horses themselves and stated they had no emotional attachment to the horses. If a horse did not live up to the Engdahls’ show or breeding standards, they would get rid of it. The Engdahls’ ranch and horses appreciated in value after the purchases. However, the Engdahls lost money on their horse operations every year. The Engdahls deducted these losses on their tax returns. The IRS disallowed the deductions. The Engdahls filed a petition for review in tax court.

Rule of Law


Holding and Reasoning (Hall, J.)

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