Estate of Power v. Commissioner

In 1941, Elizabeth Power inherited a farm that she used primarily for commercial orchards. In the 1950s, Power began raising and breeding horses there under the name Waseeka Farm. Power enjoyed operating Waseeka Farm and attended horse shows to watch her relatives ride Waseeka Farm’s horses. From 1958 through 1974, Power reported losses from the horse operations. Power changed accounting methods and reported profits from 1975 through 1977, but the horse-related activities would have yielded net losses under Power’s original accounting method. Power earned substantial income from other sources from 1958 to 1977, including $60,000 annual trust income and $400,000 in capital gains. The Internal Revenue Commissioner (defendant) determined an income-tax deficiency for 1972–74 and 1977, finding that Power had not engaged in horse-breeding for profit under § 183 of the Internal Revenue Code, so losses from that activity could not be offset against Power’s other income. The tax court upheld the commissioner’s determination, finding that Power had not shown net profits from Waseeka Farm in the relevant years. The court explained that the only way to show profit would have been offsetting capital gains realized from selling farmland in 1973 and 1974 against the farm losses. Based on testimony that the relevant land was not used for horse operations, the court concluded that those land-sale proceeds could not be offset because Power’s horse operations and holding of the farmland were separate activities. The court further held that Power had not engaged in horse-breeding for profit during the relevant years, noting the (1) lack of profit objective based on the decades-long string of losses, (2) small-scale, relatively inexpensive horse-breeding activity, (3) personal satisfaction Power took in her horses and horse-show attendance, and (4) enabling role of Power’s regular trust income in the money-losing horse-breeding venture. Power died during the tax-court proceedings, but her estate (plaintiff) appealed the decision, asserting that (1) Power was entitled to a presumption that she engaged in for-profit horse-breeding under § 183(d) because the activity was profitable in two of the seven years ending in 1977, and (2) even without the presumption, Power had shown that she engaged in for-profit horse-breeding.