Keating v. Commissioner

Nora Keating (plaintiff) was an emergency-room physician working about 60 hours per week, primarily in 24-hour shifts. Between 1996 and 2002, Keating purchased 13 horses, bred seven, and sold two, both for half of what she bought them for. Keating maintained her work schedule and began spending seven to 10 hours on her days off with the horses, including training them, caring for them, and competing in shows. In 2000, Keating built a barn, and in 2001 she began providing boarding and leasing services and conducting clinics. In 2002 Keating opened a checking account in the name Stony Creek Arabians, but she also used her personal checking accounts for horse-related transactions. For instance, Keating deposited the funds from selling the two horses into a personal account. Keating maintained a ledger of all horse-related expenses and kept receipts, but she did not keep expense records for the horses individually. Keating had no business plan or financial projections. On her federal income tax returns for 1996 through 2002, Keating submitted Schedule F forms for profit or loss from farming, on which she deducted net losses of up to $101,132 per year. The commissioner of internal revenue (defendant) determined that the deductions were improper upon finding that Keating did not engage in horse activity for profit. The tax court sustained the commissioner’s determination based on the nine factors set out in the treasury regulations. Keating appealed.