Exam A
Test your knowledge of equine law. by Attorney Krysia Nelson
Business or not a business? That is the question.
lifelong horsewoman was a cancer surgeon. She became interested in the discipline of
dressage and bought a Warmblood dressage horse, a stallion, whom she competed very suc- cessfully as an amateur. She decided that she would start a “side” business (to her medical prac- tice) of purchasing and training dressage horses with the intent to sell or lease them at a profit. She acquired three horses with the plan to train and compete them through Prix St. Georges at which point she believed she could achieve maximum sales prices. She encountered common obstacles, such as lameness and training setbacks, that pre- vented her from realizing any profits. The doctor earned approximately $300,000 per
year working as a surgeon. She reported net losses from her equine activity in amounts roughly half of her take-home pay, about $150,000 per year. By
claiming her horse expenses as business deduc- tions, she reduced her tax liability considerably. The doctor was audited by the IRS, which initially claimed that her horse activities were merely an expensive hobby and not a legitimate busi- ness. The doctor was able to con- vince the IRS otherwise, by pointing out that she kept meticulous business records and spent all of her free time working with the horses. Then the doctor was audited by her state tax
department which, like the IRS, claimed that her horse activities were merely an expensive hobby and not a legitimate business. The state claimed that the doctor owed more than $27,000 in back taxes and interest because she had improperly claimed her horse-related expenses as business expense deductions.
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