On December 5, 2016, the Department issued an assessment for personal income tax, interest, and penalty for the periods starting January 1, 2011 through December 31, 2015. On February 15, 2017, the Taxpayers submitted a formal protest letter which was acknowledged by the Department on March 13, 2017. The Taxpayer started activities in the agriculture and farming field in 2011. The Taxpayers have since purchased cattle and have tried different business strategies with the goal of having a profitable agricultural and ranching business. When starting the business the Taxpayers both had full time jobs and in the beginning of 2017 decided to pursue the agricultural and ranching activities full time. The Taxpayers have seen a loss from their activities since 2011 but the Taxpayers believe that 2016 will be showing a profit on the activities. However, based on the adjustments for prior year losses and depreciation they are unsure what the 2016 tax returns will show. The Taxpayers argue that there have had losses while starting the business and they are starting to see profits. The Department argues that the deduction for the losses was denied and assessed because the activity during the time at issue was not a for-profit activity. The Hearing Officer determined that the decision on the profit status of the business will be based on 26 U.S. Code § 183and the federal 9 factor test. Federally, the deduction of losses in excess of profits is disallowed when the activity being engaged in is found to not be a for-profit activity. The 9 factors are: 1) the manner in which the person carries on the activity; 2) the expertise of the person and his or her advisors; 3) the time and effort put into the activity; 4) the expectation that assets may appreciate in value; 5) the person’s success in carrying on similar or dissimilar activities; 6) the history of income or loss with respect to the activity; 7) the amount of profits earned; 8) the financial status of the person; and 9) the elements of personal pleasure and recreation. The Hearing Officer determined that six out of the nine factors weigh in favor that the activity is for-profit and that the losses in the startup years of a business are fairly common and should not be used against the Taxpayers. The Hearing Officer determined that the Department’s disallowance of the deduction was not reasonable and that the Taxpayers overcame the presumption of correctness. The Hearing Officer decided that the Taxpayers’ tax, penalty and interest should be abated based on the reasons listed above. The Taxpayers’ protest is granted.
Dustin R. and Clarissa Ptolemy