David M. Gonzales

16-43

On November 16, 2015, the Department assessed the Taxpayer for personal income tax, penalty and interest for the tax periods from January 1, 2011 through December 31, 2014.  On January 14, 2016, the Taxpayer filed a protest.  The Taxpayer is a full-time employee for the New Mexico Department of Transportation, and has been since approximately 1992.  Sometime in 2001, the Taxpayer began a cattle operation.  Over time, the Taxpayer’s cattle operation went from purchasing some cows to lease to roping and rodeo operators to breeding cattle and selling them for beef.  In the process of establishing the breeding operation, the Taxpayer determined what type of cattle would be most desirable for beef cattle, and that it might take up to ten years to breed that type and grow the herd large enough to be profitable.  At one point in 2010, the Taxpayer had 110 head of cattle, but had to sell most of them off because of various issues and sometime in 2012 or 2013, the herd was as low as 18 head.  The Taxpayer has never made a profit on his cattle operation and categorizes his best years as “breaking even.”  During all the tax years in question, the Taxpayer claimed significant losses on his personal income taxes in relation to his cattle operation.  The issue to be decided at hearing is whether the Taxpayer is liable for the assessment.  The parties agree that the determination hinges on whether the Taxpayer’s cattle operation should be considered as a for-profit business or not under 26 USCS Section 183.  The Taxpayer argues that the time and effort required to engage in the cattle business make it a for-profit activity, while the Department argues that the Taxpayer’s conduct was not sufficient to show that the activity was for-profit.  There is a federal deduction allowed for expenses occurred when engaging in any trade or business, but this deduction is disallowed when the activity is not for-profit.  The federal regulations list nine factors to aid in determining whether an activity is for-profit or not.  In examining each of these factors, the Hearing Officer found that some factors weighed against finding that the activity is for-profit, while others weighted for it, but in the end six of the nine factors indicated that the activity engaged in by the Taxpayer was not for-profit and the deductions were correctly disallowed by the Department.  The Hearing Officer did find that the Taxpayer reasonably relied on a tax professional, an enrolled agent, who prepared his tax returns and advised him to take the deductions.  Due to this, the penalty was ordered to be abated, but the assessed tax and interest were determined to be correct.  The Taxpayer’s protest was granted in part and denied in part.