John Alan Cohan

John Alan Cohan

For example, a livestock insurance agent might combine that business with his ranch, and aggregate the profits and losses.  Or, an architect of horse farms might combine that with his horse breeding activity.  Or, an animal supply business might combine that with its dog breeding-showing venture.

In one Tax Court case a holistic dentist argued that his apple farm was unified with his dental practice because patients got samples of his apples and were encouraged to eat them-so that expenses of his dental practice included the costs of operating the farm–but he lost.  [Zdun v. Commissioner, T.C. Memo 1998-296.]  In another case an attorney argued that his law practice was closely associated with his polo activities because his clients consisted mainly of people met at the polo games, and competing in the events enhanced his reputation among clientele.  He also lost.  [De Mendoza v. Commissioner, T.C. Memo 1994-314.]

However, Tracey Topping of Wellington, Florida, won an important Tax Court case on this point.  [Topping v. Commissioner, T.C. Memo 2007-92.] She argued that her equestrian related activities and her interior design business (for barns and second homes) were a single integrated business.  She argued that her equine activities were necessary to her success as an interior designer.  She deducted substantial horse activity costs against her income as an interior designer, and the court ruled that these expenses were ordinary and necessary advertising-promotion expenses associated with her design business.

The court said that her competing at horse shows created goodwill that benefited her design business, that she marketed the business by competing in horse events, and that her prominence as a competitor created goodwill that benefited her design business.

The whole idea is that there was one activity–the horse activity being unified with the interior design business.

In deciding whether two or more undertakings may be treated as one, the IRS will consider if the activities are sufficiently interconnected, the degree of organizational and economic interrelationship, the business purpose served by conducting the activities together or separately, and the similarity of the undertakings.

Ms. Topping’s approach, approved by the Tax Court, consists of entering in and attending horse shows, and making contacts with prospective clients at the shows.  She later sets up meetings with them.  When she competes her name is announced over the loudspeaker and flashed on the leaderboards.

Ms. Topping also relies upon trainers both to refer clients and improve her performance as a competitor.  Every one of the trainers that she has worked with has referred at least one design client to her.  She also engages a C.P.A. to handle her accounting matters.

The court said that Ms. Topping’s success as an equestrian competitor creates goodwill that benefits her design business.  She had competed for sport since a young age, and she transformed this sport experience into a way to establish goodwill as an interior designer.

The court said that her equestrian activities “significantly benefit her design business, and we find a significant business purpose for the combination of these undertakings.  Her prominence as a competitor has gained respect among her peers and causes them to seek her out when they are in need of a designer for their horse barns and recreational homes.”

A single set of books and records should be used to track both undertakings, and both should to be filed in the same Schedule C.

Early on in her business, she tried to develop clients through her longtime experience playing golf. When golf failed to produce any clients, she dropped her golf club membership.

The IRS had faulted Ms. Topping for not using conventional advertising (e.g., equestrian magazines or banners at horse shows).  However, the evidence showed that traditional advertising of a personal service business is not welcomed by the clientele Ms. Topping sought.

The court said:  “Further, the evidence demonstrates that petitioner demonstrated good business judgment.  Her equestrian contacts are responsible for more than 90 percent of her client base, and her overall business produced a sizable net profit for all of the years at issue.  Therefore, petitioner has not only demonstrated that she honestly believed that her mode of advertising would turn a profit, but also has proven that it has been successful and that adopting [the IRS’s] suggestion would probably have backfired.”

The court concluded that Ms. Topping’s design business materially benefits from her equestrian-related activities, whereas in the above-mentioned cases involving a dentist and a lawyer there was only an “incidental” benefit.

“The evidence demonstrates that petitioner’s involvement in the equestrian world is the cornerstone of her cultivation of relationships with her clientele. Given the nature of petitioner’s clientele, we find her testimony about the relationship between her equestrian-related activities and her design business to be credible and logical.”

Not everyone can qualify in treating two activities as one under IRS Regulations, and it is important to consult a tax attorney to see if your situation meets the criteria, or what objectives need to be met in your situation to qualify.


John Alan Cohan is an attorney who has served the livestock and horse industries since 1981. For consultations, telephone at:  (310) 278-0203 or e-mail at johnalancohan@aol, or visit his web site at .


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