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II. Horse Activity
A. Statutory Framework
Section 183(a) provides the following general rule: “In the
case of an activity engaged in by an individual * * *, if such
activity is not engaged in for profit, no deduction attributable
to such activity shall be allowed under this chapter except as
provided in this section.” Section 183(b)(1) then goes on to
prescribe that, if an activity is not engaged in for profit, a
taxpayer may take those deductions which would be allowable
without regard to profit motive. Furthermore, if an activity is
not engaged in for profit, section 183(b)(2) permits the taxpayer
to claim those deductions which would be allowable “if such
activity were engaged in for profit, but only to the extent that
the gross income derived from such activity for the taxable year
exceeds the deductions allowable by reason of paragraph (1).” In
other words, because deductions for expenses related to an
activity not engaged in for profit are generally limited to the
amount of gross income from such activity, the practical effect
of section 183 is to preclude a taxpayer from deducting losses
incurred in such activity.
An “activity not engaged in for profit” is defined in
section 183(c) as “any activity other than one with respect to
which deductions are allowable for the taxable year under section
162 [trade or business expenses] or under paragraph (1) or (2) of
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