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III. Petitioner’s Equestrian Expenses Are Ordinary and Necessary
in Carrying On the Activities of Topping White
Section 162(a) of the Internal Revenue Code allows the
deduction of “all the ordinary and necessary expenses paid or
incurred during the taxable year in carrying on any trade or
business.” INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 83 (1992)
(citing sec. 162(a)). Respondent argues that even if we
determine that the equestrian and design undertakings constitute
a single activity and that petitioner had a profit motive,
petitioner failed to establish all the equestrian expenses were
ordinary and necessary. To be “necessary”, an expense must be
appropriate and helpful to the taxpayer’s business. See Welch v.
4(...continued)
racing of horses, if the gross income derived from the activity
exceeds the deductions for any 2 of 7 consecutive taxable years,
then the activity shall be presumed to be engaged in for profit
unless the Commissioner establishes to the contrary. See Bunney
v. Commissioner, T.C. Memo. 2003-233 (citing Golanty v.
Commissioner, 72 T.C. 411, 425 (1979), affd. without published
opinion 647 F.2d 170 (9th Cir. 1981)). We find that petitioner's
equestrian activities were secondary to her activities as a
designer. Therefore, this part of the presumption does not
apply. Sec. 183(d) presumes an activity is conducted for profit
if the gross income exceeds the attributable deductions for 3 out
of 5 consecutive years (the gross income test). The presumption
applies only after the third profit year. Mitchell v.
Commissioner, T.C. Memo. 2006-145 (citing sec. 183(d)). Since we
found that petitioner’s equestrian and design activities
constitute a single undertaking, the sec. 183(d) presumption
applies for the years 2001 and 2002. However, we do not analyze
the factors in terms of the presumption because we find that this
case turns on the fact that the equestrian and design
undertakings were an integrated business. Therefore, we find the
presumption to be unnecessary since the characterization of
petitioner’s design undertaking and equestrian undertaking as a
single activity carries the day.
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