Tax Court: Arabian Horse Farm Run For Profit, Still Owes Penalties

by Bruce Givner on March 31, 2015

On March 23, Judge Mark V. Holmes of the U.S. Tax Court ruled that Henry and Christie Metz, owners of Silver Maple Farm (SMF), satisfied all the requisite characteristics of business-owners who intended to earn profit from their venture. The couple’s failure to report income from the sale of a farm property in 2004 was still subject to accuracy-related penalties imposed by the Internal Revenue Service.

Before owning the Arabian horse farm, the Metzes owned a baking company, Metz Baking. In 1989 a Belgian sugar company took an interest in their company, earning them $10-12 million. In 1994, Metz Baking was acquired by Specialty Foods, bringing the couple another $10-12 million.

In 1991 the Metzes started SMF and registered in Iowa as an S corporation, with both Christie and Henry working in full-time positions at the company. In 1995 the business moved to Naples, Fl. after a string of annual losses, and then moved again to Santa Ynez Valley, Ca. in 2003. Between 1999 and 2009, the business burned through millions of dollars, yet the Metzes remained optimistic about their business prospects.

The IRS began auditing the Metzes in 2005, and the audit was subsequently expanded to 2004-2009. The Commissioner issued a notice of deficiency for 2004-2007 in 2010, and for 2008-2009 in 2011, which disallowed SMF’s passthrough losses, net operating loss carryforwards, and investment interest deductions. The 2011 notice also determined that the Metzes had failed to report income from the sale of a farm in Naples, Fl.

Holmes ruled that the couple more than satisfied tax code Section 183 requirements for operating a business with the subjective intent of making a profit, and ruled that the interest paid to JPMorgan was deductible. Although the judge sympathized with the stress felt by the family due to the struggling business, Holmes affirmed the IRS-imposed Section 6662(a) penalties for the unreported real estate sale income.

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