There is evidence that riding of horses developed when the horse was first domesticated, probably in Central Asia in the 2nd millennium B.C. As the techniques of domestication and agriculture spread from Mesopotamia to Central Asia, the horse, found in a state of nature, was likely used to replace the ox, which had been used for riding and driving.
Of all the common domestic animals the horse is probably the most temperamental and nervous. An animal of “flight” rather than “fight,” the horse has relatively good eyesight, good hearing, and an exceptional sense of smell. The reaction of a horse to even a suggestion of danger is flight. When trapped by man in the wild or attacked by carnivores, the horse can become extremely dangerous -- kicking, bucking, striking with its forefeet, and biting. Even thoroughly domestic breeds raised on modern stud farms present a dangerous situation when trainers first attempt to mount yearlings or two-year-olds.
Training is a skill that takes many years to learn. Under the IRS hobby loss rule, if you have developed personal expertise as a trainer, this is a factor that counts in your favor in arguing that your horse activity is a business rather than a hobby. Training of horses is more complicated and difficult than training any other type of domestic animal. The sheep, goat, cow and pig need only become accustomed to human presence and accustomed to periodic handling or milking. James Fillis, a famous 19th century horse trainer and instructor in equitation to the Imperial Russian Army, described the training of a horse as a series of “struggles.”
Different breeds of horse require different types of training. For instance, cutting horses need to learn how to carry a rider and cut into a cattle herd, while race horses require an entirely different orientation.
Under the IRS hobby loss rule, one of the factors pertains to your expertise or that of your advisers in conducting the horse activity. If you have personal expertise as a trainer, the IRS will want evidence of what you did to develop your skills as a trainer, not just your verbal statement about it. Many people gradually acquire experience in training horses, working with a professional trainer, but it is hard to document this. If you have formal training lessons from a trainer, you should have invoices that show the dates of the lessons you received. If you attend seminars or purchase training instructional material, these are fairly easy to document.
Sometimes the IRS will argue that the only reason why you are getting experience training horses is your love of horses. The IRS will argue that you enjoy working with horses, and that your efforts at training are consistent with a hobby, not a business. In response the argument for the taxpayer is that developing skills as a trainer helps reduce costs because if you personally train some of your horses, or at least give them preliminary training, you won’t have to pay fees to a professional trainer.
Increasingly today, the IRS targets horse owners who have a significant history of losses beyond the startup phase, which consists of the first few years. Also, many audits are conducted for horse owners who are only in the startup phase, and people are usually caught off guard because their records are inadequate to withstand IRS scrutiny. Today, more than in previous years, the IRS will want to know what sort of “market study” you conducted before embarking on the activity.
Thus, taxpayers in the horse industry need to conduct a lot more of formalities than in previous years. The IRS now routinely asks people being audited whether they have a written business plan, for instance, or whether they have consulted experts about how to make a profit in the activity. Often enough, taxpayers fail to win audits because they do not have even rudimentary information that the IRS expects them to produce. One of the most important pieces of evidence is a formal business plan, which is essential to show that you researched the finances associated with the activity and that you have a plan for eventually turning a profit.
[John Alan Cohan is an attorney who has worked in the farming, livestock and horse industries since 1981. He can be reached at 310-278-0203, or at JohnAlanCohan@aol.com. His website is www.JohnAlanCohan.com.]
