Taxing Lessons Case Summaries

Case — Multiple Business Undertakings – One Activity?

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TL Case Summ


Can a lawyer combine his equestrian activity and his equine industry legal practice into one business unit?


Taxpayer Says: The equestrian activity and the legal practice were interconnected because the equestrian activity generated clients for the legal practice. The two should be treated as one business, allowing the equestrian-related activity expenses to be deducted along with other expenses of the legal practice.

Internal Revenue Service Says: The equestrian-related activity is not sufficiently related to the legal practice to be combined with it. The equestrian-related expenses stem from activities which were not engaged in for profit and are therefore not deductible.


From Internal Revenue Code Section 162: Allows a deduction for all ordinary and necessary business expenses paid or incurred during the taxable year in carrying on any trade or business. The determination of whether an expenditure satisfies the requirements of section 162 is a question of fact.

From Internal Revenue Code Section 183: Section 183 and the regulations thereunder provide rules to determine whether an activity is engaged in for profit.

From Federal Tax Regulation Section 1.183-2(a): Deductions are not allowable under section 162 for activities which are carried on primarily as a sport or hobby or for recreation.

From Federal Tax Regulation 1.183-1(d)(1): Multiple undertakings of a taxpayer may be treated as one activity if the undertakings are sufficiently interconnected. The most important factors in making this determination are the degree of organizational and economic interrelationship of the undertakings, the business purpose served by carrying on the undertakings separately or together, and the similarity of the undertakings. The Commissioner generally accepts the taxpayer’s characterization of two or more undertakings as one activity unless the characterization is artificial or unreasonable.

From Mitchell v. Commissioner, T.C. Memo. 2006-145: Other factors considered in determining whether a taxpayer’s characterization is unreasonable include: (a) Whether the undertakings are conducted at the same place; (b) whether the undertakings were part of the taxpayer’s efforts to find sources of revenue from his or her land; (c) whether the undertakings were formed as separate activities; (d) whether one undertaking benefited from the other; (e) whether the taxpayer used one undertaking to advertise the other; (f) the degree to which the undertakings shared management; (g) the degree to which one caretaker oversaw the assets of both undertakings; (h) whether the taxpayer used the same accountant for the undertakings; and (i) the degree to which the undertakings shared books and records.


When you have more than one business undertaking, you may be able to combine them into a single activity, and report the income and expenses together. This allows you to offset the expenses and losses from one activity against the gains from another.

Disputes arise when the combination of two businesses includes one that could be considered a hobby or other type of passive activity, because those losses would be limited if the two businesses were not combined.

In this case, the taxpayer, an attorney specializing in equine industry law, combined his law practice income and expenses with $71,836 of business promotion expenses incurred attending horse shows in which his son was riding.

The taxpayer was well-known in the equestrian world from his years of competing in horse shows prior to becoming an attorney. Potential clients would approach him at the shows he attended with his son because of his ready availability to deal with equine industry matters. He had developed over 40 clients by going to shows from 1998 to the time of trial, and he spent much of his time at the shows doing legal work, including negotiating horse sales or leases and drafting contracts.

He believes the horse show expenses are similar to advertising, and are deductible as part of his legal practice.

The IRS says the horse show expenses are not sufficiently connected to the legal practice. At the most, the horse show contacts resulted in two new clients during the year in question (2005), and the horse show expenses were more than the fees generated by those contacts during that year. The expenses are not deductible because they were incurred in an activity the taxpayer carried on primarily as a sport or hobby or for recreation instead of for profit.


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HL Carpenter, an experienced investor and a CPA, specializes in reader friendly articles on taxes and investing for individuals and small businesses, and publishes two newsletters: Taxing Lessons and Top Drawer Ink. Visit and

This information should not be considered legal, investment or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment or tax advice. Always consult your legal, investment and/or tax advisor regarding your personal situation.


Sorry, wrong answer :(
Right answer!
For the IRS. The facts in this case do not show sufficient interconnectedness between taxpayer’s equine industry legal practice and his equestrian activities. The taxpayer’s characterization of his equestrian activities and his legal practice as one activity is unreasonable. The equestrian activities were not engaged in for profit and no expenses relating to them are deductible under section 162.