## Facts

- Elizabeth Power inherited a farm in 1941 and initially used it primarily as a commercial orchard.
- In the 1950s, she began raising and breeding horses on the property as “Waseeka Farm” and attended horse shows involving the farm’s horses.
- From 1958 through 1974, the horse operation generated substantial annual losses.
- Power later changed accounting methods and reported profits for 1975–1977, but under her prior method the horse operation would have continued to show net losses.
- During the relevant period, Power had significant other income, including substantial annual trust income and large capital gains, enabling her to fund the horse activity.
- The Commissioner determined the horse operation was not engaged in for profit under I.R.C. § 183 and issued deficiency determinations for 1972–1974 and 1977.
- The Tax Court sustained the Commissioner, treated horse-breeding and certain farmland sales as separate activities, and disallowed use of the horse losses to offset other income.
- After Power died, her estate appealed.

## Issues

1. Whether the horse-breeding activity qualified for the rebuttable presumption of a profit objective under I.R.C. § 183(d) based on alleged profitability in two of seven years.
2. Whether, even without the presumption, Power conducted the horse-breeding activity with an actual and honest objective of making a profit under I.R.C. § 183.

## Decision

- The First Circuit affirmed the Tax Court.
- The court held the estate was not entitled to the § 183(d) presumption because the operation did not satisfy the statutory profitability requirement when evaluated on a consistent basis and without unrelated land-sale gains.
- The court held the Tax Court’s finding of no profit objective was not clearly erroneous, so the losses were not deductible beyond § 183 limitations.
- The court approved treating the horse-breeding operation and sales of farmland not used in the horse operation as separate activities for § 183 purposes.

## Legal Principles

- Under I.R.C. § 183, deductions attributable to an activity are limited if the activity is not engaged in for profit; the taxpayer bears the burden to show an actual and honest profit objective.
- The § 183(d) presumption requires meeting the statutory profit-years threshold; “profits” that depend on inconsistent accounting treatment or unrelated gains may be disregarded in determining eligibility.
- Courts may define the relevant “activity” for § 183 and may separate a money-losing operation from investment assets (including land) when they are not functionally integrated.
- Profit objective determinations are fact-intensive and reviewed for clear error; sustained multi-year losses, substantial outside income that absorbs losses, small-scale operations, and significant personal pleasure support a finding of no profit motive.

## Conclusion

The First Circuit sustained tax deficiencies by affirming that Waseeka Farm’s horse-breeding losses were subject to § 183 because the activity neither qualified for the § 183(d) presumption nor showed a genuine profit objective, and unrelated land-sale gains could not be aggregated to manufacture overall profitability.


Estate of Power v. Commissioner, 736 F.2d 826 (1st Cir. 1984)