## Facts

- Nora E. Keating (an emergency-room physician) and Richard L. Shearer (a firefighter medic) filed joint federal income tax returns for 1996–2000 and separate returns thereafter.
- In 1996, after moving to North Dakota, Keating bought a 10-acre farm and began a horse-related activity focused on Arabian horses.
- From 1996–2002, Keating purchased 13 horses, bred seven, and sold only two horses, each at about half of her purchase price.
- Keating had significant experience owning and caring for horses but lacked experience in the business aspects of buying, selling, breeding, or showing horses.
- She consulted a breeder, trainers, and a veterinarian about training, breeding, and animal care, and she consulted a CPA about recordkeeping, but she did not seek advice on the economic or business feasibility of the activity.
- Keating maintained a ledger and receipts but had no formal business plan, no financial projections, no horse-by-horse profitability analysis, and at times commingled personal and horse-activity funds.
- On federal returns for 1996–2002, Keating reported the activity on Schedule F and claimed substantial annual net losses (reaching roughly $100,000 in some years).
- The Commissioner determined the activity was not engaged in for profit under I.R.C. § 183 and disallowed the claimed losses, resulting in deficiencies.

## Issues

1. Whether Keating conducted the horse-related activity with an actual and honest profit objective, allowing loss deductions under I.R.C. §§ 162 or 212.
2. Whether the activity was not engaged in for profit within the meaning of I.R.C. § 183, limiting deductions and sustaining the asserted deficiencies.

## Decision

- The Eighth Circuit affirmed the Tax Court.
- The court held that substantial evidence supported the Tax Court’s finding that Keating lacked the requisite profit objective.
- The court sustained the disallowance of the claimed losses and the resulting deficiencies.
- The court applied clear-error review to the Tax Court’s profit-motive finding and deferred to the Tax Court’s fact-intensive assessment.

## Legal Principles

- I.R.C. § 183 limits deductions from an activity “not engaged in for profit,” permitting deductions only to the extent authorized by the statute and regulations.
- To deduct losses as business or income-producing expenses under I.R.C. §§ 162 or 212, a taxpayer must show an actual and honest objective to make a profit.
- Profit objective is determined from all facts and circumstances, commonly evaluated using the nonexclusive factors in Treasury regulations under § 183, including:
  - the manner in which the taxpayer carries on the activity (businesslike practices, planning, and financial controls);
  - the taxpayer’s and advisers’ expertise (including consultation on economic feasibility);
  - time and effort devoted to the activity;
  - expectation of asset appreciation;
  - history of income or losses and operational changes aimed at profitability;
  - the taxpayer’s financial status (including other substantial income);
  - elements of personal pleasure or recreation.
- Persistent, substantial losses combined with weak business practices, limited evidence of economic planning, and significant recreational motivation support a finding of no profit objective.

## Conclusion

The court upheld deficiencies after concluding that Keating’s horse activity, marked by sustained large losses, limited sales success, lack of business planning and financial discipline, substantial outside income, and significant personal enjoyment, was not conducted with an actual and honest profit objective under I.R.C. § 183.


Keating v. Comm’r, 544 F.3d 900 (8th Cir. 2008)