## Facts

- In 1978, Dr. Robert Remuzzi (an orthopedic surgeon) and his wife, Rachael Remuzzi, bought and moved to a large, dilapidated farm near Leesburg, Virginia (Fairleigh Farm), largely for personal pleasure and recreation.
- The property had not been operated as a farm for years and was in disrepair when purchased.
- The Remuzzis had no prior farming or cattle-raising background.
- The Remuzzis arranged for Llewellyn Payne to operate the farm and manage cattle; Payne had experience as a farmer but no experience running a large farm and carried substantial personal debt.
- Dr. Remuzzi loaned Payne $15,000 as part of their arrangement; Payne was to repay through the cattle operation (including providing a share of calves until the value equaled the loan amount) and then share profits from raising cattle.
- Payne moved onto the farm with cattle and equipment and performed basic work such as repairing fences and clearing pasture.
- Payne’s health and mental condition deteriorated over time; his property (including cattle) was repossessed, and he ultimately defaulted on the loan.
- The Remuzzis obtained a default judgment against Payne for the unpaid balance.
- From 1978 through 1982, the farm generated large, continuing losses averaging about $32,000 per year, while the Remuzzis’ average annual income from other sources exceeded $166,000 and the farm produced substantial tax benefits.
- Recordkeeping and financial controls for the farm were limited, and revenues during the period were minimal compared to expenses.
- Dr. Remuzzi continued a full-time medical practice and had limited time to devote to farm operations.
- On their federal returns for the years at issue (1980 and 1981), the Remuzzis claimed Schedule F deductions for farm losses.
- The Commissioner disallowed the claimed losses, determining the farm was an “activity not engaged in for profit” under I.R.C. § 183 and asserting deficiencies.

## Issues

1. Whether the Remuzzis conducted their cattle-farm activity with an actual and honest objective of making a profit, or instead engaged in an “activity not engaged in for profit” under I.R.C. § 183.
2. Whether the Remuzzis’ asserted intent to earn a profit—particularly their claim that Payne’s illness and default caused the losses—was supported by the objective facts and circumstances.

## Decision

- The Tax Court held the Remuzzis’ cattle-farm activity was not engaged in for profit within the meaning of I.R.C. § 183.
- The court sustained the Commissioner’s disallowance of the claimed farm-loss deductions for the years at issue, allowing only those deductions permitted under § 183(b).
- The court rejected the argument that Payne’s decline and default sufficiently explained the sustained losses or established a bona fide profit objective.

## Legal Principles

- I.R.C. § 183 limits deductions from an activity if the taxpayer does not carry on the activity with an actual and honest objective of making a profit; in that event, deductions are allowed only to the extent provided in § 183(b).
- A taxpayer’s statement that they intended to make a profit is not controlling; objective facts carry greater weight.
- Treasury Regulation § 1.183-2(b) lists nonexclusive factors used to evaluate profit objective, including: businesslike operation and records; the taxpayer’s preparation and reliance on competent advisers; time and effort devoted; expectation that assets may increase in value; success in other activities; history of income or losses; amount and frequency of any profits; the taxpayer’s financial status; and personal pleasure or recreation.
- Large, consistent losses over multiple years, minimal revenues, weak financial controls, and limited efforts to cut costs or improve profitability support a finding of no profit objective.
- Substantial income from other sources and significant tax benefits from the loss activity can support an inference that the activity is pursued for reasons other than profit.
- The loss or incapacity of an operator or employee is a common business risk; pointing to that event does not by itself convert an otherwise nonbusiness activity into a profit-motivated enterprise.
- The burden of proving a profit objective rests on the taxpayer.

## Conclusion

The Tax Court concluded that, based on the objective record—including sustained losses, minimal revenue, limited businesslike practices, substantial outside income, and strong lifestyle and recreational elements—the Remuzzis failed to prove an actual and honest profit objective for their cattle-farm activity, so their claimed farm-loss deductions for the years at issue were limited under I.R.C. § 183(b).


Remuzzi v. Commissioner, T.C. Memo 1988-8 (1988)