The Time that Miniature Donkeys Made Their Impact on The Tax Code

It’s not every day that we see cases like these. William Huff, a hedge fund manager, had a miniature donkey-breeding venture that he started to create income for his adult daughter. In 2013 and 2014, the farm generated losses totaling about $134,000. This alerted the IRS, who believed that the intent of the business was not to generate profit, but as a hobby of Mr. Huff’s. This led Mr. Huff down a rabbit hole of proving he, in fact, does not like donkeys; and created a landmark case for Section 183, the hobby loss rule.

Initially, the IRS served Mr. Huff a notice of deficiency, which did not allow him to deduct the losses from his (unfortunately unavailing) miniature donkey business, along with other penalties. Their basis for this decision was based on Section 183, otherwise known as the hobby loss rule, which specifies that if your business is a hobby you may not take any deductions on it. The IRS looks at a few factors to make this determination, which includes whether or not you put in enough time and effort for the business to make a profit, if you’ve made money from similar activities in the past, and whether or not your income depends on the business. 

In Mr. Huff’s case, he appeared to pass all of these qualifications; he was putting in the necessary effort to turn a profit, had not bred donkeys in the past, and his income was certainly not dependent on this miniature donkey farm. While he didn’t do much work on the farm himself, he did put in the effort to hire staff to properly handle the operation. Another consideration for the hobby loss rule is whether or not the owner operates the business for personal pleasure or profit. Mr. Huff assured the judge that he believes donkeys are “quite ugly”, asserting that he does not gain enjoyment from operating the business. The reason stated for creating the business was to pass it on to his daughter, who at the time already had smaller farms for other animals like chickens. 

Judge Patrick J. Urda presided over the case, eventually delivering a favorable ruling for Mr. Huff. This was the first win for business owners on Section 183 in a long while, and provided a landmark case for business owners with side gigs.

If you’re in search of help for defending from an IRS audit, penalties, or any other tax issues (whether they’re donkey-adjacent or not), Weisberg Kainen Mark, PL has the experience necessary to protect your business. Contact us today to schedule your consultation at (305) 374-5544.

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