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Costello v. Commissioner (T.C. Memo. 2021-9)

On January 25, 2021, the Tax Court issued a Memorandum Opinion in the case of Costello v. Commissioner (T.C. Memo. 2021-9). The primary issues presented in Costello was whether the would-be-chicken-farmers (petitioners) were entitled to deductions for losses from farming activities, or whether the losses were startup expenses for which IRC § 195 prohibits a current deduction.

Author’s Note

Schadënfreude is German for happiness at the misfortune of others.  The Greek ἐπιχαιρεκακία is a similar thought, as is delectatio morosa in Latin.  Call it what you want, the utter ineptitude of petitioner-wife’s farming “activities” is funny as hell.

I like to garden. I am not a farmer. The petitioner-wife is not a farmer either. For at least seven years, and I quote, “her serial attempts at raising chickens, growing vegetables, and raising cattle were all unsuccessful.”

This woman was a livestock murderer from all accounts.

Did she forget to water them?

Also, kudos to Judge Halpern for keeping a straight face throughout the opinion. Candidly, I did not.

Background (a/k/a, the Worst Farmer in History)

These facts are totally unnecessary, but they’re funny as hell, so here you go…

In 2007, petitioner-wife decided to raise chickens on the property to sell for meat. “Apparently, that activity did not go well.”

Your mouth to God’s ear, Judge Halpern.

Petitioner-husband could not recall whether, from 2007 through 2011, petitioners sold any of the chickens, and the only sale that petitioner-wife reported for 2007 through 2011 is $264 received on the resale (at a loss) of livestock in 2011.

Sometime in 2011, petitioner-wife switched from raising chickens for meat to raising them for egg production. By 2012, however, she had determined that she would not make money with commercial egg production because of an upward trend in the price of chicken feed. So, she once again switched from commercial egg production to building a flock in order again to sell chickens for meat.

In May 2012, she purchased more than 69 birds, distributed among at least 14 breeds. She sold no chickens in 2012 or 2013 but had plans to begin sales in 2014. Her plans were thwarted when, in January 2014, wild dogs destroyed most of the flock.

I mean, that is terrible for the chickens. I shouldn’t laugh. I can only imagine the carnage, but come on, lady.  Surely there were protective measures you could have put in place for your flock.

Between 2007 and 2011, petitioner-wife grew watermelons, squash, peppers, apples, bananas, pomegranates, date palms, and asparagus on the property. She claimed the expenses of growing those crops as farming expense deductions, but she reported no revenues from sales. Her lack of revenue was due to the fact that the property is on the edge of the world’s largest evaporative salt plant, and, in 1973, a spill from the salt plant created a salt flat on a portion of the property.

I can’t even make this shit up.

Moreover, evaporation from the salt plant blows across the property and poisons the soil. Crops grown on the property are not commercially acceptable.

Ibid, noting that I couldn’t make this up if I wanted to.

In 2012, petitioner-wife acquired three cows and three calves. Her plan, according to petitioner-husband, was: “Feed the calves, make them big, sell them, impregnate the mothers, repeat.”

Ah, the joys of animal husbandry.

That plan did not work because, as he explained: “[I]t quickly became apparent that we weren’t going to make money on cows because when I turned them out onto the 6,500 acres, they couldn’t find enough to eat.”

Business or Personal (or Murder)

While it is true that IRC § 183(a) as a general rule disallows any deduction attributable to an activity not engaged in for profit and that the regulations implementing IRC § 183 lay out nine nonexclusive factors for determining whether an activity is engaged in for profit, some of which favor petitioner-wire (Treas. Reg. § 1.183-2(b)(1)) and some of which do not (Treas. Reg. § 1.183-2(b)(7)), somehow the petitioner-husband managed to convince the TC that, notwithstanding “seven fallow years,” his wife was determinedly seeking during the years in issue to earn a profit from farming. Nevertheless, we do agree with respondent that, during 2012 and 2013, her activities were for the most part preoperational and, for that reason, she may not deduct her losses.

Business or Pre-Operation (or Murder)

A taxpayer has not engaged in carrying on any trade or business within the intendment of IRC § 162(a) until such time as the business has begun to function as a going concern and performed those activities for which it was organized.” Richmond Television Corp. v. United States, 345 F.2d 901, 907 (4th Cir. 1965), vacated and remanded on other grounds, 382 U.S. 68 (1965). Carrying on a trade or business requires a showing of more than initial research into or investigation of business potential. IRC § 162(a); Dean v. Commissioner, 56 T.C. 895, 902 (1971).

The business operations must have actually commenced. McKelvey v. Commissioner, T.C. Memo. 2002-63, *3, aff’d, 76 F. App’x 806 (9th Cir. 2003). Until the time the business is performing the activities for which it was organized, expenses related to that activity are not currently deductible under IRC § 162. Heinbockel v. Commissioner, T.C. Memo. 2013-125, at *42 (quoting Glotov v. Commissioner, T.C. Memo. 2007-147, *2). They are instead classified as startup or pre-opening expenses. Hardy, 93 T.C. at 687. And startup expenses–which include those incurred before the day on which the active trade or business begins–are only deductible over time once an active trade or business begins. See IRC § 195(a); IRC § 195(c)(1)(A)(iii).

IRC § 195(a) provides that no deduction shall be allowed for startup expenditures, and IRC § 195(c)(1) defines startup expenditures as, among other things, any amount paid in connection with creating an active trade or business, which, if paid or incurred in connection with the operation of an existing active trade or business, would be allowable as a deduction for the taxable year in which paid or incurred. IRC § 195(b), in turn, provides that startup expenditures may, at the election of the taxpayer, be treated as deferred expenses that are allowed as a deduction prorated equally over a 15-year period beginning with the month in which the active trade or business begins. Startup expenses incurred in an unsuccessful attempt to create a business may be deductible if the attempt is “far enough along.” See, e.g., Seed v. Commissioner, 52 T.C. 880 (1969) (finding deductible loss under IRC § 165(c)(2) for legal and other expenses on abandonment of business venture following denial of application for charter); Rev. Rul. 77-254.

Conclusion

As the petitioner-husband noted, his wife has “tried several things on the property; so far, nothing has worked.”  Unfortunately, that losing streak continued, as the Tax Court denied the deductions under IRC § 195.

Worst. Chicken. Farmer. Ever.

(T.C. Memo. 2021-9) Costello v. Commissioner

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