CATTLE FARM WITH NO CATTLE DENIED FARMING LOSSES

June 3, 2021 by TxSEA
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The Tax Court held that a taxpayer with a cattle and tree farm, but no cattle or any immediate trees could not use the
farm’s losses to offset other income. According to the court, this farm was not being conducted for profit.
Some of the facts: Sheepdog Farms, LLC was formed in 2004 by Stephen Whately, who is a successful banker.
According to the return, cattle was its primary product. In addition, maintenance of the property’s timber, which was not
expected to be harvested until 2021, with an expected future value, according to an expert’s testimony, of $332,000. The
farm had no cattle on the property until 2008. And, Mr. Whately did not establish a forest-management plan until the IRS
notified him of the audit.
Sec. 162(a) allows a deduction of all ordinary and necessary expenses paid or incurred during the tax year of carrying on
a trade or business. However, Sec. 183(b)(2) limits deductions to the amount of gross income derived from the activity if
the activity was not engagement in for profit.
The court stated “A cattle farm without cattle and a tree farm that doesn’t yet harvest timber is highly likely to produce a
bumper crop of losses”. ~Whatley, T.C. Memo 2021-11.

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