This article analyzes the recent Tax Court Memorandum decision in Mark P. Himmel and Deborah W. Himmel v. Commissioner of Internal Revenue, T.C. Memo. 2025-35, which provides valuable insights for tax practitioners navigating the complexities of hobby loss rules under Internal Revenue Code (IRC) § 183 and penalties for failure to timely file under IRC § 6651(a)(1).

I. Case Background and Facts

The petitioners, Mark and Deborah Himmel, engaged in breeding, boarding, showing, and training Arabian horses beginning in 1981 through their sole proprietorship, Plantation Arabians. Despite reporting losses dating back to at least 1993, they continued this activity up to the time of trial. The Internal Revenue Service (IRS) audited the Himmels’ joint Forms 1040 for the taxable years 2004 through 2009, all of which were filed after the specified filing dates (including extensions), and disallowed the loss deductions they claimed relating to their horse activity. The IRS also determined other adjustments to income, expenses, and credits, none of which the Himmels contested at trial. Consequently, a Notice of Deficiency dated September 14, 2012, was issued, determining federal income tax deficiencies, additions to tax under § 6651(a)(1), and accuracy-related penalties under § 6662(a). After briefing, the parties stipulated that the Himmels were not liable for the accuracy-related penalties. Thus, the remaining issues for the Tax Court’s decision were whether the Himmels engaged in their horse activity for profit within the meaning of § 183(a) and whether they were liable for the additions to tax under § 6651(a)(1).

The Himmels were college graduates, married since 1978, with Mr. Himmel holding a marketing degree and a 30% ownership interest in an office supply company, KEM Supply House, where he had previously served as sole manager. Mrs. Himmel held a dental hygiene degree and worked as a dental hygienist full-time until 1990 and part-time until 2008, after which she worked only occasionally. Additionally, from 2004 to 2011, Mrs. Himmel was the primary caretaker for her father who had Alzheimer’s disease.

Mr. Himmel had been involved with horses since childhood, owning his first horse in 1976 and purchasing five mares in 1980. Mrs. Himmel had also been involved in the Arabian horse industry since at least 1979, holding leadership positions in various horse associations and exhibiting horses at a high level. In 1981, they formed Plantation Arabians. They followed an informal business plan to breed their own horses, buy horses, and then train and show them to enhance their sale value, alongside other income-generating activities like boarding and training client horses. Their property included a residence and a barn with stalls and an arena, with improvements made over time. Despite these efforts, Plantation Arabians reported only two horse sales in 14 years of annual operating results, with only one sale ($14,800) during the years at issue. Mr. Himmel’s career as an Arabian horse show judge was negatively impacted by a judging scandal in 2001, which he later settled a lawsuit over in 2005. The Himmels maintained separate books and records for Plantation Arabians using QuickBooks but also paid some expenses from personal accounts with annual reconciliation for tax purposes.

II. Taxpayers’ Request for Relief

The Himmels requested relief from the IRS’s determination disallowing the loss deductions related to Plantation Arabians, arguing that they engaged in the horse activity for profit within the meaning of § 183(a). They also argued that they were not liable for the additions to tax under § 6651(a)(1) for the late filing of their returns, asserting reasonable cause.

III. Court’s Analysis of the Law

A. Section 183: Activity Not Engaged in for Profit

The court began its analysis by noting the general rule that deductions are allowed for ordinary and necessary expenses paid or incurred in carrying on a trade or business or for the production of income under §§ 162(a) and 212(1). However, under § 183, if an activity is not engaged in for profit, no deduction attributable to that activity is generally allowed except as provided in § 183(b). The determination of whether the requisite profit objective exists is based on all surrounding facts and circumstances, with greater weight accorded to objective facts than subjective statements of intent, citing Treas. Reg. § 1.183-2(b) and cases like Keanini v. Commissioner, 94 T.C. 41, 46 (1990). The court assessed the profit intent of Plantation Arabians based on that of its sole owners, the Himmels.

The court noted that under § 183(d), an activity consisting mainly of breeding, training, showing, or racing horses is presumed to be engaged in for profit if gross income exceeds deductions in any two of seven consecutive years. However, this presumption did not apply to the Himmels as Plantation Arabians never met this gross income test.

The court then turned to the nine factors outlined in Treas. Reg. § 1.183-2(b) to evaluate the Himmels’ profit objective:

Manner in which the taxpayer carried on the activity: The court considered factors such as maintaining complete books and records, having a business plan, conducting the activity similarly to profitable ventures, changing operating procedures to improve profitability, and advertising, citing Donoghue v. Commissioner, T.C. Memo. 2019-71. While the Himmels maintained a separate checking account and used QuickBooks, the commingling of personal and business expenses and the lack of tracking direct and indirect costs for individual horses suggested the books were not maintained with a profit objective. The court found that the Himmels did not conduct their activity similarly to Mr. Dearth’s successful Arabian horse farm, particularly in their failure to frequently sell horses or cut costs during financial downturns. While they had an informal business plan, it lacked meaningful financial analysis. The court found no meaningful changes in operating procedures to improve profitability during the years at issue. Their advertising through horse shows and word of mouth was deemed appropriate for the industry. Overall, this factor weighed against the Himmels.
Expertise of the taxpayer or their advisors: This factor examines the taxpayer’s own expertise and consultation with experts regarding profitable business practices, citing Betts v. Commissioner, T.C. Memo. 2010-164. While the Himmels had experience with horses, they did not produce credible evidence of receiving advice from experts on profitably running a horse business beyond general hobbyist advice. The Himmels themselves lacked formal training in agriculture or horse breeding, though they possessed considerable practical knowledge. On balance, this factor was deemed neutral.
Time and effort spent by the taxpayer: Significant personal time and effort devoted to the activity can indicate a profit objective, especially if it lacks substantial personal or recreational aspects, citing Treas. Reg. § 1.183-2(b)(3). The court found that Mr. Himmel spent a significant amount of time on the farm, and Mrs. Himmel also contributed substantially, despite reduced involvement during some years due to caretaking responsibilities. This factor weighed in the Himmels’ favor.
Expectation that assets used in the activity may appreciate: An expectation of overall profit through asset appreciation can indicate a profit motive, even without operational profit, citing Treas. Reg. § 1.183-2(b)(4) and Carmody v. Commissioner, T.C. Memo. 2016-225. The Himmels provided no reliable evidence of their horses’ increasing fair market value. While the appreciation of the Back Project property was considered, the inclusion of their personal residence in the valuations and the incomplete evidence of the original cost of improvements prevented the court from determining the appreciation attributable to the horse activity. This factor weighed against the Himmels.
Success in carrying on other similar or dissimilar activities: Past success in converting similar activities to profitable enterprises can be indicative of a profit motive, citing Treas. Reg. § 1.183-2(b)(5). The Himmels’ other horse-related ventures, Arabians de la Bonne Terre and Snaffles, Inc., were both unsuccessful and short-lived, contrasting with the long-term unprofitability of Plantation Arabians. This factor weighed against the Himmels.
Taxpayer’s history of income or losses with respect to the activity: A history of losses beyond the initial startup phase can indicate a lack of profit motive, citing Treas. Reg. § 1.183-2(b)(6) and Engdahl v. Commissioner, 72 T.C. 659, 669 (1979). Plantation Arabians had not reported a net profit since 1990, with significant cumulative losses. The court rejected the argument that losses during the years at issue were solely due to intervening setbacks, noting the pre-existing history of losses. This factor weighed against the Himmels.
Amount of occasional profits earned: The amount of profits in relation to losses is a relevant factor, citing Treas. Reg. § 1.183-2(b)(7). The Himmels had not generated substantial profits. The court did not consider the legal settlement from the IAHA as properly attributable to the horse activity. Their optimism about future profits was not adequately supported by evidence of significant horse sales. This factor weighed against the Himmels.
Financial status of the taxpayer: A lack of substantial income from other sources might indicate the activity is engaged in for profit, citing Treas. Reg. § 1.183-2(b)(8). However, the Himmels had other sources of income, including Mr. Himmel’s salary and rental income. The significant tax benefits derived from the horse activity losses suggested a lack of profit motive. This factor weighed against the Himmels.
Elements of personal pleasure or recreation: The presence of personal motives can indicate the activity is not engaged in for profit, citing Treas. Reg. § 1.183-2(b)(9). The Himmels admitted their love for Arabian horses and enjoyment of training and showing them, alongside their social connections within the industry. This factor weighed against the Himmels.

Weighing these factors, the court found that seven factors favored the IRS, one favored the Himmels, and one was neutral. Consequently, the court concluded that the Himmels did not have an actual and honest objective to operate Plantation Arabians for profit during the years at issue and sustained the IRS’s disallowance of the claimed loss deductions.

B. Section 6651(a)(1): Additions to Tax for Failure to File Timely

The court then addressed the additions to tax under § 6651(a)(1), which imposes a penalty for failure to file an income tax return by the due date (including extensions). The Commissioner bears the burden of production to show the return was filed late, pursuant to § 7491(c), citing Wheeler v. Commissioner, 127 T.C. 200, 207-08 (2006). The court found that the IRS met this burden as the Himmels’ joint Forms 1040 for the years at issue were all filed past the specified filing dates, including extensions.

To avoid the penalty, the taxpayer must show that the failure to file timely was due to reasonable cause and not willful neglect, citing Higbee v. Commissioner, 116 T.C. 438, 446-47 (2001). Reasonable cause exists if the taxpayer exercised ordinary business care and prudence but was nevertheless unable to file on time, citing Treas. Reg. § 301.6651-1(c)(1). The burden of proving reasonable cause remains with the taxpayer, citing Higbee, 116 T.C. at 447-48.

The Himmels argued that their failure to file timely was due to reasonable cause, stating they worked with a CPA and tax attorney and maintained adequate records. Mrs. Himmel also cited her role as a full-time caregiver for her father. However, the court found that the Himmels failed to articulate any specific reason for the delays that constituted reasonable cause. The court noted that a taxpayer’s selective inability to perform tax obligations while managing other business and personal activities does not excuse the failure to file, citing Godwin v. Commissioner, T.C. Memo. 2003-289. Therefore, the court held that the Himmels did not have reasonable cause for failing to timely file their returns and sustained the additions to tax under § 6651(a)(1).

IV. Court’s Conclusions

The Tax Court concluded that the Himmels did not engage in their horse activity with a genuine profit objective within the meaning of § 183 and were liable for the additions to tax under § 6651(a)(1) for the late filing of their income tax returns.

V. Practice Points for CPAs

Thorough Profit Motive Analysis: When advising clients involved in activities with recurring losses, especially those with personal enjoyment elements, CPAs must conduct a thorough analysis of the nine factors under Treas. Reg. § 1.183-2(b). Objective evidence supporting a profit objective is crucial.
Business-like Operations: Encourage clients to operate their activities in a business-like manner, including maintaining detailed and separate books and records aimed at tracking profitability, developing formal business plans with financial projections, and adapting operations to improve financial performance.
Documentation of Expertise and Advice: Advise clients to document any consultations with experts regarding the profitable operation of their activity, distinguishing general hobbyist advice from specific business guidance.
Asset Appreciation Strategy: If relying on asset appreciation as a profit motive, clients should maintain credible evidence of the assets’ fair market value and its appreciation over time, demonstrating that the expected appreciation will exceed operating expenses and recoup past losses.
Timely Filing is Paramount: Emphasize the importance of timely filing of tax returns and the need for specific and valid reasons constituting reasonable cause for any filing delays. Relying solely on the use of a tax professional or personal difficulties without demonstrating a direct impediment to timely filing is generally insufficient to avoid penalties.

The Himmel v. Commissioner decision serves as a stark reminder of the scrutiny applied to activities with a history of losses and the taxpayer’s burden of proving a genuine profit objective to deduct related expenses. It also underscores the strict requirements for establishing reasonable cause for failing to file tax returns on time. Tax practitioners should leverage the court’s detailed analysis in this case to better advise clients and ensure compliance with federal tax law.

Prepared with assistance from NotebookLM.