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IRC section 183: Farm Hobby Losses
With Cattle Operations and Horse Activities
Table of Contents
Page
Introduction
……………………………………………………………….. v
Statement of Purpose …………………………………………….……... v
Objectives ………………………………………………………………. vi
Chapter 1, Market Segment Definition and Overview
…………………. 1-1
Purpose …………………………………………………………………. 1-1
Definition ……………………………………………………………….. 1-1
Background …………………………………………………………….. 1-1
Current Status …………………………………………………………... 1-2
Horse Activities ……………………………………………………. 1-2
Cattle Operations …………………………………………………... 1-8
Books and Records ………………………………………………… 1-9
Future Outlook ………………………………………………………….. 1-11
Resources ……………………………………………………………….. 1-11
Chapter 2, Issues
…………………………………………………………... 2-1
Purpose ………………………………………………………………….. 2-1
Issues ……………………………………………………………………. 2-1
Pre-Examination Analysis ………………………………………………. 2-1
Review of Tax Return ………………………………………………….. 2-1
Reporting of Schedule C or Schedule F ………………………………... 2-2
History of Losses ……………………………………………………….. 2-2
Large, Unusual, or Questionable Items …………………………………. 2-3
Gross Receipts ………………………………………………………….. 2-4
Other Substantial Income Sources ……………………………………… 2-4
Factor 1: The Manner in Which the Taxpayer Carries
on the Activity ………………………………………………….. 2-5
Factor 2: The Expertise of the Taxpayer or His or Her advisors ….. 2-8
Factor 3: The Time and Effort Expended by the Taxpayer in
Carrying on the Activity ………………………………………… 2-10
Factor 4: The Expectations That the Assets Used in the Activity
May Appreciate in Value ………………………………………. 2-11
Factor 5: The Success of the Taxpayer in Carrying on Other 
Similar or Dissimilar Activities …………………………………. 2-13
Factor 6: The Taxpayer’s History of Income or Losses
With Respect to the Activity ……………………………………. 2-14
iii
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Factor 7: The Amount of Occasional Profits, if Any,
Which Are Earned ………………………………………………. 2-15
Factor 8: The Financial Status of the Taxpayer ………………..….. 2-17
Factor 9: The Elements of Personal Pleasure or Recreation ……….. 2-18
Compliance Issues ………………………………………………………. 2-19
Underreporting of Income ………………………………………….. 2-20
Employment Taxes …………………………………………………. 2-20
IRP Document Compliance …………………………………………. 2-20
Misplaced Income Sources …………………………………………. 2-21
Chapter 3, Examination Techniques
…………………………………….. 3-1
Purpose ………………………………………………………………….. 3-1
Information Document Request (IDR) …………………………………. 3-1
Issue Identification ………………………………………………….. 3-2
Using Specialists and Other Resources …………………………….. 3-2
Initial Interview …………………………………………………………. 3-3
Exam Location and Business Tour …………………………………….. 3-4
Tour of Operation …………………………………………………... 3-4
Unique Indirect Methods ……………………………………………….. 3-9
Books and Records ……………………………………………………… 3-9
Sources of Information ………………………………………………….. 3-9
Other …………………………………………………………………….. 3-10
Chapter 4, Supporting Law
……………………………………………..... 4-1
Purpose …………………………………………………………………. 4-1
Internal Revenue Code …………………………………………………. 4-1
Treasury Regulations …………………………………………………… 4-1
Activity Not Engaged in for Profit …………………………………. 4-2
Case Law ……………………………………………………………….. 4-5
Coordinated Issue Paper ………………………………………………... 4-5
Appendix
…………………………………………………………………... A-1
Appendix A
 ─ 
Calculating the Examination Adjustments
Per IRC section 183 ………………………………………………… A-3
Appendix B
 ─ 
Alternative Positions ……………………………………. A-7
Appendix C
 ─ 
General Suspense and IRC section 183(e) Procedures …. A-9
Appendix D
 ─ 
 
Sample Initial Interview ………………………………… A-11
Appendix E
 ─ 
Tax Savings Benefit Analysis ……………………………A-21
Glossary
…………………………………………………………………….. G-1
iv
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