Ninth Circuit agrees farming activity is partnership


The Ninth Circuit agreed with the Tax Court that a father-son farming and logging operation was a partnership for federal income tax purposes and that the father’s deduction of the bulk of the activity’s expenses on his individual return was not acceptable.

William and Randal Holdner operated a farming activity, Holdner Farms. Randal, the son, conducted the farm’s day-to-day physical operations, and William, the father, who was also a practicing accountant, was responsible for sales, purchasing, financing, and accounting. Each party reported one-half of the activity’s gross income for tax purposes. However, William Holdner allocated the expenses between himself and his son arbitrarily. Most of the expenses he allocated to himself and deducted on his tax return’s Schedule F, Profit or Loss From Farming, claiming a net loss in each of the years at issue, 2004–2006. Although the Holdners did not file a partnership return for Holdner Farms, upon examination of their individual returns, the IRS determined that Holdner Farms was a partnership in which the Holdners held equal ownership interests and that they must allocate the income and expenses from the partnership accordingly. The IRS also assessed an accuracy-related penalty against William Holdner for the years under examination because of the improper deductions of Holdner Farms’ expenses.

In analyzing the Holdner Farms activity, the Tax Court used the eight-factor test from its opinion in Luna, 42 T.C. 1067 (1964), for determining whether an enterprise is a partnership for federal income tax purposes. The court concluded that seven of the eight Luna factors supported characterizing the activity as a partnership. The court also determined there was not substantial proof that the Holdners did not hold equal interests in the partnership and therefore the income, expenses, and other partnership items should be allocated equally between them. It also sustained the accuracy-related penalty against William Holdner because, as a practicing accountant with many years’ experience, he did not act reasonably in allocating a disproportionate share of Holdner Farms’ expenses to himself.

In a short, unpublished opinion, the Ninth Circuit agreed with the Tax Court that Holdner Farms operated as a partnership for the years at issue.

  Holdner, No. 11-71593 (9th Cir. 10/12/12), aff’g T.C. Memo. 2010-175

By Alice A. Upshaw, CPA, MPA, CMA, instructor of accounting, and Darlene Pulliam, CPA, Ph.D., Regents Professor and McCray Professor of Business, both of the College of Business, West Texas A&M University, Canyon, Texas.


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