Shooting wild hogs counts toward a lawyer’s material participation in a farming activity

The Tax Court allowed a taxpayer’s reconstructed logs and testimony to establish that he materially participated in a farming activity. 

Facts: Clarence Leland, an attorney in Mississippi, purchased a 1,276-acre farm in Turkey, Texas, in 2004. He entered a crop-sharing arrangement in 2005 with Clinton Pigg, a local farmer, who had complete responsibility for planting and harvesting crops on the farm. Leland had complete responsibility for maintaining the farm’s infrastructure. On their joint returns for 2009 and 2010, Leland and his wife claimed losses from the farming activity.

Pigg worked 29 or 30 hours on the farm in 2009 and, because he abandoned his cotton crop in 2010 when it did not develop, only about four hours that year. Several times each year, Leland spent 13 to 16 hours each way commuting to the farm, where he maintained fences, roads, and farm equipment. He also spent as much as six hours per day killing wild hogs, which had damaged crops, fences, and water lines. Leland hunted and trapped the hogs, including by baiting them with grain and Kool-Aid, and then shot them.

Issue: The IRS denied deductions for the losses, claiming that Leland did not materially participate in the farming activity under the Sec. 469 passive loss rules and found the Lelands liable for accuracy-related penalties.

Holding: The court was satisfied that Leland participated in the farm activities for more than 100 hours in each of the years and that his participation was not less than any other individual’s. Pigg was the only other individual participating, besides minimal help from Leland’s family members. The court held that the material participation qualifications under Temp. Regs. Sec. 1.469-5T(a)(3) were satisfied with respect to Leland. Although Leland did not keep contemporary records of time spent on the farm, he reconstructed his records based on credit card receipts, records maintained in his law office, and invoices for purchases related to the farming activity. He also provided credible testimony supporting his claim of participating nearly 360 hours in 2009 and nearly 210 hours in 2010.

• Leland, T.C. Memo. 2015-240

—By Allen Ford, the Larry D. Horner/KPMG Distinguished Teaching Professor of Accounting, and Nikita Waldron, CPA, a doctoral student, both at the University of Kansas in Lawrence, Kan.