American Horse Council Tax Bulletin Update
Tax Court Finds Riding Arena Repairs Not Deductible
The taxpayers, husband and wife, purchased in 2006 a 10 acre parcel of land in Santa Ynez, California, on which they built their residence and various other structures. These structures include three barns and a horse riding arena used in a horse boarding and sales business operated by Santa Ynez Valley View Farm, LLC, a California limited liability company the taxpayers formed and at all times wholly-owned.
Construction of the riding arena was completed in early 2007 at a cost of $150,000. As it turned out, defects in the construction of the riding arena required taxpayers to expend more than $100,000 in 2007 and 2008 in order to remedy the defects. They sued the original contractor for defective construction and in 2009 settled the lawsuit for a payment of $50,000. The taxpayers reported on their 2009 tax return an itemized deduction of $69,100 as a casualty loss deduction resulting from the repairs to the riding arena.
The IRS disallowed the casualty loss deduction taken by the taxpayers on their 2009 return on the grounds that it was not a “casualty” as that term is used in the tax code. The taxpayers did not agree and took the disagreement to the U.S. Tax Court. The husband represented himself and his wife at trial.
The Court noted that to be deductible a casualty must be from “unusual and unexpected events *** caused by sudden or destructive force.” Accordingly, the court found that expenses paid or incurred to correct damage caused by faulty construction methods are not deductible as a casualty loss.