Young v. Commissioner: When Poor Recordkeeping Destroys a Case
The Tax Court’s decision in Young v. Commissioner, T.C. Memo. 2025-95, offers a clear warning: even sincere business owners can lose deductions if their records are weak. The taxpayers operated a pecan farm in Oklahoma that later shifted into horse training and event hosting. Despite providing receipts, they failed to show a consistent profit motive or credible accounting. The Court denied their deductions under Internal Revenue Code §183, finding the activity resembled a hobby rather than a business.
Authoritative references:
1. Lack of Profit Evaluation
The taxpayers never prepared financial projections, budgets, or a written business plan. The Court concluded that without documented evidence of expected profitability, the activity could not qualify as a trade or business.
Supporting authority:
Treas. Reg. §1.183-2(b)(1) and (2) — factors include manner of carrying on the activity and expertise of the taxpayer.
2. Commingling of Personal and Business Expenses
The Youngs used the same property and accounts for both personal and business purposes without allocating expenses between them. The IRS disallowed all claimed losses, noting that farm-related costs were inseparable from household expenses.
Supporting authority:
IRC §262(a) — personal living expenses are never deductible.
Treas. Reg. §1.262-1 — requires segregation of personal and business costs.
3. Inadequate Recordkeeping
Although the taxpayers kept receipts, they lacked a consistent ledger showing dates, categories, or purposes for each expenditure. The Court reaffirmed that loose receipts or canceled checks alone do not establish deductibility without organized records.
Supporting authority:
Treas. Reg. §1.6001-1(a) — taxpayers must maintain books sufficient to establish income and deductions.
4. Change in Activity Without Reassessment
The transition from pecan farming to equestrian events occurred with no new cost analysis, revenue forecast, or feasibility plan. The Court found that no effort was made to assess whether the new business model could ever be profitable.
Supporting authority:
Treas. Reg. §1.183-2(b)(3) — changing the nature of an activity without financial reassessment indicates lack of profit motive.
5. Personal Enjoyment and Hobby Elements
The Court observed that the taxpayers personally enjoyed roping and horse training. While enjoyment does not disqualify a business, it increases the burden of proving intent to make a profit.
Supporting authority:
Treas. Reg. §1.183-2(b)(9) — personal pleasure or recreation is a factor against a business intent.
Key Takeaways for Clients
To support a legitimate profit motive and withstand IRS scrutiny, every business or side activity should have:
A written business plan demonstrating expected profitability.
Separate bank accounts and detailed accounting records.
Regular financial statements or ledgers summarizing income and expenses.
Periodic performance reviews with documented adjustments when needed.
Receipts with clear business purposes linked to ledger entries.
Accurate, contemporaneous documentation is the foundation of every defendable deduction.
The Young case underscores that substantiation and profit analysis are not optional. Taxpayers must maintain clear, organized records and show a reasonable expectation of profit. Failing to do so transforms a legitimate business into a hobby under Section 183, with all deductions disallowed.
If your business or rental activity has recurring losses, now is the time to review your books and structure. I assist clients in building credible accounting systems that meet IRS standards. Contact me to schedule a profit motive review before filing your next return.
