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The Oregon Tax Court, Magistrate Division, ruled that expenses were deductible ordinary and necessary business expenses. <a href="https://cdm17027.contentdm.oclc.org/digital/collection/p17027coll6/id/10041/rec/1">Medford v. Oregon Dep’t of Revenue</a>, No. TC-MD 240188R (Or. T.C., Mag. Div. June 20, 2025). Here, the Medfords had a horse boarding business that, arguably, was not so well run. During the period 2013 to 2019, the business was profitable in only one year (2014). The Oregon Department of Revenue (the “Department”) audited the Medford’s individual income tax returns for 2019, accepted the reported gross receipts but recharacterized them as ordinary income, and denied the business expense deductions (which the Medfords had reported on their Schedule C) as non-deductible hobby losses.

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In 2013, Sally and Reggie Medford purchased a property that would allow them to return to their horse-loving roots. It had a residence, a barn, and an indoor riding area—and, importantly, exceeded their budget. They explored hazelnut farming and goat breeding, but the region was not suitable and they turned to horse boarding and care. They consulted breeders and performed online research. They organized a limited liability company (French Prairie Acres LLC), launched a website, spread the word (word-of-mouth advertising), purchased liability insurance, expanded the four-stall barn to the size of 14 stalls, hired laborers, entered boarding agreements with horse owners, maintained horse rosters and stall assignments, tracked veterinary care, and kept income and expense ledgers (albeit handwritten). Sally worked for the business full time, while Reggie assisted with maintenance and construction on the weekends (he had another job, giving them some additional cashflow to support the business). They saw that they were not making ends meet so they increased boarding fees by $75.00 per month, but it was not a sufficiently large increase to turn the business profitable.

During the audit, the Department discovered that the Medfords sold the property in 2023 and realized a gain on the sale in the amount of $875,000. The Department asserted that their horse-loving background, less-than-stellar record-keeping, lack of business plan beyond consulting some breeders, potential employee misclassifications (payment of hired hands as independent contractors who may have met the definition of employee), differences in hand-written ledgers versus bank accounts, poor rate-setting (not raising their fees sooner and more often), and having sold the property for a large gain (indicating that perhaps this was just a ploy to make their personal real estate more valuable rather than running a profit-making horse boarding and care business), together with the income from Reggie’s job helping to support the business, should result in consideration of the horse boarding and care activities as non-deductible hobby losses rather than ordinary and necessary deductible business expenses.

The Judge concluded that Oregon follows the federal treatment for deduction of ordinary and necessary business expenses and the federal hobby-loss-limit rules for Oregon personal income tax such that the question distilled to whether the Medfords operated the facility with a profit motive. The Judge found that while the Department raised valid concerns about financial controls, mistakes, and lack of a business plan, “the law does not require perfection; only that the taxpayer act in a manner consistent with an intent to make a profit.” The Judge also found convincing Sally’s full-time labor in the business and the couple’s investment of many years to construct, manage, and expand the facility and that they could not have afforded the property and the activities without the revenue from boarding. In sum, the Medford’s “businesslike operation and extensive personal commitment to build a business were persuasive toward proving that they intended to operate profitably. While they made mistakes, perfection is not required.”&nbsp;

While the case deals with hobby losses, so often, tax auditors assert they could have run the business better (not at a loss), would have kept better or different records (anticipated exactly what the auditor would have wanted to see as proof), or would have run the business differently and do not respect the way business owners establish their business, file their returns, treat income, or incur and deduct expenses. In fact, “we don’t like it” is not the law or the test for tax correctness. You don’t have to be perfect to win. Don’t be bullied.

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This update is one in a series of updates written for the <a href="/news-and-events/the-br-state-local-tax-spotlight-july-2025/" id="25887">July 2025</a> edition of The BR State + Local Tax Spotlight.

© 2025 Blank Rome LLP. All rights reserved. Please contact Blank Rome for permission to reprint. Notice: The purpose of this update is to identify select developments that may be of interest to readers. The information contained herein is abridged and summarized from various sources, the accuracy and completeness of which cannot be assured. This update should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.

Oregon Department of Revenue Loses Deduction Denial—No Horsing Around!

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Oregon Department of Revenue Loses Deduction Denial—No Horsing Around!

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