Research Problem Only one page. RP 6 The morning of January 1, 2009 brought a chill to the Tampa Bay area. Cold air from Canada sank south to remind Flor

Research Problem Only one page. RP 6
The morning of January 1, 2009 brought a chill to the Tampa Bay area. Cold air from Canada sank south to remind Flor

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Research Problem Only one page. RP 6
The morning of January 1, 2009 brought a chill to the Tampa Bay area. Cold air from Canada sank south to remind Floridians that
winter does bring cold temperatures to some. Sammy Spartan was driving east that morning along Highway 60 headed to one of his
favorite golf resorts, Streamsong. The resort, constructed in the shell of abandoned phosphate mines is a world class golf facility
located in the middle of Florida. Along the way Sammy took in the fragrant aromas of the citrus farms lining the highway. Those
smells brought back memories of Sammy’s grandfather and happy summer days spent on his grandad’s citrus farm in Central
Florida.
Sammy was (and is) the owner of Spartan Materials, LLC. This successful business operates two plants in the Tampa port area
recycling vehicle parts and batteries then fabricating new and reconditioned parts. While the business started small, Spartan
Materials employs nearly 100 people and, although it is a thin margin business, consistently reports annual income of between
$800,000 and $1,500,000. Sammy has prospered through hard work building the business. Time records indicate that Sammy
spends between 20 and 50 hours a week on Spartan Materials, LLC.
During his drive back to his home in Avila after a less than satisfying round of golf at Streamsong Sammy happened to see a for sale
by owner sign along the road. Sammy stopped and took down the information. A citrus farm owner nearing retirement was
attempting to sell his 200-acre farm. Fresh from a poor round of golf and intoxicated by the memories of his long-ago youth, Sammy
decided to give up golf and made an offer to purchase the citrus farm. The offer was accepted after a bit of negotiation and Sammy
became the proud owner of a 200-acre citrus farm. Three years later when an adjacent tract become available Sammy added 120
acres to the farm bringing the total acreage to 320.
Over the next ten years a series of freezes, two devastating occurrences of citrus greening (a disease that kills citrus trees) and a tree
clearing hurricane took their toll on the citrus farm. Sammy spends at least three days a week working the farm mending fences,
planting, fertilizing, trimming and caring for the trees. Sammy kept meticulous records of his expenses, unfortunately, there were
few oranges to harvest and significant losses were reported from the citrus farm each year on his tax return. Those losses helped
reduce Sammy’s taxable income from Spartan Materials since Sammy claimed that both Spartan Materials and the citrus farm were
activities engaged in for profit. Sammy’s time records showed that he spent more than 1,200 hours a year personally working on the
farm. His time records at Spartan Materials LLC showed he spent more than 1,200 hours a year personally working at the
headquarters of Spartan Materials LLC.
The IRS examined Sammy’s 2018 and 2019 tax returns and disallowed the losses ($75,000 in 2018 and $82,000 in 2019) from the
citrus farm. While Sammy produced detailed records of revenue and expenses from both the citrus and materials operations, the
IRS noted that he had no formal business plan for either business, did not form a separate entity for the farm operation, never
advertised his citrus products, did not purchase crop insurance for the citrus grove but did purchase business interruption insurance
for the materials company and did not hire any advisors to assist him in either enterprise. The IRS asserted that Sammy’s activities
of mending fences, planting trees, fertilizing soils, trimming trees and related activities on the farm brought him substantial personal
pleasure. The IRS contended that the citrus farm was not entered into with the intention of making a profit. Sammy argued that he
always intended on making a profit and that a series of unfortunate and unprecedented events combined to negatively impact the
citrus business. Sammy noted that no advertising would help him sell oranges that did not exist and that he had never had a
business plan in any business. He further noted that advisors would have only added to the losses caused by disease and weather.
Sammy also provided industry statistics from the University of Gator’s Citrus Institute showing that the entire industry had
experienced losses for the past ten years largely from the freezes, greening and storms.
Rather than journey home each night, Sammy eventually bought a second hand trailer to sleep in while working on the farm, it was
not very nice. Sammy’s wife, Sally, refused to set foot in the trailer.
Sammy responded vigorously to the IRS’ allegations noting that he kept good records of expenses, that there is a market for citrus –
if he could ever produce a crop, that he worked the land himself three or four days a week (he produced time records to
substantiate his work and a record of not playing any more golf), attendance at the University of Gator’s “Citrus College” continuing
education programs and memberships and attendance at the Florida Citrus Association’s meetings. Sammy also commissioned an
expert report from a UG professor to support his claims of intent to make a profit. The expert report indicated that Sammy had
done just about everything to make a successful citrus farm but bad luck, citrus greening, a hurricane and timing had prevented his
success in the farm venture. Sammy noted that while he did derive some satisfaction from the physical labor on the farm, the fact
that others engaged in this activity on neighboring farms were paid to do the same kind of work mitigated against calling this a
pleasure activity.
Sammy offered the IRS representatives the chance “to derive personal pleasure” tending to the citrus crops, none of the IRS
representatives were interested in that kind of fun. Sammy’s affidavit in support of his position noted that “this is a farm, not a
fishing boat”, its real work out there.” The IRS disallowed Sammy’s deductions for losses on the citrus farm on his tax returns.
Sammy paid the taxes, interest and penalties then sued in US District Court for the Middle District of Florida seeking a refund. Who
prevails? (and more importantly, why)


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