Minnesota owner and attorney Stefan Tolin saw stallion potential in his precocious homebred colt Choosing Choice.
When injury sidelined the racing career of the son of Unreal Zeal, several industry advisers pointed Tolin toward Louisiana as the place to launch Choosing Choice’s stud career. Louisiana was attractive because the colt had raced successfully in Texas and Arkansas, plus breeder and stallion incentive awards were being enriched through new slot machines at the racetracks.
Tolin got Choosing Choice set up at Sebastien Farm near Washington, La., in 2002 and spent hundreds of hours traveling back and forth from his home in Minneapolis and working the telephone with state breeders.
Everything seemed to be off to a good start, with Choosing Choice covering 30 mares his first year and averaging 22 mares through 2008.
Then the Internal Revenue Service came calling.
Tax audits were nothing new to Tolin, who had his Thoroughbred investments scrutinized twice since he’d become an owner and breeder in 1990. In both earlier audits Tolin said the IRS investigators had determined he treated his racing and breeding operations as a business instead of a hobby. If an owner can meet the definition of a “material participant” in a Thoroughbred operation, then losses and expenses become eligible deductions.
In 2008, however, auditors were not buying that Tolin—the width of the United States away from his Thoroughbred investment—qualified as a material participant.
“We tried to use the previous two audits as precedent, but the IRS wouldn’t consider it,” said Tolin, who secured legal assistance from Los Angeles equine tax attorney Richard Craigo. “Each audit period has to stand on its own.”
Adding to the importance of this case, the horse industry did not have any definitive tax case in the books as a guide, according to Craigo.
Tolin was facing fines and penalties of more than $100,000.
Despite five trips Tolin had made to Louisiana to visit Sebastien Farm and approximately 90 other farms around the state in 2002, according to a U.S. Tax Court opinion, the IRS had dismissed his traveling as nothing more than “commuting.” And all the promotional work he’d done from his law office in Minnesota—where he compiled and mailed breeding packages that included video, nicking reports, and race records—had been considered the equivalent of an investor conducting research, not active participation in the making of his stallion’s career.
Critical to Tolin’s case was testimony came from Butch Sebastien, owner of Sebastien Farm, and Tom Early, with the Louisiana Thoroughbred Breeders Association, who were able to corroborate that Tolin’s trips to Louisiana were not the same as other “working vacations” to Hawaii that the IRS has seen some taxpayers claim, according to Craigo.
Sebastien characterized Tolin’s trips as “all horse business,” rising every day at 5 a.m. and working well into the evening.
“You don’t have to log all of your time, but you need to be able to build a narrative summary and be able to back that with phone records and credit card statements,” Craigo said. “Most important was the corroborating testimony from two witnesses.”
For a year and a half Tolin and Craigo filed briefs and argued their case in a trial. Four more years would pass after the two attorneys had filed their last brief and before an opinion would finally be made. Tolin got the good news April 9 that all his efforts satisfied the “more than 500 hours” rule the IRS uses to determine material participation. Tolin’s records showed in 2003 he made 1,950 long-distance phone calls related to Choosing Choice that alone accounted for 173 hours and another 2,755 long-distance calls in 2004 that accounted for 220 hours.
During his six-year audit battle Tolin said his health suffered and he had to sell all his horses five years ago to cover his legal costs. He’s glad to be on the winning side with hope of recovering most of his expenses, but he said it more important to the industry to have a court opinion providing clearer guidelines for owners who have substantial investments but don’t own a farm or have their business incorporated.
“Choosing Choice didn’t really pan out,” Tolin said. “But for what he couldn’t accomplish as a stallion, he has made up for to the industry through this case.”