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Ugly Donkeys Get Beautiful Results in Tax Court

The following is a reprint from the 2022 University of Illinois Federal Tax Workbook, Volume A, Chapter 3: Rulings and Cases. The video is a discussion of the case between instructors Bob Rhea and Jerry Brune during Fall Tax School on a hobby loss case, which involves a successful New York investment banker, William Huff. He and his wife wanted to help their daughter take her love for animals along with some unused farmland they owned in New Jersey and turn it into a living by raising miniature donkeys. Mr. Huff did a lot of research on starting and running the operation, even created an LLC, but he did not create a business plan which outlined the profit motive.

 If you like reading and hearing about cases, keep an eye out for 2023 Fall Tax School, as we’ll cover more of the most pertinent and interesting cases of the last year then.


William Huff grew up in a tough New York City neighborhood but built a large fortune in investment management with a little education and a lot of hard work. Eventually, he owned an investment firm specializing in identifying underpriced assets. He developed research methods and skills enabling his firm to acquire valuable assets at low prices and later sell them at significant profits.

Mr. Huff and his wife wanted to supplement the income of their adult daughter through interests of her own, which centered on animal care, not investments. Because Mr. and Mrs. Huff had personally invested in some New Jersey farmland, researching the best use of that property was second nature to Mr. Huff. His research concluded that breeding and raising miniature donkeys would be profitable. Investors valued the small donkeys based on their height (under 30 inches), coloration, and conformance to equine standards. The research also led Mr. and Mrs. Huff to study the optimal types of hay for raising miniature donkeys, the optimal soil, and other things they could do to optimize the value of the donkeys.

The Huffs operated the farm through Ecotone Farm, LLC, which was taxed as a partnership. They improved the farm intending to increase the likelihood that the donkey-raising business would be profitable. However, they did not prepare a written business plan, even as they invested considerable effort in maintaining records that could establish the parentage of the miniature donkeys. The Huffs kept good financial records.

Unfortunately, Mr. Huff found that raising miniature donkeys was a horse of a different color, figuratively speaking, relative to his investment activities. His research skills that brought value to investments did not result in profitable miniature donkey sales. The Ecotone partnership tax returns produced losses for the Huffs. Their tax returns left the IRS chomping at the bit to pursue statutory notices of deficiency, which alleged amounts due of $56,637 for 2013 and 2014, plus accuracy-related penalties.

The notices arose from an IRS audit finding consistent losses and indications that Mr. Huff started the donkey-raising venture without a profit motive. As evidence supporting a profit motive was lacking, the IRS cited the absence of a written business plan and the Huffs’ failure to use the financial records to correct Ecotone’s unprofitability. Issue. The issue in this case is whether the Huffs engaged in the miniature donkey-raising business with a profit motive, enabling them to deduct losses.


The issue in this case is whether the Huffs engaged in the miniature donkey-raising business with a profit motive, enabling them to deduct losses.


Because the IRS’s notices of deficiency are presumed correct, Mr. and Mrs. Huff have the burden of
proving that they engaged in Ecotone Farm, LLC, with a profit motive. Without a profit motive, taxpayers generally cannot deduct expenses associated with business activities, which happens when engaging in hobby activities. The tax court cited the frequent use by wealthy taxpayers of horse breeding operations as a way of gaining the “Uncle Sam’s [subsidy of] the weekend farm.” These taxpayers frequently managed successful businesses and were willing to be held accountable by their banks and business associates if they failed to do so. In contrast, weekend activities on their horse farms indicated they derived enjoyment from being at the farm and from their activities there.

Mr. Huff testified that he derived little pleasure from the miniature donkeys. In testimony before the tax court, he stated the following regarding the animals’ care.

It’s a lot of work… I don’t cuddle them. I don’t pet them. [T]here is no satisfaction of having these. They are not pets. This is livestock.

Mr. Huff testified that the donkeys are “quite ugly” and that each resembles a “giant hairball.”

The court found that Mr. Huff applied his investment expertise to the donkey business when he rejected an advisor’s offer to sell him 12 donkeys for $10 plus a share of future rights in the animals. Mr. Huff realized he would be liable for the animals’ feeding and care expenses yet would relinquish a substantial portion of the profits. Perceiving that this reflected his investment insight, the court concluded this decision reflected his ambition to make money in the miniature donkey breeding business. In writing the court’s opinion, Judge Urda did not resist the impulse to add some humor, stating that Mr. Huff realized it was better to “look the gift donkey in the mouth.”

Not sharing the judge’s sense of humor, the IRS argued Mr. Huff’s limited time on the farm indicated a lack of a profit motive. Nevertheless, the tax court found that Mr. Huff was not required to spend time at the farm to have a profit motive; he employed knowledgeable and experienced persons to run the operation.

The IRS further argued the history of financial losses indicated the lack of a profit motive. The tax court did not agree, finding that the start-up phase for equine breeding ventures typically lasts five to 10 years. The Ecotone venture was still within its start-up phase, described in Treas. Reg, §1.183-2(b)(6). This regulation states that a business does not lack a profit motive simply because it experiences losses during an initial phase.


The court held that the Huffs had a profit motive in the miniature donkey-raising business. They are entitled to the losses claimed on their tax returns.


Helmick v. Comm’r, TC Memo 2009-220 (Sep. 22, 2009).

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University of Illinois Tax School is not responsible for any errors or omissions, or for the results obtained from the use of this information. All information in this site is provided “as is”, with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information. This blog and the information contained herein does not constitute tax client advice.

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