Was a horse association's $1.5 million sale exempt because it made fewer than three countable horse sales in any year?

Plain-English summary

A horse-breeding and racing association sold a horse for $1.5 million and claimed an occasional-sale exemption. It said only four of its eight horse sales over 11 years were countable because the others occurred at auction or through claiming races, leaving it below the regulation's general three-sales-in-12-months guideline.

The Appeals recommendation said that guideline was not the exclusive test. A person can be engaged in a selling business even with fewer sales. Selling horses found unsuitable for racing was an ordinary and necessary part of breeding and racing, and the association's eight admitted sales totaled $2.28 million—equal to or greater than its stated racing-purse income.

The association was therefore engaged in the business of selling horses and required to hold a seller's permit. The $1.5 million sale did not qualify as an occasional sale.

Reconsideration record, incomplete horse counts, and source limits

Hearing Officer James E. Mahler issued this supplemental recommendation on individual petitioner C--- W---'s redetermination matter. It incorporates a January 30, 1990 original Decision and Recommendation that the PDF does not include. The petitioner timely sought reconsideration April 27, supplemented it June 15 and July 3, and received staff responses July 24 and September 4. None of that correspondence is reproduced.

The disputed horse E--- belonged to an association of the petitioner, Ms. M--- B---, and Ms. N--- C---. The association sold it July 13 in a redacted year for $1.5 million. The petitioner said the association sold six previously raced horses from 1983 through 1988—four privately, one at auction, one through a claiming race—then added a 1981 auction sale and 1989 claiming-race sale for eight total from 1979 through 1989.

The eight-item list stated prices of $70,000, $1.5 million, $30,000, $35,000, $50,000, $300,000, $225,000, and $70,000, totaling $2.28 million. Four private or countable sales totaled $2.055 million. The petitioner relied on Annotations 395.0480 and 395.0520 for excluding auction and claiming-race sales from the permit count and argued that four countable sales over eleven years did not meet Regulation 1595(a)(1)'s general three-substantial-sales-in-twelve-months guideline.

The record's inventory numbers were unresolved. A prior declaration said the 1979 association began with three mares and their foals including E---; the petitioner later said it began with only the mares and E---, produced 21 more foals, then had eight sales, one death, and one gift, leaving 15 horses at the end of 1989. Yet the petitioner claimed 22 horses were produced and 17 remained, without naming the extras. Staff also said the petitioner personally sold many other horses or fractional interests during the audit period and had not kept accurate records, so it could not verify that the association's list was complete.

The petitioner reported more than $2 million in purses from 1979 through 1987 and unspecified additional purses for 1988 and 1989, but disclosed no costs, expenses, losses, or income-tax deductions. Mahler nevertheless compared $2.055 million from four countable sales with the alleged purse income and found horse selling financially central. Because later purse amounts and expenses were missing, the source does not provide a complete net-income comparison.

Sections 6014 and 6066 made seller status turn on engaging in a selling business, not only a transaction count. Mahler treated Regulation 1595's three-sales language as a presumption or guideline rather than an exclusive safe harbor, comparing a boat manufacturer that remained in a selling business however few boats it could make. He also relied on the petitioner's July 29, 1987 statement that prudent breeding and racing necessarily involved culling and selling animals or interests unfit for racing.

Mahler concluded that selling horses was an ordinary and necessary part of breeding for racing even if none were bred specifically for sale. The association therefore needed a permit and the E--- sale was not occasional. That selling-business finding also supported the profit motive needed for partnership status. As an alternative, he said that without material horse sales the partnership evidence would be insufficient, in which event the petitioner's individual fractional-interest sale would be taxable anyway.

The recommendation was to reaudit as recommended in the absent original decision. The PDF does not state what that reaudit entailed and supplies no final Board action or tax outcome.

The current live annotation says a person outside section 6019 may still be a section 6014 seller and emphasizes horse-sale income exceeding racing income. Section 6019 does not appear in the supporting recommendation, and the underlying income record is incomplete as described above. The live page preserves the ordinary-and-necessary-business reasoning, nonexclusive sales count, taxable result, and December 20, 1990 date. It omits the individual petitioner and association, reconsideration history, sale and inventory details, staff's verification problem, purse-data limits, cited annotations, partnership and alternative individual-sale analysis, absent original reaudit instruction, missing records, and absent final action.

The PDF does not include the original recommendation, reconsideration request or supplements, staff responses, July 29, 1987 letter, association declaration or agreement, horse lists beyond the reproduced table, ownership and fractional-interest records, breeding, racing, foal, death or gift records, sales contracts, auction and claiming-race records, purse records, expenses, tax returns or deductions, seller's permit, audit, assessment, payment, reaudit, Board minutes or order, refund or collection record, or later appeal.

What this means for you

Horse breeders and racing operations

Low transaction frequency alone does not establish an occasional sale when selling animals is expected, necessary, and financially significant to the operation.

Accountants and tax professionals

Analyze business purpose, revenue mix, inventory turnover, and the practical role of sales—not only a mechanical annual transaction count.

Common questions

Q: Is fewer than three sales in 12 months a safe harbor?
A: No. The recommendation treated the regulation's three-sales rule as a guideline, not the exclusive seller-status test.

Q: Why were horse sales considered part of the business?
A: Breeding and racing necessarily involved selling horses that were not retained for racing, and the sale revenue was substantial.

Q: How significant were the admitted sales?
A: Eight sales totaled $2.28 million, including the disputed $1.5 million sale.

Q: Did the partnership argument produce an exemption?
A: No. The association qualified as a partnership, but it was also a selling business, so its horse sale was not occasional.

Q: Could staff verify the association's eight-sale list?

A: No. Staff said the petitioner kept inaccurate records and personally sold other horses or fractional interests during the audit period.

Q: Were the inventory counts consistent?

A: No. One reconstruction yielded 15 ending horses, while the petitioner claimed 17 and 22 produced horses without naming the extras.

Q: Was the sales-versus-racing income comparison complete?

A: No. The source gives over $2 million of purses through 1987 and unspecified later purses, but no costs, expenses, losses, or income-tax deductions.

Q: What would happen if the association lacked a profit-making sales business?

A: Mahler said partnership proof would then be insufficient and the petitioner's individual fractional-interest sale would still be taxable.

Q: What reaudit was recommended?

A: The source only says to follow the absent January 30, 1990 original recommendation, so the intended adjustment cannot be verified from this PDF.

Citations and references

• California Revenue and Taxation Code sections 6006.5, 6014, and 6066; section 6019 appears only on the current live annotation
• California Sales and Use Tax Regulation 1595(a)(1)
• Sales and Use Tax Annotations 395.0480 (June 10, 1953) and 395.0520 (February 1, 1951)
• January 30, 1990 original recommendation, April 27 reconsideration request, June 15 and July 3 supplements, July 24 and September 4 staff replies, and July 29, 1987 audit-staff letter — referenced but not included
• Association, horse ownership and inventory, breeding and racing, sales, purse and expense, tax, audit and reaudit, Board action, and outcome records — described or implicated but not included

Verbatim support

From the official December 20, 1990 supplemental recommendation:

Since he failed to keep accurate records of his selling activities, however, the staff has been unable to verify whether the above list of sales by the association is complete.

A person who makes three or more sales may reasonably be presumed to be engaged in a selling business but it does not logically follow that a person who makes fewer sales is not in a selling business.

In my view, selling horses is an ordinary and necessary part of breeding horses for racing purposes, even assuming that no horses are ever bred specifically for purposes of sale.

Reaudit as recommended in the original Decision and Recommendation.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 395.0490
• Original supporting opinion: 395.0490 PDF

Original ruling text

STATE OF CALIFORNIA
BOARD OF EQUALIZATION

395.0490

APPEALS DIVISION

In the Matter of the Petition
for Redetermination Under the
Sales and Use Tax Law of:
C--- W---

Petitioner

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SUPPLEMENTAL
DECISION AND RECOMMENDATION

No. SN -- XX XXXXXX-010

The original Decision and Recommendation dated January 30, 1990, is incorporated herein by this reference. Petitioner has filed a timely request for reconsideration dated April 27, 1990, supplemented by letters dated June 15, and July 3, 1990. The staff has responded by letters dated July 24 and September 4, 1990. James E. Mahler, Hearing Officer. Petitioner’s Contention The sale of E--- was a nontaxable occasional sale by a partnership. Summary The horse E--- was owned by an association of petitioner, Ms. M--- B--- and Ms. N--C---. The association sold the horse on July 13, 19XX, for $1,500,000. The issue is whether this sale qualifies as an exempt occasional sale. In previous correspondence with the audit staff and the Hearing Officer, petitioner stated that six horses which had been raced by the association were sold from 1983 through 1988. Four of these horses (including E---) were sold privately, one was sold by auction and one was sold through a claiming race. Petitioner did not explicitly state whether any other horses had been sold prior to being raced. However, in a letter to the audit staff dated July 29, 1987, petitioner had alleged “the uncontroverted fact that prudent horse breeding and racing activities necessarily involve the ‘culling’ and sale of those animals or interests in animals unfit for racing.” Based in part on this allegation, I assumed that other horses had been sold without being raced.

C--- W--SN -- XX XXXXXX-010

-2-

December 20, 1990
395.0490

Petitioner now informs me that this assumption was incorrect, and that only the six horses previously named were sold from 1983 through 1988. Another horse was sold at auction in 1981, and one was sold through a claiming race in 1989, for a total of eight sales from 1979 through 1989. All eight horses had been raced by the association prior to sale. Thus, according to petitioner, the following is a complete list of all horses sold by the association from 1979 through 1989: Year

Horse

Type of Sale

Price

1981

L--- H---

Auction

1983

E---

Private

1,500,000

1985

D---

Private

30,000

1986

B--- B--- B---

Auction

35,000

1986

D--- D---

Claimed

50,000

1988

F---

Private

300,000

1988

B--- t--- B---

Private

225,000

1989

P--- C---

Claimed

70,000

$

70,·000

$2;280,000
Petitioner, Ms. B--- and Ms. C--- also previously filed a declaration stating that their association was formed in 1979 with an initial stock of three mares and “the foals produced by such mares, including ‘E---’ ....” Petitioner now states that the initial stock consisted only of three mares and E---, with no other foals. According to petitioner, the initial stock of four horses was increased by 21 foals over the years, and decreased by eight sales, one death and one horse given away, leaving a stock of 15 horses at the end of 1989. (Petitioner actually claims that 22 horses were “produced” by the association, and that the ending inventory was 17 horses, but the extra horses are not named on petitioner’s lists.) The staff notes that, in addition to the horses owned and sold by the association, petitioner also sold many other horses or fractional interests in horses during the audit period. Since he failed to keep accurate records of his selling activities, however, the staff has been unable to verify whether the above list of sales by the association is complete. Petitioner also states that the association earned “over $2,000,000” in racing purses from 1979 through 1987, and apparently additional purses in unspecified amounts during 1988 and 1989. Petitioner does not reveal the costs, expenses or losses incurred by the association over those years. He also does not reveal the amounts of any deductions or losses which he may have claimed for income tax purposes with respect to the association’s activities.

C--- W--SN -- XX XXXXXX-010

-3-

December 20, 1990
395.0490

An association of individuals may qualify as a partnership for tax purposes only if it is formed to engage in a “business” with the intent to earn a profit. Associations formed to engage in recreational activities or hobbies, without the requisite profit motive, are not engaged in business and thus do not qualify as partnerships for tax purposes. (See the discussion in the original Decision and Recommendation.) Petitioner has maintained throughout these proceedings that his association with Ms. B--and Ms. C--- was a partnership formed to earn a profit by breeding and racing horses, with no intent to engage in the business of selling horses. In the original Decision and Recommendation, I concluded that the association had the requisite profit motive and did qualify as a partnership, but my conclusion was not based entirely on the alleged intent to profit from racing. I also found that the association intended to profit from sales of horses. For the same reason, I concluded that the association was in the business of selling horses and was required to hold a seller’s permit. Petitioner requests reconsideration in light of the new allegations regarding the association’s selling activities. Analysis and Conclusions Insofar as is relevant to this case, Revenue and Taxation Code Section 6006.5 defines “occasional sale” to exclude sales of tangible personal property held or used in activities which require a seller’s permit Section 6066 of the Code requires every California “seller” to hold a seller’s permit. Section 6014 provides that “seller” includes every person “engaged in the business of selling” taxable property. Subdivision (a) (1) of Sales and Use Tax Regulation 1595 further provides: “Generally, a person who makes three or more sales for substantial amounts in a period of 12 months is required to hold a seller’s permit ....” Petitioner relies on the “three or more sales” rule in Regulation 1595. According to petitioner, the association made only eight sales of horses from its inception in 1979 through the end of 1989. Furthermore, petitioner alleges that four of those sales were at auction or through claiming races, and the Board’s staff has previously decided that such sales are not to be considered in determining whether a seller’s permit is required. (See Sales and Use Tax Annotations 395.0480 [6/10/53] and 395.0520 [2/1/51].) Thus, petitioner admits to only four “countable” sales during an 11-year period and concludes that this level of sales is not sufficient to require the holding of a seller’s permit. I would agree with petitioner’s analysis if the “three or more sales” rule were the exclusive test for determining whether a seller’s permit is required. It is not the exclusive test, however. Revenue and Taxation Code Section 6066 requires every person engaged in a selling business in California to have a seller’s permit, without regard to the number of sales. A person who makes three or more sales may reasonably be presumed to be engaged in a selling business but it does not logically follow that a person who makes fewer sales is not in a selling business. For example, a person in the business of manufacturing and selling boats is clearly engaged in a selling business, no matter how many or how few boats he is able to produce per year.

C--- W--SN -- XX XXXXXX-010

-4-

December 20, 1990
395.0490

In his July 29, 1987 letter to the audit staff, petitioner admitted that prudent horse breeding and racing activities necessarily involve the sale of horses found unfit for racing. I agree entirely with this admission. In my view, selling horses is an ordinary and necessary part of breeding horses for racing purposes, even assuming that no horses are ever bred specifically for purposes of sale. In this particular case, the selling prices in the eight admitted sales total $2,280,000, and of that amount, $2,055,000 was derived from the four “countable” sales. This equals or exceeds the income which the association allegedly received from racing purses. Under these circumstances, it borders on the frivolous to argue that selling horses was an unanticipated or inconsequential part of the association’s activities. For these reasons, I again conclude that the association was engaged in the business of selling horses. This activity required a seller’s permit and the sale of E--- therefore does not qualify as an exempt occasional sale. Because the association was engaged in the business of selling horses, I also continue to believe that the association had the requisite profit motive to qualify as a partnership for tax purposes. If I believed that selling horses was an unanticipated or inconsequential part of the association’s activities, however, I would find the evidence insufficient to show that the association was a partnership. In that event, the sale of petitioner’s fractional interest in Exploded would be a taxable sale by petitioner individually. Recommendation Reaudit as recommended in the original Decision and Recommendation.

______
James E. Mahler, Hearing Officer

12/20/90
Date