Internal Revenue Service
Revenue Ruling

TaxLinks.com   sm

 Rev. Rul. 76-70

1976-1 C.B. 225

Section 61
Section 1211
Section 1221
Section 1231

IRS Headnote

Race horse; holding period. A race horse owner may not offset the gain from the sale of a race horse that had been owned and raced for less than 24 months against a long-term capital loss resulting from the sale of common stock held for investment purposes.

Full Text

Rev. Rul. 76-70

Advice has been requested whether the loss on the sale of investment property may be used to offset the gain from the sale of a race horse under the circumstances described below. The taxpayer sustained a capital loss of 8x dollars on the sale of common stock held for investment purposes for more than six months. During the same tax year, the taxpayer also sold a race horse for a gain of 8x dollars. The taxpayer, an owner of race horses, had purchased the horse as a three-year old and had regularly raced it at public race tracks for a period of seven months.

Section 61(a) of the Internal Revenue Code of 1954 defines gross income as all income, from whatever source derived, except as otherwise provided by law.

Section 1221 of the Code defines the term "capital asset" as property held by the taxpayer (whether or not connected with the taxpayer's trade or business) but does not include, among other things, property used in a trade or business that is subject to an allowance for depreciation under section 167.

Section 1231(a) of the Code provides, in part, that if, during the taxable year, the recognized gains on sales or exchanges of property used in a trade or business, plus the recognized gains from the compulsory or involuntary conversion of property used in the trade or business and capital assets held for more than six months into other property or money, exceed the recognized losses from such sales, exchanges, and conversions, such gains and losses shall be considered as gains and losses from sale or exchanges of capital assets held for more than six months. However, in the case of cattle and horses section 1231(b)(3)(A) defines property used in a trade or business as cattle and horses, regardless of age, held by the taxpayer for draft breeding, dairy, or sporting purposes and held by the taxpayer for 24 months or more from the date of acquisition.

Section 1.1231-2(b)(1) of the Income Tax Regulations states that whether or not livestock is held by a taxpayer for draft, breeding, dairy, or sporting purposes depends upon all of the facts and circumstances in each case. Sec. 1.1231-2(c) of the regulations states that, except for rare and unusual circumstances, a horse will be considered as having been held for sporting purposes if it has actually been raced at a public race track.

Section 1211(b) of the Code provides, in general, that for a taxpayer other than a corporation, losses from the sales or exchanges of capital assets are allowed only to the extent of the gains from such sales or exchanges plus (if such losses exceed such gains) whichever of the following is less: (A) the taxable income for the taxable year, (B) $1,000, or (C) the sum of the excess of the net short-term capital loss over the net long-term capital gain, and one-half of the excess of the net long-term capital loss over the net short-term capital gain. Section 1222(4) defines the term "long-term" capital loss as loss from the sale or exchange of a capital asset held for more than six months, if and to the extent that such loss is taken into account in computing taxable income.

In this case since the horse was used in a trade or business and was subject to an allowance for depreciation under section 167 of the Code, it is not a capital asset under section 1221. In addition, since the horse was held by the taxpayer for less than 24 months, the gain on its sale does not qualify to be treated as a long-term capital gain under the special rule for sales or exchanges of property used in a trade or business provided by section 1231. Thus, the gain on the sale of the horse is ordinary income within the meaning of section 61(a).

The loss on the sale of the common stock is a long-term capital loss within the meaning of section 1222(4) of the Code, since it was held for investment purposes for a period in excess of six months. However, the deductibility of the loss is subject to the limitations of section 1211(b).

Accordingly, in computing taxable income, the taxpayer in the instant case may not offset the loss on the sale of the common stock against gain from the sale of the race horse. However, if the horse had been sold after having been held for sporting purposes and had been held for 24 or more months the gain on its sale would be combined with the loss on the sale of the common stock in determining the taxpayer's net capital gain or loss for the year.