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Jewish World ReviewApril 10, 2001 / 17 Nissan, 5761

Tax Tales by A. J. Cook

A.J. Cook
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Consumer Reports

IRS drills hole in dentist's claim -- DENTIST Terry Zdun believes an apple a day keeps the dentist away.

The Internal Revenue Service believes operating a hobby like a business keeps their agents away.

In the clash between the two, the IRS tried to take a bite out of his bank account.

Zdun, who practices what he calls holistic dentistry, says organic apples contribute to oral health. He had these apples, grown in the family orchard, available for patients at his Grants Pass and Medford, Ore., offices.

Sometimes they paid for the apples; sometimes he gave them away. He admitted, however, that only 10 to 15 percent of the patients took them, despite his theory that patients would eat them if they were readily available.

He and his wife, Carol, live on 151 acres, five of which have trees producing about 40,000 pounds of apples a year. They don't hire workers to help with the harvest, working the orchard themselves.

Even so, the trees haven't produced a profit throughout their 14 years of operation. For two of the years the IRS examined, it wasn't even close. The orchard averaged gross receipts of $1,300 and expenses of $45,000.

The IRS refused to allow the couple to offset dental profits with orchard losses, saying they were not integrated activities. An example of an integrated activity would be dog breeding, grooming and kennel operations. They qualify because they are similar and commonly performed together. A loss from any one could be used to reduce taxable profit of the other two.

Zdun still insisted he couldn't practice holistic dentistry without his organic apples.

The court disagreed. The judge observed that the trees produce apples only from August to December, and Zdun, with no storage facilities, still manages to practice all year. The court ruled the two activities are not integrated, so the orchard losses will not offset the dentistry income.

If not integrated, can orchard losses still be used like losses from a separate business? No, said the judge, it isn't a business. It wasn't operated to make a profit.

One of the principal indications it's no more than a hobby is that even though it continued to have losses, the dentist made no changes to make it profitable; that's what the owner of a for profit business would do.

The judge was moved by Zdun's description of how the trees, planted right up to the house, fill the air with fragrance. He was also moved to say the Zduns intended to live in a house nestled among flowering trees, not for the profit from them but for the pleasure of this idyllic setting.

The moral: A tree may grow in Oregon, but it doesn't bear a tax deduction.

A.J. Cook, lawyer and accountant, is counsel with the law firm of Pietrangelo Cook PLC. Comment by clicking here.


03/29/01: How to avoid late tax payment penalties
03/23/01: To give is divine, but you'd better have a good appraisal
03/06/01: Home improvements as medical deductions?
02/14/01: Distinguishing income from receipts confuses
02/07/01: IRS sank its teeth into hunters' expenses
01/30/01: 'Match game' could mean big bucks for IRS
01/22/00: Getting the address right

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