Petitioner, a corporate marketing
employee, incurred substantial losses in the horse business.
The Commissioner determined that the activity was not engaged in for
profit. In this opinion, the Tax
Court agrees with that decision.
deficiencies in petitioner's Federal income taxes and an addition to tax as
Year Deficiency Addition to Tax Sec. 6651(a)(1)
‑‑‑‑ ‑‑‑‑‑‑‑‑‑‑ ‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑
1997 $19,780 ‑‑
The issue for decision is whether petitioner is entitled to
deduct claimed losses reported on Schedule F, Profit or Loss from Farming, from
his horse activity for the years in issue. Petitioner presented neither evidence
nor argument concerning the addition to tax and is thus deemed to have conceded
Unless otherwise indicated, all section references are to the
Internal Revenue Code in effect for the years in issue, and all Rule references
are to the Tax Court Rules of Practice and Procedure.
FINDINGS OF FACT
Some of the facts have been stipulated, and the stipulated
facts are incorporated in our findings by this reference. Petitioner resided in
La Jolla, California, at the time he filed the petition in this case.
Petitioner received an undergraduate degree in marketing from
San Diego State University. He received a master of business administration with
a specialization in finance from National University. Petitioner has been
employed with several public and privately held companies since he was 21 with
positions ranging from sales representative to chief operating officer and
executive vice president. Petitioner spent 3 years of active duty in the Navy
and 23 years in the Naval Reserves, retiring at the rank of captain. Petitioner
has taught courses in marketing, sales management, business planning, small
business management, computer science, aeronautics, and accounting at various
colleges in southern California.
Petitioner was married prior to the years in issue and was
granted a Judgment of Dissolution of the marriage on August 17, 1992.
Petitioner's daughter, Sarah A. Bunney, was born on March 13, 1983.
During 1997, petitioner was employed by Time Warner
Entertainment and Video Home Sales Services, Inc. Petitioner's wages as reported
on his Forms W‑2, Wage and Tax Statement, totaled $99,962 in 1997. During
1998, petitioner was employed by Winnebago Software Co. (Winnebago) and Verio‑San
Diego, Inc. In 1998, petitioner traveled to northern California and Sun Valley,
Idaho, as part of his employment. Petitioner's wages as reported on his Forms
W‑2 totaled $34,739 in 1998. During 1999, petitioner was employed by
Winnebago and Pulse Engineering, Inc. As a part of his employment in 1999,
petitioner traveled to Singapore; China; Germany; Toronto, Canada; Boston,
Massachusetts; New York City, New York; and Eden Prairie, Minnesota.
Petitioner's wages as reported on his Forms W‑2 totaled $122,385 in 1999.
Petitioner began riding horses when he was 8 years old and has
always had an interest in horses. In 1990, he developed an interest in
"reining" horses, a type of western riding sport. Petitioner engaged
in the horse activity under the name M & S Performance Horses (M & S).
At the outset, petitioner neither obtained a business license nor filed a
fictitious name statement for M & S. During the years in issue, petitioner
operated M & S to breed, train, sell, and compete horses.
Petitioner researched the horse activity by going to reining
competitions, reading books and publications about the industry, and attending
clinics. In 1992, petitioner purchased his first breeding stallion, an American
paint horse, Bandits Lucky Doc. On November 23, 1992, petitioner prepared a
business plan for M & S, including an income statement and an estimate of
revenues and expenses.
Over the next few years, M & S changed direction due to a
change in the breeding rules for reining horses. As a result of this change,
petitioner began to purchase high‑quality broodmares to breed with horses
in southern California. Petitioner did not update his business plan to reflect
the change in the direction of the business. Petitioner sold Bandits Lucky Doc
Petitioner employed Manuel Campos (Campos) as a trainer for 6
years. Campos's business, Manuel Campos Performance Horses (Campos Horses), had
about 15 to 20 full‑time clients, with 3 of them engaging in breeding or
training as a business. When petitioner first became a client of Campos Horses,
he owned a breeding stallion and was breeding paint horses. Petitioner also took
riding lessons from Campos.
From January 1, 1995, through December 31, 1996, petitioner
was a member of the National Reining Horse Association (Reining Association).
Petitioner let his membership expire at the end of 1996. Petitioner was not
listed with the Reining Association as a trainer or breeder during the years in
issue. In March 2001, petitioner signed a declaration with the Reining
Association stating that he had not trained or assisted in training for
remuneration for the prior 5 years. Neither petitioner nor M & S was listed
with the Reining Association as having collected any lifetime earnings or points
from Reining Association approved shows. Petitioner's daughter, however, has
ridden horses in reining competitions in the youth categories. Petitioner's
daughter earned $4.81 in lifetime earnings and 18.50 points in Reining
Association approved shows as of December 31, 2002.
Petitioner maintained his business records using the computer
software program known as Quicken. Petitioner created with the Quicken program a
list of expenses for the years in issue. Petitioner did not maintain records of
any bills from veterinarians for services provided to M & S. Campos Horses
occasionally would provide bills and invoices for services performed, as
Petitioner did not receive or maintain bills of sale or
purchase records for all of the horses he owned. Petitioner did not receive or
maintain registration documents or transfer reports to establish the number and
identities of the horses he owned during the years in issue. Petitioner did not
consistently provide a bill of sale to customers who purchased his horses. The
retained copies of bills of sale showed either petitioner or petitioner and his
daughter as the sellers.
Petitioner kept advertising and promotional materials on his
computer. Petitioner prepared flyers and business cards on his computer
advertising Bandits Lucky Doc for breeding. Of the advertisements that
petitioner kept, none of them listed M & S or petitioner as the seller or
breeder of the horse advertised. In 2000, petitioner used the name "Three
Colts West Performance Horses" to promote a horse on a flyer. In 2001,
petitioner placed three advertisements in Performance Horse Magazine under his
name without reference to M & S.
Petitioner distributed business cards at competitions and
shows in order to advertise Bandits Lucky Doc. M & S did not have stationery
with its own name or logo. Instead, almost all correspondence was prepared under
petitioner's name or under petitioner's and petitioner's daughter's names.
Several letters were prepared under the heading of "Olympic Equine
Enterprises" or "Three Colts West Performance Horses". Petitioner
did not retain correspondence sent to M & S from potential clients or other
Until 1996, petitioner insured Bandits Lucky Doc. Petitioner
did not insure any of the horses that he owned during the years in issue. In
1996, petitioner prepared an inventory of some of the equipment used by M &
S in order to have the equipment covered under his homeowner's insurance policy.
Some of the equipment was stored at an offsite trainer's facility.
Petitioner did not have a dedicated telephone line for M &
S and instead used a pager, a cellular telephone, and his home telephone line.
Petitioner occasionally used his employers' telephone numbers for M & S. In
2000, petitioner opened a dedicated bank account for M & S with Union Bank
of California. On March 23, 2000, petitioner filed a fictitious business name
statement for M & S.
On May 15, 1996, in connection with custody and child support
proceedings, petitioner signed a declaration that was filed with the Superior
Court of California for the County of San Diego. In the declaration, petitioner
claimed that the losses incurred by M & S should be considered to reduce his
income for purposes of calculating child support payments. Petitioner made a
similar claim regarding losses from a consulting business, The Graham Group
(Graham). Petitioner estimated $2,050 in monthly losses from M & S and $525
in monthly losses from Graham.
On October 21, 1999, petitioner filed an Income and Expense
Declaration with the Superior Court. Petitioner estimated monthly expenses of
$3,482 for his daughter's "pet supplies and associated expenses". On
June 16, 2000, petitioner filed a second Income and Expense Declaration
estimating monthly expenses of $3,588 for pet supplies for "daughter's
horses". On May 15, 2001, petitioner filed a Responsive Declaration to
Order to Show Cause or Notice of Motion with the Superior Court. Petitioner
stated in the declaration that he paid 100 percent of the expenses related to
his daughter's three horses, totaling over $1,600 per month.
Petitioner filed Forms 1040, U.S. Individual Income Tax
Return, for 1997 through 1999. Petitioner listed his occupation on the returns
as "Manager: Equine Business". Attached to each of the Forms 1040 was
a Schedule F reporting a net farm loss each year for petitioner's horse
activity. Petitioner described his horse activity on the Schedules F as
"equine breeding, training, and sales".
From 1993 through 2000, petitioner reported the following
gross receipts and losses with respect to the horse‑related activity:
Year Gross Income Expenses (Loss)
‑‑‑‑‑‑‑‑ ‑‑‑‑‑‑‑‑‑‑‑‑ ‑‑‑‑‑‑‑‑ ‑‑‑‑‑‑‑‑‑‑
1993 ($11,000) $14,380 ($25,380)
1994 (10,350) 40,797 (51,147)
1995 (2,125) 104,738 (106,863)
1996 ‑0‑ 80,332 (80,332)
1997 (9,000) 82,065 (91,065)
1998 1,000 62,972 (61,972)
1999 2,900 94,474 (91,574)
2000 13,700 106,550 (92,850)
‑‑‑‑‑‑‑‑‑‑‑‑ ‑‑‑‑‑‑‑‑ ‑‑‑‑‑‑‑‑‑‑
Total ($14,875) $586,308 ($601,183)
Petitioner has never realized a profit from the horse activity.
Petitioner filed Form 4868, Application for Automatic
Extension of Time to File U.S. Individual Income Tax Return, for 1998, extending
the due date for the return until August 15, 1999. Petitioner did not request a
further extension of time to file. On August 26, 1999, petitioner filed his
return for 1998.
At the outset, we note that petitioner's briefs did not comply
with Rule 151(e) in that his proposed findings of fact recite testimony from
trial and rely on documents that were not admitted into evidence. Thus his
briefs are unreliable and unhelpful. The factual assertions not based on
evidence will be disregarded.
Respondent determined that petitioner's horse activity was not
an activity engaged in for profit within the meaning of section 183. Under
section 183(a), if an activity is not engaged in for profit, no deductions
attributable to the activity shall be allowed except as provided in section
183(b). Section 183(b)(1) allows only those deductions that are not dependent
upon a profit objective, such as taxes. Section 183(b)(2) allows the deductions
that would be allowable if the activity were engaged in for profit, but only to
the extent that gross income attributable to the activity exceeds the deductions
permitted by section 183(b)(1). An "activity not engaged in for
profit" is defined in section 183(c) as "any activity other than one
with respect to which deductions are allowable for the taxable year under
section 162 or under paragraph (1) or (2) or section 212."
Under section 183(d), in the case of an activity consisting in
major part of the breeding, training, showing, or racing of horses, if the gross
income derived from the activity exceeds the deductions for any 2 of 7
consecutive taxable years, then the activity shall be presumed to be engaged in
for profit unless the Commissioner establishes to the contrary. See
Golanty v. Commissioner, 72 T.C. 411, 425 (1979), affd. without published
opinion 647 F.2d 170 (9th Cir.1981). Because M & S has operated at a loss
since it began in 1992, the presumption does not apply in this case.
The Court of Appeals for the Ninth Circuit, to which an appeal
in this case would lie, has held that, for a deduction to be allowed under
section 162 or section 212(1) or (2), a taxpayer must establish that he engaged
in the activity with the primary, predominant, or principal purpose and intent
of realizing an economic profit independent of tax savings. Wolf v. Commissioner, 4 F.3d 709, 713 (9th Cir.1993), affg. T.C.
Memo.1991‑212; Indep. Elec. Supply,
Inc. v. Commissioner, 781 F.2d 724, 726 (9th Cir.1986), affg.
Lahr v. Commissioner, T.C. Memo.1984‑472; see
Prieto v. Commissioner, T.C. Memo.2001‑266, affd. 59 Fed. Appx. 999
(9th Cir.2003). The taxpayer's expectation need not be a reasonable one, but the
profit objective must be bona fide.
Golanty v. Commissioner, supra at 425‑426; sec. 1.183‑2(a),
Income Tax Regs. In determining whether the requisite intention to make a profit
exists, greater weight is to be given to the objective facts than to the
taxpayer's self‑serving characterization of his intent.
Indep. Elec. Supply, Inc. v. Commissioner, supra at 726; sec.
1.183‑2(a), Income Tax Regs.
Section 1.183‑2(b), Income Tax Regs., sets forth a
nonexclusive list of factors to be considered in determining whether the
taxpayer has the requisite profit objective. The factors are: (1) The manner in
which the taxpayer carries on the activity; (2) the expertise of the taxpayer or
his advisers; (3) the time and effort expended by the taxpayer in carrying on
the activity; (4) the expectation that assets used in the activity may
appreciate in value; (5) the success of the taxpayer in carrying on other
similar or dissimilar activities; (6) the taxpayer's history of income or loss
with respect to the activity; (7) the amount of occasional profits, if any, that
are earned; (8) the financial status of the taxpayer; and (9) elements of
personal pleasure or recreation. These factors are not intended to be exclusive,
and no one factor or majority of the factors need be considered determinative.
Golanty v. Commissioner, supra at 426‑427; sec. 1.183‑2(b),
Income Tax Regs. In this case, the predominant factors weighing against
petitioner are whether petitioner carried on the activity in a businesslike
manner, petitioner's history of losses, and the elements of personal pleasure
involved. None of the other factors supports his position.
Petitioner argues that he conducted his horse activity in a
businesslike manner. Maintaining complete and accurate books and records,
conducting the activity in a manner substantially similar to comparable
businesses that are profitable, and making changes in operations to adopt new
techniques or abandon unprofitable methods are factors that may indicate that a
taxpayer conducted the activity for profit.
Engdahl v. Commissioner, 72 T.C. 659, 666‑667 (1979); sec.
1.183‑2(b)(1), Income Tax Regs.
Petitioner did not maintain accurate and complete books and
records for M & S. Petitioner testified that it was not his practice to use
bills of sale or purchase agreements when horses changed ownership. The
documents that petitioner provided as bills of sale were
computer‑generated, and petitioner admitted to printing them from his
computer hard drive in preparation for trial. Petitioner testified that it was
not the general practice in the industry to provide bills of sale and that the
important documents were the registration document and transfer report. At the
time of trial, however, petitioner was unable to provide registration documents
for any horse that he owned, and he did not have copies of transfer reports for
any horses that he purchased or sold during the years in issue. Petitioner did
not maintain records of the breeding of any mares.
The materials that petitioner provided as evidence of his
advertising were also computer‑generated and were printed in preparation
for trial. Petitioner provided no evidence of original advertisements used by M
& S. Petitioner had no record of correspondence from other persons. The
correspondence he provided was also computer‑generated and was prepared
Petitioner had no records of bills or invoices for any
expenses he incurred on behalf of M & S. Petitioner provided a list of
expenses that was prepared using the Quicken software program. The expense
report was prepared and printed solely for trial.
Petitioner did not maintain records for the purpose of
decreasing expenses or increasing profits. Almost all of petitioner's evidence
regarding his record keeping was printed from his computer in preparation for
trial. Petitioner provided no credible evidence of conducting a business of
horse breeding, and there is no reliable evidence that he was breeding any
horses after selling Bandits Lucky Doc.
A taxpayer's history of income or loss with respect to an
activity may indicate the presence or absence of a profit objective. See
Golanty v. Commissioner, 72 T.C. at 426;
Kuberski v. Commissioner, T.C. Memo.2002‑200; sec.
1.183‑2(b)(6), Income Tax Regs. The magnitude of the activity's losses in
comparison with its revenues may be an indication that the taxpayer did not have
a profit objective. McKeever v.
Commissioner, T.C. Memo.2000‑288. A continuous series of losses during
the startup stage will not necessarily be deemed indicative that the activity
was not engaged in for profit. Sec. 1.183‑ 2(b)(6), Income Tax Regs. The
cumulative loss, however, should not be of such a magnitude that an overall
profit on the entire operation could not possibly be achieved. See
Bessenyey v. Commissioner, 45 T.C. 261, 274 (1965), affd. 379 F.2d 252 (2d
From 1992 until 2000, M & S had cumulative losses totaling
$601,183. Petitioner claims that it takes time to reach a profitable level in a
horse breeding business and that M & S was still in the startup phase.
Petitioner has not, however, provided any evidence or plan that he could ever
recoup his prior losses or make the business profitable. Petitioner did not
provide any evidence that he changed his business plan in order to make the
business profitable. The magnitude of M & S's continuing losses in
comparison to the revenues M & S received negates a profit objective.
Elements of personal pleasure or recreation from an activity
may indicate that the activity was not engaged in for profit. Sec.
1.183‑2(b)(9), Income Tax Regs. Petitioner stated in documents filed with
the Superior Court that he supported his daughter's interest through the years
by providing for the costs of maintaining her horses and paying for riding
competitions. Petitioner has provided no credible evidence that he owned any
horses other than those used by his daughter for recreational purposes.
Based on the preponderance of the evidence, and particularly
the large, recurring, and unlikely to be recouped losses, we conclude that
petitioner's horse activity was not engaged in for profit.
To reflect the foregoing,
will be entered for respondent.
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