read the Tax Court opinion in this case, go to Prieto v.
Commissioner of Internal Revenue
Platintiffs Prieto engaged in a
horse activity that lost money and that the Commissioner determined was not
engaged in for profit. The Tax
Court upheld the decision of the Commissioner and in this opinion the Court of
Appeals upholds the decision of the Tax Court.
Victor and Marion Prieto engaged in a horse activity from 1991
to 2000 that involved buying horses to train and resell. The horse activity
sustained losses, and the Prietos deducted these losses from their income in
their individual tax returns each year. The Commissioner of Internal Revenue
sent the Prietos a Notice of Deficiency in 1999 notifying them that they were
liable for unpaid income taxes for tax years 1994 and 1995 because the horse
activity was not engaged in for profit, and therefore, losses from the activity
were not deductible for those years. The Prietos filed a petition in the tax
court challenging the Commissioner's determination. The Tax Court held a trial
and entered a final decision upholding the Commissioner's determination that the
horse activity was not engaged in for profit in tax years 1994 and 1995. The
Prietos appeal this decision. We have jurisdiction, 26 U.S.C. § 7482, and we
The issue of whether the Prietos engaged in the horse activity
with the primary intent of making a profit is a factual question that is
reviewed for clear error. Custom Chrome, Inc. v. Comm'r, 217 F.3d 1117, 1121
(9th Cir.2000). Under the clear error standard, this Court must uphold the tax
court's factual finding unless it is "left with the definite and firm
conviction that a mistake has been committed." Wolf v. Comm'r, 4 F.3d 709,
712 (9th Cir.1993) (citation omitted). Because the parties are familiar with the
facts, we only discuss those relevant to our analysis.
Expenses from a trade or business are not deductible unless
the activity is engaged in primarily for profit. See 26 U.S.C. § 183(a); Wolf,
4 F.3d at 713. The Treasury regulations promulgated under Section 183 of the
Internal Revenue Code indicate that, while the focus of the test for profit
motive is on the subjective intent of the taxpayer, the determination is
"made by reference to objective standards, taking into account all of the
facts and circumstances of each case." 26 C.F.R. § 1.183‑2(a). The
Treasury regulations identify nine non‑exclusive factors that "should
normally be taken into account" in analyzing a taxpayer's profit motive.
See 26 C.F.R. § 1.183‑2(b).
The Tax Court found that the Prietos did not engage in the
horse activity primarily for profit. This finding is not clearly erroneous. The
Tax Court opinion contains a couple of minor factual errors. However, even after
excluding them from the analysis, we conclude that the record still amply
supports the district court's finding that the horse activity was not engaged in
for profit. Furthermore, while the Tax Court did not expressly address each of
the nine factors listed under 26 C.F.R. § 1.183‑2(b) in its written
decision, the regulations do not require it to mechanically do so. We are not
"left with the definite and firm conviction that a mistake has been
committed." Wolf v. Comm'r, 4 F.3d at 712.
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