T.C. Memo. 1998-397
UNITED STATES TAX COURT
SIDNEY DISHAL AND ANNA DISHAL, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 687-97. Filed November 10, 1998.
Dan L. Shehi, for petitioners.
Jeremy L. McPherson, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
PARR, Judge: Respondent determined deficiencies in petitioners'
Federal income taxes and penalties as follows:
Accuracy-Related Penalties
Year Deficiency Sec. 6662 (a)
1992 $34,257 $6,851
1993 53,429 10,686
1994 53,432 10,686
All section references are to the Internal Revenue Code in
effect for the taxable years in issue, and all Rule references
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are to the Tax Court Rules of Practice and Procedure, unless
otherwise indicated. References to petitioner are to Sidney Dishal.
After a concession,1the issue for decision is: Whether
petitioners engaged in their horse breeding and horse racing
activities during the years in issue with the objective of making a
profit within the meaning of section 183. We hold they did.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The
stipulated facts and the accompanying exhibits are incorporated
herein by this reference. At the time the petition in this case was
filed, petitioners resided in Piedmont, California.
In 1945, petitioner went to work as a fabric salesman in
southern California and was extraordinarily successful in that
pursuit. In 1958, petitioner left his sales job and started a cotton
processing business which manufactured cotton padding used in
furniture and bedding. By his business and management skills,
petitioner made the business unusually profitable. Petitioner
partially retired from that business in 1990 and fully retired from
it by 1992.
Petitioners were engaged in thoroughbred horse breeding and
racing activities during the taxable years 1992, 1993, and 1994.
Petitioners began their horse activities in 1976 with one horse.
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Respondent conceded that petitioners were not liable for
the accuracy-related penalty pursuant to sec. 6662 (a) for each
of the years in issue.
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In each of the years 1988 through 1996, petitioners owned
between 20 and 30 horses. Nearly all of the horses which petitioners
owned between 1976 and 1996 were bred by petitioners. Petitioners
purchased two females and half interests in two stallions during
that 20-year period.
Petitioners have not raised stallions for stud purposes.
Instead, they send their brood mares to stud ranches. When their
brood mares produce male foals, petitioners may have the foals
gelded. Petitioners believe that gelding a horse may improve the
horse's racing performance and earnings. Brood mares may appreciate
in value when their offspring are successful in horse races.
On a regular basis, petitioner personally visits the
facilities where his horses are boarded and trained in order to
inspect the condition of the horses and to consult with the
caretakers and trainers. Including the time spent driving between
his home and the horse facilities, petitioner normally spends at
least 4 hours a day, 6 days a week, inspecting his horses and
conversing with their handlers. Petitioners usually attend races in
which their horses are participating. Petitioners send some of
their horses to Arizona to race. These horses are more capable of
racing successfully in Arizona than in California where the
competition is greater.
The only physical assets used by petitioners in their horse
breeding and horse racing activities are their horses. Petitioners
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did not use any real estate owned by them in their horse breeding
or horse racing activities in any of the tax years 1976 through
1996. Except for horses which are racing, in training to race, or
boarded at a stud ranch, all of petitioners' horses are boarded at
Rancho del Charro, a commercial horseboarding facility located
approximately 30 miles southeast of petitioners' residence. Elvin
Adams (Adams) is the ranch manager of Rancho del Charro.
The horses which are racing are trained and boarded at the
racetrack. There are two major racetracks near petitioners' home.
One of the tracks is approximately 10 miles northwest of
petitioners' residence, and the other is about 35 miles southwest
of petitioners' residence. The racetracks do not operate at the
same time of year. Jeff Bonde (Bonde) trains petitioners' horses at
the racetracks.
Several of petitioners' horses have won more than $100,000
over their racing careers. Petitioners have also been "breeding up"
their horses for higher stakes races by upgrading their brood mares
and the stallions with which they are bred. Petitioners currently
have two horses entered in Breeder's Cup races which have purses
over $1 million.
Several horses have had their racing careers, and; in some
instances their lives, ended by unforeseen and unfortunate
circumstances which were beyond petitioners' control. Petitioners'
horses, Super High Pockets1, Miss Super Natural, Glorious and Bold,
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Nipsey's Sundance, and Rusty's Lady all died in accidents at the
racetrack. The horse Miss Nipsey Ann died after producing a foal.
The horses Ann's Veil and Lexi's Dream developed tendon problems
which ended their racing careers. Ann's Bold Lady fractured her
knee and Super Clan developed a flesh-eating disease. The horses
Pauli's Dream Girl and Moonlight Glory also had their racing
careers diminished by injuries not specified in the record.
Petitioners did not have a written business plan for their
horse breeding or horse racing activities at any time between 1976
and 1996. It has been petitioners' policy, however, to race the
horses that are healthy, retire the females for breeding when they
can no longer compete successfully on the racetrack, and race the
males until they are claimed, sold, or given away. Petitioners have
donated horses to the University of California and to the Sonoma
County Horse Association.
Petitioners did not personally prepare written records of the
income they received from individual race horses or from individual
brood mares for the years 1989 through 1996. This was not
necessary, because the trainers of the race horses maintained
records of the horses' earnings. Professional organizations
maintained records of breeders and owners awards. Statistics for a
particular race horse, including lifetime earnings, the total
number of races entered and the number of wins, places, and shows
are available from professional horse organizations, newspapers,
and racing forms.
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Petitioners maintained complete records of their expenses
from their horse breeding and horse racing activities during the
years 1988 through 1996. Petitioners personally keep the books
and pay the bills in their horse breeding and horse racing
activities.
Neither petitioner nor Anna Dishal (Mrs. Dishal) has ever
been engaged in any farming, breeding, or racing business other
than the horse activities in which they have been engaged between
1976 and 1996. Neither petitioner nor Mrs. Dishal rides horses at
all.
Between 1989 and 1996, petitioners had income from purses
from horse races, sales of horses to third parties, from
breeders' awards, and from owners' awards.
OPINION
The Commissioner's determinations are presumed correct, and
the taxpayer bears the burden of proving otherwise. Rule 142(a);
Welch v. Helvering, 290 U.S. 111, 115 (1933).
Section 183 (a) generally limits the amount of expenses that a
taxpayer may deduct with respect to an activity "not engaged in for
profit" to the deductions provided in section 183(b). Section 183
(b) (1) provides that deductions which would be allowable without
regard to whether such activity is engaged in for profit are to be
allowed. Section 183(b)(2) further provides that deductions which
would be allowable only if such activity were engaged in for profit
are to be allowed, but only to the extent that, the gross income
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derived from such activity for the taxable year exceeds the
deductions allowable under section 183(b)(1). An activity is "not
engaged in for profit" if it is an activity other than one with
respect to which deductions are allowable for the taxable year
under section 162 or section 212 (1) or (2) . Sec. 183 (c) .
In determining whether an activity is engaged in for profit,
the Court of Appeals for the Ninth Circuit, to which this case is
appealable, has stated that the taxpayer must show that he or she
engaged in the activity with the primary purpose of making a
profit. Wolf v. Commissioner, 4 F.3d 709, 713 (9th Cir. 1993).
Petitioners bear the burden of proving the requisite intent. E.g.,
Golanty v. Commissioner, 72 T.C. 411, 426 (1979), affd. without
published opinion 647 F.2d 170 (9th Cir. 1981); Johnson v.
Commissioner, 59 T.C. 791, 813 (1973), affd. 495 F.2d 1079 (6th
Cir. 1974). Whether a taxpayer is engaged in an activity with the
requisite profit objective is determined from all the facts and
circumstances. E.g., Hulter v. Commissioner, 91 T.C. 371, 393
(1988); Taube v. Commissioner, 88 T.C. 464, 480 (1987); Golanty v.
Commissioner, su ra at 426; sec. 1.1832(a) and (b), Income Tax
Regs. More weight is given to objective facts than to the
taxpayer's mere statement of his or her intent: E.g., Dreicer v.
Commissioner, 78 T.C. 642, 645 (1982), affd. without opinion 702
F.2d 1205 (D.C. Cir. 1983); sec. 1.183-2(a), Income Tax Regs.
The regulations promulgated under section 183 list the
following nine factors that should normally be taken into account
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in determining whether an activity is engaged in for profit: (1)
The manner in which the taxpayer carried 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, which are earned, (8) the financial status of the
taxpayer, and (9) the extent to which elements of personal pleasure
or recreation are involved. Sec. 1.183-2(b), Income Tax Regs. The
list of factors in the regulations is not exclusive, and other
factors may be considered in determining whether. an activity is
engaged in for profit. These factors are not merely a counting
device where the number of factors for or against the taxpayer is
determinative, but rather all facts and circumstances must be taken
into account, and more weight may be given to some factors than to
others. Cf. Dunn v. Commissioner, 70 T.C. 715 (1978), affd. on
another issue 615 F.2d 578 (2d Cir. 1980). Not all factors are
applicable in every case, and no one factor is controlling.
Abramson v. Commissioner, 86 T.C. 360, 371 (1986); Allen v.
Commissioner, 72 T.C. 28, 34 (1979); sec. 1.183-2(b), Income Tax
Regs.
Respondent determined that during the years in issue
petitioners, were not engaged in horse breeding and horse racing
for profit within the meaning-of section 183. We disagree.
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Petitioners were very serious about their horse activities
and operated them in a businesslike manner. Petitioners maintained
extensive records and kept complete accounts of their expenses from
their horse activities for the years in issue. Bonde, petitioners'
horse trainer, testified that petitioner checked every piece of
paperwork involved with his horses, including medical charts and
veterinarian bills. Bonde further testified that petitioner expects
a great deal from a trainer, including providing a leading rider to
ride his horses.
In addition, petitioners had a business plan, which was to
earn money by breeding top horses to run in superior races. This
plan was evidenced by petitioner's actions and attempted changes to
improve profitability. Petitioner consulted with knowledgeable
individuals about horse breeding and began to "breed up" by
upgrading his brood mares and the stallions with which they were
bred. This plan has produced foals which have been performing
better at the racetrack. Based on the facts of this case, we find
that petitioners conducted their horse activities in a businesslike
manner, and this indicates a profit motive. Sec. 1.183-2(b)(1),
Income Tax Regs.
A taxpayer's expertise, research, and study of an activity,
as well as his consultation with experts, may be indicative of a
profit motive. Sec. 1.183-2(b)(2), Income Tax Regs. Petitioners
consulted Bonde as the trainer of their racehorses. Bonde has been
training horses for 25 years, at the time of trial had approximately 30
clients, and trains between 20 and 50 horses at one time. Adams, the
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ranch manager of Rancho del Charro, where petitioners board their
horses, supervised approximately 200 racehorses, of which 23 belonged to
petitioners. Prior to coming to Rancho del Charro in 1992, Adams worked
for 20 years for another horse breeder. Petitioner spent a substantial
amount of time consulting and conversing with both Bonde and Adams
regarding his horse activities. Petitioner's consultation with experts
indicates a profit motive.
Petitioner is retired from his cotton processing business and is
therefore able to devote a substantial amount of time to the horse
activities. Petitioner personally visits the facilities where his horses
are boarded and trained in order to inspect, the condition of the horses
and to consult with the caretakers and trainers. Including the time
spent driving between his home and the boarding facilities, petitioner
spends at least 4 hours a day, 6 days a week; inspecting his horses and
consulting with their trainers. Bonde, petitioners' horse. trainer,
testified "[Petitioner] is very active. He's there very regularly,
probably more than most of the clients I train for, actually. I don't
ever remember him missing a race, and he comes out and inspects his
horses at least five times a week." Adams, petitioners' ranch manager,
testified that petitioner spends much time with his horses and that
petitioner "examines all of his horses and feeds some of them, doctors
them, cleans water troughs, [and] picks up rocks." The substantial
amount of time and effort expended by petitioner in the horse
activities indicates a profit motive. Sec. 1.183-2(b)(3), Income
Tax Regs.
A record of substantial losses over several years may be
indicative of the absence of a profit motive. Sec. 1.1832(b)(6),
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Income Tax Regs. Respondent argues that petitioners' consistent
history of losses in the horse activities is persuasive evidence
that they did not expect to make a profit. The losses petitioners
sustained, however, were in part due to unforeseen and unfortunate
circumstances beyond their control which abruptly ended the racing
careers, and in some instances the lives, of several of their
horses. In addition, petitioners have abated their net losses from
the horse activities in recent years. Furthermore, petitioners are
capable of making up their losses from prior years since their
horses are now entered in high stakes races. We conclude that the
losses sustained are not an indication that the horse activities
were not engaged in for profit.
Occasional profits which are earned from an activity may
indicate a profit motive. Sec. 1.183-2(b)(7), Income Tax Regs. Several
of petitioners' horses have won more than $100,000 over their racing
careers. Furthermore, an opportunity to earn a substantial ultimate
profit in a speculative venture may be sufficient to indicate a profit
motive. Sec. 1.183-2(b)(7), Income Tax Regs. Petitioners have been
"breeding up" their
horses for higher stakes races. Petitioners currently have two horses
entered in Breeder's Cup races which have purses over $1 million. This
indicates a profit motive.
The presence of elements of personal pleasure or recreation in
carrying on an activity may indicate that the activity is not engaged in
for profit. Sec. 1.183-2(b)(9), income Tax Regs. On the basis of all the
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facts and circumstances, we find that personal pleasure is not a motive
in petitioners' horse activities.
After reviewing the entire record, we conclude that
petitioners engaged in their horse breeding and horse racing
activities with the primary purpose and dominant intent of making
profit within the meaning of section 183.
To reflect the foregoing,
Decision will be
entered for petitioners.