Hillman v. Commissioner

T.C. Memo. 1999-255

UNITED STATES TAX COURT

BARRY S. AND YVONNE C. HILLMAN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 16506-97. Filed August 2, 1999.

Arnold O. Zacks, for petitioners.

John J. Boyle, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

GALE, Judge: Respondent determined the following

deficiencies and accuracy-related penalties with respect to

petitioners’ Federal income tax:

Penalty
Year Deficiency sec. 6662

1993 $8,471 $1,694
1994 7,366 1,473
 - 2 -

Unless otherwise noted, all section references are to the

Internal Revenue Code in effect for the years in issue. All Rule

references are to the Tax Court Rules of Practice and Procedure.

All dollar amounts are rounded to the nearest dollar.

The issues for decision are: (1) Whether petitioners’

activity relating to the breeding and showing of horses was an

activity engaged in for profit. We hold that it was not. (2)

Whether petitioners are entitled to business mileage deductions

over and above the amounts respondent has allowed. We hold that

they are not. (3) Whether petitioners are liable for accuracy-

related penalties under section 6662(a). We hold that they are.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. We

incorporate by this reference the stipulation of facts and

attached exhibits.

At the time of filing the petition, petitioners resided in

Lewis Center, Ohio. Petitioners filed joint tax returns for the

years in issue, which were prepared by Barry Adelman, C.P.A.

Horse-Related Activities

Petitioners were married in 1969 and have two children, Todd

and Denise. Denise was born in 1974, and she has received

training in showing horses since 1982, when she was 8 years old.

During the years in issue, petitioners lived in a residence

situated on 8.5 acres, on which was also located a garage, seven-
 - 3 -

stall barn, riding arena for horses, pasture land, and an acre of

trail and woods.

Petitioner Barry Hillman (Dr. Hillman) was 64 years old at

the time of trial and a medical doctor. During the years at

issue and continuing through the time of trial, Dr. Hillman

operated a medical practice in Columbus, Ohio, as a sole

practitioner with three employees. Petitioner Yvonne Hillman has

assisted Dr. Hillman in his medical practice as an office worker

since 1969. During the years in issue, Mrs. Hillman was Dr.

Hillman’s office manager and kept the books for his medical

practice. She was paid $3,600 in annual wages during 1993 and

1994 for which she was issued Forms W-2. Petitioners provided

Mr. Adelman with all original checks, deposit slips, and

financial records for Dr. Hillman’s medical practice. In 1993

and 1994, Dr. Hillman devoted between 45 and 50 hours per week to

the practice.

On their 1991, 1992, 1993, 1994, 1995, and 1996 joint

returns,1 petitioners reported the following income and expenses

from Dr. Hillman’s medical practice on Schedule C:

1
Petitioners have reserved a relevancy objection with
respect to post-1994 exhibits. Sec. 1.183-2(a), Income Tax
Regs., directs consideration of “all of the facts and
circumstances” in determining whether an activity is engaged in
for profit, and evidence from years subsequent to the years in
issue is relevant to the extent it may create inferences
regarding the existence of a profit motive in the earlier years.
See, e.g., Hoyle v. Commissioner, T.C. Memo. 1994-592; Smith v.
Commissioner, T.C. Memo. 1993-140. We therefore overrule
petitioners’ relevancy objection.
 - 4 -

Gross Total Net profit
Year income expenses or (loss)

1991 $347,239 $166,448 $180,791
1992 338,812 179,465 159,347
1993 361,316 179,467 181,849
1994 337,346 194,984 142,362
1995 433,447 194,278 239,169
1996 329,884 163,415 166,469

In 1993 and 1994, Dr. Hillman also reported on Schedule C

consulting fees in the amounts of $5,000 and $10,000,

respectively.

On their joint returns for the 1991, 1992, 1993, 1994, 1995,

and 1996 taxable years, petitioners reported an activity

described as “show horses” on Schedule C. Since 1991,

petitioners have reported the following income and expenses with

respect to their show horse activity:

Gross Total Net profit
Year income expenses or (loss)

1991 $0 $14,964 ($14,964)
1992 0 17,386 (17,386)
1993 0 19,383 (19,383)
1994 0 17,775 (17,775)
1995 150 17,222 (17,072)
1996 1,000 11,086 (10,086)

Total 1,150 97,816 (96,666)

The expenses that petitioners claimed with respect to their

show horse activity consisted of the following items and amounts:
 - 5 -

1991 1992 1993 1994 1995 1996

Advertising --- --- $85 $45 --- $25
Depreciation $1,440 $4,019 4,321 3,728 $4,235 3,154
Insurance 216 511 557 --- 557 576
Supplies 75 425 --- --- --- ---
Repairs --- --- --- --- 165 ---
Veterinarian 1,270 432 803 229 612 663
Horse shows 3,338 2,946 2,068 2,413 1,633 ---
Dues 116 480 415 175 210 455
Feed & bedding 3,139 2,281 4,225 3,050 3,932 4,556
Professional
training &
board 3,695 3,785 2,780 4,380 3,070 ---
Stable help 810 1,580 2,130 1,880 2,040 1,189
Blacksmith 865 --- --- --- 497 365
Farrier --- 927 1,105 896 --- ---
Equipment &
outfit --- --- 894 979 66 43
Sponsorship --- --- --- --- 205 30
Transfer fee --- --- --- --- --- 30

Dr. Hillman has been involved with horses for 40 years. He

has owned horses since 1982, when he purchased two Morgan horses,

Pal Joey and Lady Arrow. A Morgan is a very even-tempered breed

that is quite versatile, suitable for riding, jumping, or draft

purposes. Morgans live approximately 30 years.

In 1987 or 1988, Dr. Hillman was involved in a prior horse-

breeding activity, which was abandoned after 3 years because it

was unprofitable.

During the years 1991 through 1996, petitioners owned five

horses, Riskybiznis, Ben Hur, Chicardo, Ashley, and Pal Joey, but

only two of the horses were consistently claimed as part of

petitioners’ show horse activity during the period; namely,

Riskybiznis, claimed for every year, and Ben Hur, claimed for

every year starting in 1992 when petitioners acquired him.

Chicardo, although purchased in 1985 and sold on June 1, 1995,

was claimed only in 1994 and 1995. Ashley, acquired in 1984 and
 - 6 -

donated to a veterinary school in 1994, was claimed only in 1994.

Pal Joey was owned throughout the period but never claimed.

Petitioners took depreciation deductions with respect to the

horses claimed as part of their show horse activity.

For 1993 and 1994, the years in issue, petitioners made no

allocation of their claimed Schedule C expenses for feed and

bedding and stable help between the horses they claimed as part

of their show horse activity and the other horses that they

owned.

Petitioners purchased Riskybiznis, a stallion, in 1988 for

$7,200. The horse was gelded (neutered) in 1991 or 1992,

rendering him incapable of breeding. Petitioners claimed

Riskybiznis as part of their show horse activity in 1991, 1992,

1993, 1994, 1995, and 1996. Riskybiznis participated in the

following horse shows:

Name or Prize money
location Years earned Expenses

Gold Cup 1991/1992 Unknown $1,495
River Ridge 1991 Unknown 792
Silver Cup 1991/1992 Unknown 846
Penn-Ohio 1990/1991 Unknown 932
Jubilee 1990 Unknown 386

Totals Unknown 4,451

In 1996, petitioners “leased” Riskybiznis to a trainer, an

arrangement under which the trainer bore the costs of the horse’s

upkeep in exchange for the right to enter him in horse show
 - 7 -

competitions. Petitioners did not receive any cash or property

with respect to this arrangement.

Petitioners purchased Ben Hur, a stallion, in 1992 for

$12,000. Morgan stallions generally begin to breed at about 4

years of age and can breed until approximately 28 years of age.

Ben Hur has not produced offspring since petitioners purchased

him, although he did produce offspring prior to their ownership.

Petitioners claimed Ben Hur as part of their show horse activity

in 1992, 1993, 1994, 1995, and 1996. Ben Hur participated in the

following horse shows:
Name or Prize money
location Years earned Expenses

Gold Cup 1992/1994/1995 Unknown $862
River Ridge 1992/1994/1995 Unknown 792
Twin Rivers 1995 $35 525
Buckeye 1992/1994/1995 75 615
Ohio State Fair 1994 Unknown 266
KYOVA 1994 Unknown Unknown
Blue Ribbon Classic 1994/1995 Unknown 350
Delaware Cty Fair 1994 Unknown 182
Penn-Ohio 1992 15 408

Totals 125 4,000

Petitioners purchased Chicardo, a 3-year-old stallion, in

1985 for $1,500. Petitioners gelded Chicardo in 1991 or 1992

because they decided that he was not good enough to hold for

breeding. Petitioners claimed Chicardo as part of their show

horse activity for 1994 and 1995. Chicardo did not participate

in horse shows after 1990. Chicardo was ridden partly for

pleasure because he was not as valuable as Ben Hur or

Riskybiznis, and petitioners were planning to sell him as an
 - 8 -

easy-to-ride horse. Petitioners sold Chicardo on June 1, 1995,

for $1,800.

Petitioners purchased Ashley, a 2-year-old filly, in 1984

for $2,500. Petitioners claimed Ashley for their show horse

activity in 1994 only. Ashley participated in two horse shows in

1990, for which neither the prize money nor expenses are known.

Morgan mares generally begin to be bred at about 4 years of age

and can produce one foal a year. Ashley miscarried three foals

in 4 years. Ashley never produced a live foal, and had a history

of uterine infections. On October 5, 1994, petitioners donated

Ashley to Ohio State University, College of Veterinary Medicine.

Ashley had a uterine infection at the time of the donation. Dr.

Hillman executed a euthanasia authorization in connection with

the donation, which was required by Ohio State University for all

such donations. After digestive problems were discovered, Ashley

was euthanized on December 23, 1994.

On their 1994 return, petitioners claimed a deduction for a

noncash charitable contribution with respect to Ashley in the

amount of $4,800. Petitioners’ return reported that Ohio State

University determined Ashley’s fair market value. However, Ohio

State University does not provide appraisals for gifts of

property and did not do so in Ashley’s case.

None of petitioners’ horses participated in horse shows in

1993. Aside from the $125 earned by Ben Hur, petitioners did not
 - 9 -

know the amount of their horses’ winnings at any of the shows.

When petitioners’ horses were shown in a professional event, the

trainer who showed the horses would normally subtract the prize

money earned from the training bill. The total “known” expenses

for horse shows during the period 1991 through 1996 totaled

$8,451. Expenses for horse shows claimed on petitioners’ returns

for this period totaled $12,398.

From 1991 through 1994, Denise spent 5 to 6 hours every

other day grooming and exercising the horses that petitioners

included in their show horse activity. She was not compensated

for her services. Denise showed petitioners’ horses as an

amateur. Prize money was generally not awarded to amateurs in

the shows in which Denise participated; when awarded, it ranged

between $15 and $25.

Petitioners used college students as stable help. The

stable help would muck out the stalls and feed and care for the

horses. Petitioners paid some of the stable help, while others

worked in exchange for riding privileges. Dr. Hillman did not

know whether Forms 1099 or W-2 were issued to any of the stable

help.

Petitioners used six different trainers between 1991 and

1996, who worked with both Denise and the horses. These trainers

were hired to train the horses and to provide instruction to

Denise regarding how to show horses in competition.
 - 10 -

Petitioners maintained a separate bank account for all of

their horse-related expenditures. Dr. Hillman kept all bills and

invoices related to the show horse activity in an envelope and

would transfer the information every 2 to 4 weeks to a ledger

kept for this purpose. In 1993, Dr. Hillman spent no more than 3

hours per month on bookkeeping and management duties with respect

to his show horse activity.

Petitioners’ accountant, Mr. Adelman, did not have access to

any records for petitioners’ show horse activity. Dr. Hillman

instead provided Mr. Adelman with a yearend compilation of income

and expense figures for the activity for inclusion on their tax

returns.

Petitioners did not prepare or maintain a written business

plan regarding their show horse activity. Dr. Hillman discussed

petitioners’ show horse activity with their accountant, but these

discussions focused on the tax aspects of the activity.

Mileage Deduction

Respondent reduced petitioners’ allowable deductions for

business mileage that Dr. Hillman claimed with respect to his

medical practice from $6,823 to $3,636 for the 1993 taxable year

and from $8,128 to $4,308 for the 1994 taxable year.

Dr. Hillman maintained office hours 4 to 5 days a week,

performed surgery at five hospitals 4 to 5 days per week, and

made hospital rounds 5 to 6 days per week. The distance from his
 - 11 -

residence to his medical office was 12 miles one way. Dr.

Hillman estimated his business mileage by subtracting 24 miles on

4 days of each week (representing one round trip between his

residence and medical office for each day he maintained office

hours) from the total change in miles on his odometer for the

year. In this manner, Dr. Hillman estimated business mileage of

24,368 miles and 28,027 miles for 1993 and 1994, respectively,

which he provided to Mr. Adelman. In respondent’s determination,

these mileage figures were reduced to 12,987 and 14,854,

respectively.

OPINION

I. Horse-Related Activities

The first issue to be resolved is whether petitioners’

activities involving the breeding and showing of horses

constituted an activity not engaged in for profit.2 As a general

rule, individuals are not allowed to deduct losses attributable

to an activity “not engaged in for profit”, except to the extent

2
The parties have treated all of petitioners’ horse-related
activities as a single activity for purposes of sec. 183, see
sec. 1.183-1(d)(1), Income Tax Regs., which we refer to as the
show horse activity, consistent with petitioners’ usage on their
returns.
 - 12 -

of any gross income generated by the activity. See sec. 183(a)

and (b)(2).3

Respondent asserts that petitioners were not engaged in the

show horse activity for profit, which would result in a

disallowance of their claimed losses to the extent that they

exceeded gross income generated by the activity. Petitioners

argue that they were engaged in show horse activity for profit

and that accordingly their losses are fully deductible.4

Section 183(c) defines an activity not engaged in for profit

as an “activity other than one with respect to which deductions

are allowable for the taxable year under section 162 or under

paragraph (1) or (2) of section 212.” Deductions are allowable

under section 162 or section 212 with respect to activities for

which the taxpayer has the requisite section 183 profit motive.

See Holmes v. Commissioner, ___ F.3d ___, ___ (6th Cir., July 1,

1999), revg. and remanding T.C. Memo. 1997-401; Hayden v.

Commissioner, 889 F.2d 1548, 1552 (6th Cir. 1989) (“The threshold

inquiry in determining whether an activity is a trade or business

or is carried on for the production of income is whether the

activity is engaged in for the primary purpose and dominant hope

3
Deductions that would be allowable without regard to
whether or not such activity is engaged in for profit are not
restricted by this rule. See sec. 183(b)(1).
4
Petitioners have not argued that any of the losses claimed
are nevertheless deductible by virtue of sec. 183(b)(1).
 - 13 -

and intent of realizing a profit.”), affg. T.C. Memo. 1988-310.

“Profit” for purposes of section 183(a) means economic profit,

independent of tax savings. See Hayden v. Commissioner, supra at

1552. “An activity is engaged in for profit if the taxpayer

entertained an actual and honest, even though unreasonable or

unrealistic, profit objective in engaging in the activity.”

Campbell v. Commissioner, 868 F.2d 833, 836 (6th Cir. 1989),

affg. in part, revg. in part and remanding T.C. Memo. 1986-569;

see also Keanini v. Commissioner, 94 T.C. 41, 46 (1990); Dreicer

v. Commissioner, 78 T.C. 642, 644-645 (1982), affd. without

opinion 702 F.2d 1205 (D.C. Cir. 1983); sec. 1.183-2(a), Income

Tax Regs.

It is therefore the taxpayer’s intent to earn a profit that

determines the deductibility of an activity’s losses under

section 183, see Dreicer v. Commissioner, supra at 645; Bessenyey

v. Commissioner, 45 T.C. 261, 274 (1965), affd. 379 F.2d 252 (2d

Cir. 1967), and such intent is a question of fact, see Hayden v.

Commissioner, supra at 1552. Intent is to be determined by

examining all the facts and circumstances, giving greater weight

to objective facts than to the taxpayer’s statement of intent.

See Siegel v. Commissioner, 78 T.C. 659, 699 (1982); Engdahl v.

Commissioner, 72 T.C. 659, 666 (1979); sec. 1.183-2(a) and (b),

Income Tax Regs. The taxpayer bears the burden of proving the

requisite profit objective. See Rule 142(a); Hayden v.
 - 14 -

Commissioner, supra at 1552; Dreicer v. Commissioner, supra at

646; Golanty v. Commissioner, 72 T.C. 411, 426 (1979), affd.

without published opinion 647 F.2d 170 (9th Cir. 1981).

Section 1.183-2(b), Income Tax Regs., sets forth a

nonexclusive list of factors to be considered in determining

whether an activity is engaged in for profit. See Campbell v.

Commissioner, supra at 836. These factors are: (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) whether elements of personal pleasure or

recreation are involved. No single factor is controlling.

Rather, the facts and circumstances of the case taken as whole

are determinative. See Abramson v. Commissioner, 86 T.C. 360,

371 (1986); sec. 1.183-2(b), Income Tax Regs.

Petitioners’ proof with respect to their profit motive

consists in large part of Dr. Hillman’s uncorroborated self-

serving testimony. Because Dr. Hillman signed an income tax

return, under penalties of perjury, which reported that a donated
 - 15 -

horse had been valued by the recipient educational institution,

when such was not the case,5 his credibility is subject to some

doubt, and we give his testimony less weight as a result.

Manner in Which Activity Conducted

The fact that a taxpayer carries on an activity in a

businesslike manner and maintains complete and accurate books and

records may indicate that the activity was engaged in for profit.

See sec. 1.183-2(b)(1), Income Tax Regs. The record is replete

with instances where petitioners did not conduct the show horse

activity in a businesslike manner. Petitioners had no written

business plan. Asked to describe his business plan at trial, Dr.

Hillman testified that it was to concentrate on breeding so that

he would eventually build up a small herd. Yet petitioners had

two of their three stallions gelded, and, so far as the record

indicates, the third stallion--Ben Hur, who had produced several

offspring prior to acquisition by petitioners--was bred only with

Ashley, petitioners’ mare with a history of foaling failures.

Ashley was petitioners’ sole mare, and she suffered three

miscarriages before petitioners donated her to a veterinary

school in 1994. Nevertheless, there is no evidence that

petitioners ever sought a replacement mare, either during

5
A representative of the institution testified at trial,
without contradiction or challenge, that the institution never
provided appraisals of donated property and did not do so in the
case of Dr. Hillman’s donation.
 - 16 -

Ashley’s difficulties or after her disposition. In sum,

petitioners claimed a business plan focused on breeding, but in

the 6 years they have engaged in this activity, they have not

obtained a single foal or breeding fee.

Other unbusinesslike conduct abounds. Petitioners did not

allocate the costs of feed, bedding, and stable help between

horses claimed as part of the show horse activity and those not

claimed. Similarly, they treated all amounts paid to trainers as

a business cost, although the testimony revealed that these

trainers in part provided instruction to petitioners’ daughter

regarding how to show horses. Dr. Hillman could not recall

whether, and there is no evidence that, they issued Forms W-2 or

1099 to the show horse activity’s workers; by contrast, such

formalities were observed in the conduct of Dr. Hillman’s medical

practice. Likewise, petitioners’ accountant was provided the

complete records of the medical practice; he received only year-

end compilations with respect to the show horse activity.

The evidence demonstrates that the records maintained by

petitioners with respect to the activity were neither accurate

nor complete. Their intermingling of the expenses allocable to

nonbusiness horses and their daughter’s instruction with

ostensible business expenses has already been noted. With a few

exceptions, prize money was not recorded or reported.

Petitioners claimed expenses for horse shows totaling $12,398 on
 - 17 -

their returns for the period 1991 through 1996; they ultimately

stipulated that the “known” amounts expended for horse shows for

the period totaled $8,451, which indicates an overstatement

exceeding 46 percent. Moreover, to the extent records were

maintained, there is no evidence that they were utilized to

improve the performance of a losing operation. Accordingly, we

discount them as a factor. See Golanty v. Commissioner, supra at

430; Bessenyey v. Commissioner, 45 T.C. at 274; Sullivan v.

Commissioner, T.C. Memo. 1998-367.

A change in operating methods or abandonment of unprofitable

methods in a manner consistent with an intent to improve

profitability may indicate a profit motive. See sec. 1.183-

2(b)(1), Income Tax Regs. However, in the instant case, there is

no convincing evidence that petitioners made modifications in

their activity to improve profitability. Petitioners’ failure to

consider a replacement for their only brood mare has been

discussed. Similarly, there is no convincing evidence that Dr.

Hillman sought to improve on the record of breeding fees earned

by his remaining stallions; i.e., those he did not have gelded.

Dr. Hillman cited his “leasing” arrangement for Riskybiznis under

which a trainer took on the costs of the horse’s care, but any

savings here--which were not documented--were almost certainly

small in relation to petitioners’ annual losses.
 - 18 -

Overall, the numerous unbusinesslike practices engaged in by

petitioners provide strong evidence of a lack of profit motive.

Expertise of Petitioners and Their Advisers

Preparation for an activity by extensive study or

consultation with experts may indicate a profit motive where the

taxpayer conducts the activity in accordance with such study or

advice. See sec. 1.183-2(b)(2), Income Tax Regs. The record

demonstrates that Dr. Hillman was involved with horses for 40

years and had become quite knowledgeable in the breeding of

horses. Petitioners have also spent considerable sums to employ

professional trainers for their horses (although as noted some of

the trainers’ time was spent instructing petitioners’ daughter).

Dr. Hillman testified that he consulted with others concerning

the purchase of horses and delegated actual purchasing to them.

However, the mere fact that Dr. Hillman had skill in the

breeding of horses and petitioners hired various experts does not

prove that petitioners engaged in their show horse activity for

profit. See Glenn v. Commissioner, T.C. Memo. 1995-399, affd.

without published opinion 103 F.3d 129 (6th Cir. 1996).

Expertise with respect to the breeding and showing of horses is

to be distinguished from expertise in the economics of these

undertakings. See, e.g., Burger v. Commissioner, 809 F.2d 355,

359 (7th Cir. 1987), affg. T.C. Memo. 1985-523; Sullivan v.

Commissioner, supra; Glenn v. Commissioner, supra; see also
 - 19 -

Golanty v. Commissioner, 72 T.C. at 432. A taxpayer’s failure to

obtain expertise in the economics of horse-related activities

indicates a lack of profit motive. See Burger v. Commissioner,

supra at 359. In this case, petitioners sought no professional

advice on the economic aspects of the breeding and showing of

horses. Dr. Hillman’s discussions with his accountant focused on

the tax aspects of petitioners’ show horse activity.

Time and Effort Expended

The fact that the taxpayer devotes much of his or her

personal time and effort to carrying on an activity, particularly

if the activity does not have substantial recreational aspects,

may indicate a profit motive. See sec. 1.183-2(b)(3), Income Tax

Regs. Dr. Hillman testified that he spent “something over 500

hours” attending horse shows in 1993, and that the bookkeeping

tasks associated with the show horse activity took approximately

2 to 3 hours per month. Dr. Hillman’s testimony regarding time

spent at horse shows is self-serving, uncorroborated, and not

credible. The parties have stipulated that none of petitioners’

horses participated in horse shows in 1993. Even putting aside

this inconsistency, Dr. Hillman’s estimate of “over 500 hours”

appears scripted to meet respondent’s alternative argument that

the show horse activity was a section 469 “passive activity”,
 - 20 -

rather than recollected as a good faith estimate.6 Moreover, to

the extent Dr. Hillman attended horse shows and otherwise oversaw

the show horse activities, we believe the recreational aspects of

these activities are manifest. All or most of the onerous labor

required in maintaining the horses--e.g., mucking stalls,

feeding, etc.--was hired out and deducted as a business expense.

We do not believe that the time and the effort which

petitioners have shown they dedicated to the show horse activity,

particularly given its recreational aspects, support an inference

that a profit motive existed.

Expectation That Assets May Appreciate

An expectation that assets used in the activity will

appreciate in value may indicate a profit objective. See sec.

1.183-2(b)(4), Income Tax Regs. A profit motive may be inferred

where there are no operating profits, so long as the appreciation

in value of the activity’s assets exceeds the operating expenses.

See id. The appreciation in value must be sufficient, however,

to recoup the accumulated losses of prior years. See Golanty v.

Commissioner, supra at 427-428; Bessenyey v. Commissioner, 45

6
Treasury regulations provide that an individual taxpayer
will be deemed to have “materially participated” in an activity
(which precludes a finding that the activity was a “passive
activity” for purposes of sec. 469) if the taxpayer participates
in the activity for more than 500 hours during the taxable year.
See sec. 1.469-5T(a)(1), Temporary Income Tax Regs., 53 Fed. Reg.
5725 (Feb. 25, 1988).
 - 21 -

T.C. at 274; Sullivan v. Commissioner, T.C. Memo. 1998-367; Dodge

v. Commissioner, T.C. Memo. 1998-89; Taras v. Commissioner, T.C.

Memo. 1997-553.

The only evidence in the record of petitioners’ horses’

appreciation consists of Dr. Hillman’s self-serving,

uncorroborated estimates. No expert or other reliable evidence

of value was introduced. Given that Dr. Hillman reported on his

1994 return that Ashley, a mare purchased 10 years earlier for

$2,500 that suffered chronic uterine infections and had been

donated to a veterinary school with a euthanasia authorization,

had a fair market value of $4,800, we do not believe his

estimates are entitled to significant weight.7 Even if we

accepted Dr. Hillman’s value estimates, the appreciation

experienced as of 1993--approximately $33,000, using his

estimates--falls significantly short of petitioners’ accumulated

losses through 1993, which exceeded $51,000. Losses in excess of

$17,000 occurred in each of the two succeeding years.

Petitioners have failed to show that the appreciation in value of

their assets creates any inference of profit motive.

7
In addition, Dr. Hillman’s asking price for Chicardo was
$3,500, but the horse was ultimately sold for $1,800.
 - 22 -

Past Success in Similar or Dissimilar Activities

A taxpayer’s past success in similar or dissimilar

activities is relevant in determining profit motive. See sec.

1.183-2(b)(5), Income Tax Regs. Dr. Hillman concedes that a

previous effort at horse breeding was unsuccessful. Dr. Hillman

did operate his medical practice successfully. While success in

a dissimilar activity might weigh in petitioners’ favor, given

the substantial time that Dr. Hillman devoted to his medical

practice, it is not clear that he spent significant time on the

show horse activity. Accordingly, this factor is neutral. Cf.

Surridge v. Commissioner, T.C. Memo. 1998-304.

The Activity’s History of Income and Losses

An activity’s history of income or loss may reflect whether

the taxpayer has a profit motive. See sec. 1.183-2(b)(6), Income

Tax Regs. Unless explained by customary business risks or

unforeseen or fortuitous circumstances beyond the taxpayer’s

control, a record of continuous losses beyond the period

customarily required to obtain profitability may indicate that

the activity is not engaged in for profit. See id. A record of

substantial losses over many years and the improbability of

achieving a profitable operation are important factors bearing on

a determination of profit motive. See Golanty v. Commissioner,

supra at 426; Bessenyey v. Commissioner, 45 T.C. at 274.
 - 23 -

Petitioners’ show horse activity lost substantial sums every

year for 6 years, aggregating at nearly $100,000. Apart from

their somewhat vague business plan to “not start out large”,

petitioners have not claimed any specific startup period wherein

losses are customary. Petitioners do assert that they

experienced unforeseen adverse circumstances in the poor health

and foaling difficulties encountered with Ashley. While Ashley’s

problems may not have been foreseeable, we think they fall well

short of accounting for petitioners’ losses. Ashley was acquired

as a 2-year-old in 1984 and was old enough for breeding in 1986.

Dr. Hillman testified that the horse miscarried three times in 4

years. But petitioners owned her for 10 years; they claimed her

as part of their show horse activity in only 1 year. If

petitioners had been engaged in a profit-seeking breeding

activity, we believe they would have acted more promptly to

address the problem of a nonperforming brood mare. Moreover,

there is no evidence that they have acquired a brood mare during

2 years subsequent to the years in issue. We are left both with

the impression that the record does not contain a full accounting

of petitioners’ experience with Ashley, and the conviction that

any losses occasioned by Ashley’s unforeseen problems do not

satisfactorily explain the history of losses in this case.

Petitioners’ failure since 1994 either to acquire a new brood

mare or to obtain any breeding fees from their stallions, and
 - 24 -

their failure even to track their horse show winnings, suggests a

certain indifference to the bottom line, and little probability

that their operations will become profitable. Petitioners’

history of losses, their inability to account for them, and their

bleak prospects all suggest a lack of profit motive.

Amount of Occasional Profits

The amount of occasional profits, if large in relation to

losses incurred or the taxpayer’s investment, may indicate a

profit motive. See sec. 1.183-2(b)(7), Income Tax Regs.

In this case, petitioners have never earned a profit from

their show horse activity, and the evidence suggests that any

future profits are unlikely.

Taxpayer’s Financial Status

Substantial income from sources other than the activity,

particularly if the losses from the activity generate substantial

tax benefits, may indicate that the activity is not engaged in

for profit, especially if there are personal or recreational

elements involved. See sec. 1.183-2(b)(8), Income Tax Regs.

Dr. Hillman’s earnings from his medical practice were

$181,849 in 1993 and $142,362 in 1994 and never less than

$142,362 annually from 1991 through 1996. Dr. Hillman’s medical

practice income allowed petitioners to sustain the losses from

their show horse activity. Deducting these losses significantly

reduced the after-tax cost of such activities to petitioners.
 - 25 -

Cf. Golanty v. Commissioner, 72 T.C. at 429; Sullivan v.

Commissioner, T.C. Memo. 1998-367. When combined with the

recreational elements present for Dr. Hillman and Denise, as well

as petitioners’ tendency to treat personal expenses for Denise’s

equine instruction and the care of “nonbusiness” horses as

business expenses, we believe the after-tax economics of

petitioners’ show horse activity support an inference that the

activity was not engaged in for profit.

Personal Pleasure or Recreation

The existence of recreational elements in an activity may

indicate that the activity is not engaged in for profit; on the

other hand, where an activity lacks any appeal other than profit,

a profit motive may be indicated. See sec. 1.183-2(b)(9), Income

Tax Regs.

The record supports a finding that petitioners’ recreational

objectives were a significant component of petitioners’ show

horse activity. Dr. Hillman has been involved with horses for 40

years. Furthermore, Denise has been riding, showing, and caring

for horses since she was 8 years old and enjoyed riding and

grooming the horses included in petitioners’ show horse activity.

As previously noted, most of the onerous tasks of their horses’

care were performed by hired help, the expenses of which were

deducted.
 - 26 -

Conclusion

Based on the foregoing, we conclude that petitioners have

failed to show error in respondent’s determination that their

show horse activities in 1993 and 1994 were “not engaged in for

profit” within the meaning of section 183(a).8

II. Mileage Deductions

The second issue is whether petitioners are entitled to

automobile mileage deductions in excess of the amounts determined

by respondent. In 1993 and 1994, Dr. Hillman deducted automobile

mileage expenses for his medical practice in the respective

amounts of $6,823 and $8,128 based on 24,368 miles at 28 cents

per mile in 1993 and 28,027 miles at 29 cents per mile in 1994.

Respondent determined that Dr. Hillman’s allowable mileage

expense deduction is limited to $3,636 (or 12,987 miles) and

$4,308 (or 14,854 miles) for 1993 and 1994, respectively, on the

grounds that petitioners failed to show that any greater amounts

were for an ordinary and necessary business expense or were

expended for the purpose designated.9

8
Accordingly, we do not reach respondent’s alternative
contention that such activities constitute a “passive activity”
within the meaning of sec. 469.
9
Respondent makes no claim that these deductions are
limited by virtue of sec. 274(d). Because we conclude that
petitioners have failed to prove error in respondent’s
determination under sec. 162(a), we need not address the
application of sec. 274(d) in this case.
 - 27 -

Deductions are a matter of legislative grace, and

petitioners have the burden of proving their entitlement to them.

See, e.g., Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S.

79, 84 (1992); Deputy v. Du Pont, 308 U.S. 488, 493 (1940); New

Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). Section

162(a)(2) allows a deduction for ordinary and necessary

transportation expenses made in the pursuit of a trade or

business paid or incurred during the taxable year, which may

include the cost of operating a passenger automobile to the

extent that it is used in a trade or business. See Rev. Proc.

93-51, 1993-2 C.B. 593. Taxpayers, however, must maintain

records sufficient to substantiate deductions claimed. See

Hradesky v. Commissioner, 65 T.C. 87, 89-90 (1975), affd. per

curiam 540 F.2d 821 (5th Cir. 1976); sec. 1.6001-1(a), Income Tax

Regs. A taxpayer’s cost of commuting between his residence and

his place of business or employment is a nondeductible personal

expense, while the costs associated with travel between work

assignments are deductible. See Heuer v. Commissioner, 32 T.C.

947 (1959), affd. per curiam 283 F.2d 865 (5th Cir. 1960); secs.

1.162-2(e), 1.262-1(b)(5), Income Tax Regs. Petitioners have not

contended that Dr. Hillman’s residence served as an office;

accordingly, trips between his residence and any work site are

nondeductible commuting expenses. See Sheldon v. Commissioner,

50 T.C. 24, 27 (1968).
 - 28 -

The amounts claimed on petitioners’ returns for automobile

business mileage were computed using the standard mileage rate

for the years in issue. See Rev. Proc. 93-51, 1993-2 C.B. 593;

Rev. Proc. 92-104, 1992-2 C.B. 583. Although these revenue

procedures permit taxpayers to use a per-mile estimate of

automobile expenses in lieu of documenting actual expenses,

taxpayers must still prove the actual business miles driven

during the year. See Power v. Commissioner, T.C. Memo. 1990-583.

Dr. Hillman testified that he provided estimates of his annual

business mileage to his accountant by taking the change in the

miles on his odometer for the year, and subtracting an amount

equal to 24 miles per day (i.e., one round trip from his

residence to his medical office) for each of the 4 days per week

that he held office hours. Dr. Hillman did not maintain any

mileage logs or similar documentation of his business use of an

automobile and was unaware at the time of trial of the total

mileage he drove during the years in issue.10

There are a number of problems with petitioners’ attempt to

prove additional business mileage. First, Dr. Hillman’s

testimony reveals that by counting only 4 days per week as

10
Dr. Hillman’s testimony also did not establish that he
utilized a single vehicle exclusively for transportation in
connection with his medical duties, although this position may be
implicit in his testimony. Because we find petitioners’ proof of
additional business miles unavailing for other reasons, we need
not pursue this particular infirmity.
 - 29 -

involving commuting expense, he clearly underestimated the amount

of nondeductible commuting mileage. Dr. Hillman elsewhere

testified that he held office hours and performed operations at

hospitals 4 to 5 days per week and made hospital rounds 5 to 6

days a week. Thus, on the additional 1 to 2 days per week that

he made hospital rounds without holding office hours, he still

had nondeductible commuting expenses in connection with the trip

from his residence to the hospital, see Sheldon v. Commissioner,

supra at 27, which have not been accounted for in his estimation

methods.

Further, the record does not reveal what the distances were

between Dr. Hillman’s residence and the hospitals where he made

rounds. Dr. Hillman testified that the distance between his

residence and “the hospital” was about 12 miles, but according to

his other testimony there were five hospitals at which he

operated. Thus, there is no basis upon which we might estimate

the additional commuting mileage.

Finally, we find Dr. Hillman’s estimates improbable.11 Even

if we reduce Dr. Hillman’s total business miles claimed by an

additional 2 days per week of 24 commuting miles per day (or

2,492 miles per year), the result is that Dr. Hillman is

11
As noted previously, the incorrect representations
regarding a horse’s valuation on petitioners’ 1994 return, among
other inconsistencies, cast doubt on Dr. Hillman’s testimony, and
we therefore give it less weight in this context as well.
 - 30 -

effectively claiming that he drove at least approximately 70 and

82 business miles per day on average in 1993 and 1994,

respectively.12 According to Dr. Hillman’s testimony, his

residence, medical offices, and the five hospitals at which he

worked were all located in the Columbus, Ohio, area. There is no

evidence of the distance between Dr. Hillman’s office and the

hospitals, between the hospitals themselves, or between Dr.

Hillman’s residence and four of the hospitals. Without such

evidence there is no corroboration for Dr. Hillman’s testimony,

and we are not required to accept such self-serving testimony.

On this record, petitioners have failed to prove that the

mileage amounts allowable in computing the section 162(a)

deduction with respect to Dr. Hillman’s medical practice are any

greater than the amounts determined by respondent. See Russell

v. Commissioner, T.C. Memo. 1989-326; Joint Implant Surgeons,

Inc. v. Commissioner, T.C. Memo. 1988-558.

12
Without accounting for holidays or vacations, a 6-day
work week, as claimed by Dr. Hillman, generally results in 312
work days per year.
Dr. Hillman claimed 24,368 business miles in 1993.
Subtracting the additional 2 days per week of commuting miles--
namely, 2,492 miles annually--leaves 21,876 business miles over
312 days, or 70.1 business miles per day on average in 1993.
Dr. Hillman claimed 28,027 business miles in 1994.
Subtracting an additional 2,492 commuting miles leaves 25,535
business miles over 312 days, or 81.8 business miles per day on
average in 1994.
If one assumes that Dr. Hillman took any holidays or
vacation days during the year, the average number of business
miles per work day goes higher.
 - 31 -

III. Accuracy-Related Penalty Under Sec. 6662

Respondent determined that an accuracy-related penalty under

section 6662 applies to the entire underpayment13 in both the

1993 and 1994 taxable years, based on negligence or disregard of

rules or regulations. See sec. 6662(a) and (b)(1). Negligence

for this purpose includes any failure to make a reasonable

attempt to comply with the provisions of the Internal Revenue

Code, and disregard includes any careless, reckless, or

intentional disregard of rules or regulations. See sec. 6662(c);

sec. 1.6662-3(b), Income Tax Regs. “Negligence” has been further

defined as “a lack of due care or a failure to do what a

reasonable person would do under the circumstances.” Leuhsler v.

Commissioner, 963 F.2d 907, 910 (6th Cir. 1992), affg. T.C. Memo.

1991-179; see also Neely v. Commissioner, 85 T.C. 934, 947

(1985). Petitioners have the burden of proving error in

respondent’s determination that these penalties apply. See Rule

142(a); Leuhsler v. Commissioner, supra at 910. The accuracy-

related penalty under section 6662(a) does not apply, however, to

any portion of an underpayment if it is shown that there was

reasonable cause for such portion and that the taxpayer acted in

good faith. See sec. 6664(c)(1). Reliance on professional

13
For purposes of the instant case, the “underpayment” is
the same as the “deficiency” in each year. Compare sec. 6664(a)
with sec. 6211(a).
 - 32 -

advice may constitute reasonable cause for this purpose. See

sec. 1.6664-4(b)(1), Income Tax Regs.

Petitioners have failed to show error in respondent’s

negligence determination; the evidence amply supports a finding

of negligence. Petitioners’ fundamental grounds for claiming a

profit motive--that they expected to produce a small herd through

breeding--is illogical in light of the fact that they never

produced a foal or breeding fee during the years at issue or

thereafter. We believe that the obvious recreational benefits

and the substantial losses that sheltered petitioners’ other

income combined to create a situation which should have seemed

“too good to be true” to a reasonable and prudent person, within

the meaning of section 1.6662-3(b)(1)(ii), Income Tax Regs. See

Smith v. Commissioner, T.C. Memo. 1997-503, affd. without

published opinion ___ F.3d ___ (9th Cir., Apr. 28, 1999). In

addition, petitioners failed to allocate costs of feed and

bedding and stable help between horses used in their show horse

business and those conceded to be used for personal purposes

only, and instead treated all such costs as business expenses.

Similarly, petitioners treated the cost of their daughter’s

equine instruction as if it were a business expense. This

indiscriminate deducting of obvious personal expenditures as

business expenses demonstrates a lack of due care and a failure

to make a “reasonable” attempt to comply with the provisions of
 - 33 -

the Internal Revenue Code. Cf. Westbrook v. Commissioner, 68

F.3d 868, 880-881 (5th Cir. 1995), affg. per curiam T.C. Memo.

1993-634. Other aspects of their recordkeeping for the show

horse activity were careless, as evidenced by their failure to

record or report their horses’ winnings, and their excess claims

of horse show expenses in both years, including a claim of horse

show expenses in 1993 despite a stipulation that none of their

horses competed in shows that year. A failure to maintain

adequate books and records is evidence of negligence. See sec.

1.6662-3(b)(1), Income Tax Regs.

Petitioners contend that they are not liable for the

accuracy-related penalty under section 6662(a) for either of the

years in issue because they relied on the advice of their

accountant. A taxpayer may demonstrate reasonable cause if he

can show that he relied in good faith on a qualified adviser

after full disclosure of all necessary and relevant information.

See Jackson v. Commissioner, 86 T.C. 492, 539-540 (1986), affd.

864 F.2d 1521 (10th Cir. 1989); Paula Constr. Co. v.

Commissioner, 58 T.C. 1055, 1061 (1972), affd. without published

opinion 474 F.2d 1345 (5th Cir. 1973); sec. 1.6664-4(b)(1) and

(c)(1)(i), Income Tax Regs.

In this case, petitioners have failed to establish that they

fully disclosed all necessary and relevant information to their

accountant, Mr. Adelman. The record in this regard contains only
 - 34 -

Dr. Hillman’s self-serving and conclusory testimony that he

discussed his show horse activity, and the applicable

regulations, with Mr. Adelman. Mr. Adelman was not called to

testify. The record demonstrates that the only records of the

show horse activity provided to Mr. Adelman were yearend

compilations or “bottom-line” figures, assembled by Dr. Hillman.

Had Mr. Adelman been provided more complete disclosure, for

example, he presumably would have advised Dr. Hillman of the

necessity of allocating the expenses of the horses’ upkeep

between those horses used in the business and those not so used.

One would also expect a fully informed professional to advise of

the necessity of recording and reporting the horses’ winnings, if

a business were in fact being conducted. We conclude that

petitioners have failed to show that they made sufficient

disclosure to their accountant to invoke the reasonable cause

exception to the accuracy-related penalties.14

Petitioners have not addressed the portion of the

underpayment attributable to the disallowance of certain of Dr.

Hillman’s business mileage deductions. Accordingly, respondent’s

14
Petitioners also claim on brief that they had
“substantial authority” for the positions taken on their returns.
There is no “substantial authority” exception to the imposition
of the accuracy-related penalty for negligence. See Wheeler v.
Commissioner, T.C. Memo. 1999-56.
 - 35 -

determinations with respect to the accuracy-related penalties

under section 6662(a) are sustained in their entirety.

We have considered all of petitioners’ arguments and, to the

extent not addressed above, have found them to be without merit.

To reflect the foregoing,

Decision will be entered

for respondent.