Cramer v. Commissioner

T.C. Memo. 2000-229

UNITED STATES TAX COURT

RICHARD E. CRAMER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 8605-99. Filed July 31, 2000.

Richard E. Cramer, pro se.

Fred E. Green, Jr., for respondent.

MEMORANDUM OPINION

COUVILLION, Special Trial Judge: Respondent determined a

deficiency of $9,366 in Federal income tax and an accuracy-

related penalty of $437.20 under section 6662(a) with respect to

petitioner's 1996 tax year.1

The issues for decision are: (1) Whether petitioner's show

1
Unless otherwise indicated, section references are to
the Internal Revenue Code in effect for the year at issue.
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horse activity was an activity not engaged in for profit under

section 183, and (2) whether petitioner is liable for the

accuracy-related penalty under section 6662(a). If the Court

holds that the show horse activity was an activity engaged in for

profit, respondent alternatively claims that the expenses

incurred in the activity have not been substantiated.2

Some of the facts were stipulated. Those facts, with the

annexed exhibits, are so found and are incorporated herewith. At

the time the petition was filed, petitioner's legal residence was

Las Vegas, Nevada.3

Petitioner was employed full time during 1996 by Toyota

West, a local automobile dealer at Las Vegas, Nevada. Petitioner

operated or managed a marketing program for Toyota West that

involved the use of independent contractors who referred or

2
In the notice of deficiency, respondent determined that
petitioner realized gambling income of $7,052 in excess of the
$10,373 gambling income reported on petitioner's 1996 Federal
income tax return. At trial, petitioner conceded the $7,052 in
additional income but claimed additional losses from gambling for
that amount as an itemized deduction. Respondent conceded that
claim at trial.
3
Petitioner was married during 1996 and filed a joint
Federal income tax return with his wife, Irene Cramer. The
notice of deficiency was issued jointly to petitioner and his
wife; however, Mrs. Cramer did not petition this Court. Counsel
for respondent advised the Court at trial that the deficiency and
the sec. 6662(a) penalty had been assessed against Mrs. Cramer,
but an appropriate abatement would be made to the assessment
against her to the extent that any issues in this case are
decided in favor of petitioner.
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solicited potential automobile customers. These independent

contractors were paid a fee or a commission if a referred

individual purchased a vehicle from Toyota West. Petitioner did

not earn commissions from this program. He was paid a salary by

Toyota West.4 Sometime in early 1997, an undescribed financial

irregularity developed or was discovered in the program

petitioner administered, and he was terminated by Toyota West.

All of his records, including some personal records, were

confiscated and never returned to him. Petitioner thereafter

became a newspaper distributor.

During 1995, petitioner began breeding paint horses. These

horses are used for show purposes. Petitioner was a member of

the American Paint Horse Association. Petitioner had no

expertise in raising horses except that he was raised on a farm

and had some experience in breaking horses. Petitioner purchased

his first horse in October 1995 and later acquired other horses.

In 1996, the year at issue, petitioner had five horses, one of

which was a stud and four were brood mares. The horses were

located on a farm away from his home. Petitioner paid $120 per

month for boarding each horse. The owner of the stable also

trained horses, and the fee for that was $400 per month per

4
Petitioner and his wife reported wages and salary
income of $126,399 on their 1996 Federal income tax return, of
which $99,450 represented petitioner's wages from Toyota West.
 - 4 -

horse. Petitioner also utilized the training services of an

individual at Dallas, Texas.

According to petitioner, the income to be expected from

paint horses was from breeding. There were no monetary awards to

be had from participating in shows except that favorable ratings

for a stud enhanced the breeding fees that could be charged.

Petitioner presented no evidence to establish what success or

achievements he attained from the participation of his horses in

shows.

Petitioner realized no gross income from his horse activity

in either 1995 or 1996. The record does not show what expenses

petitioner incurred during 1995. On his 1996 joint return,

petitioner, on Schedule C, Profit or Loss From Business, claimed

expenses totaling $23,280 and a net loss for that amount, all

from the horse activity. For 1997, petitioner reported on

Schedule C a net profit of $829.5 In early 1998, petitioner

terminated the activity after his creditors foreclosed on the

horses. Petitioner, at that time, was unemployed and was unable

to continue financing the activity.

5
Petitioner's 1997 Federal income tax return was not
offered into evidence, nor were any books and records offered for
that year. Counsel for respondent stated he had obtained a
computer printout of the return, and petitioner reported, for
1997, gross receipts of $17,500, expenses of $16,671, and a net
profit of $829. Petitioner did not address the sources or the
nature of the gross receipts.
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Petitioner contends that he maintained books and records of

his activity; however, those records were kept at Toyota West,

his employer, and when his job there was terminated, the records

were confiscated and never returned. Those records, however,

would not have included any bank records because petitioner

maintained no bank accounts. He dealt only in cash. He testified

that he never had a bank account. All of his salary checks were

cashed, and all of his bills were paid in cash, including those

of the horse activity.

Section 183(a) provides generally that, if an activity is

not engaged in for profit, no deduction attributable to such

activity shall be allowed. Section 183(c) defines an activity

not engaged in for profit 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) of section 212."

This case is appealable to the Ninth Circuit Court of Appeals.

Within the Ninth Circuit, the standard for determining whether an

activity is engaged in for profit under section 183 is whether

the primary purpose of the activity was for profit. See Warden

v. Commissioner, T.C. Memo. 1995-176, affd. without published

opinion 111 F.3d 139 (9th Cir. 1997). While a reasonable

expectation of profit is not required, the taxpayer's profit

objective must be bona fide. See Hulter v. Commissioner, 91 T.C.

371 (1988). Whether a taxpayer's primary purpose in engaging in
 - 6 -

an activity was primarily for profit is a question of fact to be

resolved from all relevant facts and circumstances. See id. at

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

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

burden of proving such objective is on the taxpayer. See Rule

142(a); see Welch v. Helvering, 290 U.S. 111 (1933). In

resolving this factual question, greater weight is given to

objective facts than to the taxpayer's after-the-fact statements

of intent. See Thomas v. Commissioner, 84 T.C. 1244, 1269

(1985), affd. 792 F.2d 1256 (4th Cir. 1986); Siegel v.

Commissioner, 78 T.C. 659, 699 (1982); sec. 1.183-2(a), Income

Tax Regs.

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

nonexclusive list of nine objective factors with respect to the

determination of whether an activity is engaged in for profit.

These 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 in carrying on the

activity; (4) the expectation that the 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

history of income or losses with respect to the activity; (7) the

amount of occasional profits earned, if any; (8) the financial

status of the taxpayer; and (9) the elements of personal pleasure
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or recreation involved. 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, 720

(1978), affd. 615 F.2d 578 (2d Cir. 1980). Not all factors are

applicable in every case, and no one factor is controlling. See

Abramson v. Commissioner, 86 T.C. 360, 371 (1986); sec. 1.183-

2(b), Income Tax Regs. Further, the determination of a

taxpayer's profit motive is made on a yearly basis. See

Commissioner v. Sunnen, 333 U.S. 591, 598 (1948).

On this record, the Court is satisfied that petitioner's

activity was not carried on primarily for profit. It is fair to

conclude, among other things, that the activity was not conducted

in a businesslike manner. Although the Court is satisfied that

petitioner was deeply interested in the activity, his motivation

appears to have been primarily his love for horses. Petitioner

had no formal or informal business plan and did not show that he

sought the advice of experts on how to conduct the activity on a

profitable basis. He failed to present evidence to show that he

spent a significant amount of time on the activity as he was

employed on a full time basis during 1996. There is no

indication in the record that petitioner undertook this activity

for any purposes other than his love for horses. Petitioner has
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not satisfied the Court that he had a good faith primary

objective of making a profit from his activity during 1996. See

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

opinion 702 F.2d 1205 (D.C. Cir. 1983). The Court concludes that

petitioner's activity was not engaged in primarily for profit.

Having so concluded, the Court finds it unnecessary to consider

respondent's alternative determination that petitioner's expenses

related to the activity were not substantiated. Respondent,

therefore, is sustained on this issue.

Section 6662(a) provides that, if that section is applicable

to any portion of an underpayment in taxes, there shall be added

to the tax an amount equal to 20 percent of the portion of the

underpayment to which section 6662 applies. Under section

6664(c), no penalty shall be imposed under section 6662(a) with

respect to any portion of an underpayment if it is shown that

there was a reasonable cause and that the taxpayer acted in good

faith with respect to such portion of the underpayment.

Section 6662(b)(1) provides that section 6662 shall apply to

any underpayment attributable to negligence or disregard of rules

or regulations. Negligence is defined as lack of due care or

failure to do what a reasonable and ordinarily prudent person

would do under like circumstances. See Neely v. Commissioner, 85

T.C. 934 (1985). The term "negligence" includes any failure to

make a reasonable attempt to comply with the provisions of the
 - 9 -

internal revenue laws, and the term "disregard" includes any

careless, reckless, or intentional disregard of rules or

regulations.

Although the Court holds that petitioner's activity was not

engaged in primarily for profit during 1996, petitioner,

nevertheless, realized a profit during 1997. The activity was

discontinued during 1998 when petitioner's creditors foreclosed

on the horses. While the undercapitalization of the activity

underscores the Court's holding on the section 183 issue, the

Court cannot conclude that the totality of the facts warrants

imposition of the penalty under section 6662(a). The Court,

therefore, sustains petitioner on this issue.

Decision will be entered for

respondent for the deficiency and

for petitioner for the penalty.