T.C. Memo. 2002-9
UNITED STATES TAX COURT
DALE A. RINEHART AND JEANA L. YEAGER, f.k.a. JEANA L. RINEHART,
ET AL.,1 Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 20185-98, 15968-99, Filed January 9, 2002.
15969-99, 7007-00.
Frank C. Hider, for petitioners.
Stephen W. Brower, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
VASQUEZ, Judge: Respondent determined deficiencies in and
penalties on petitioners’ Federal income taxes as follows:
1
Cases of the following petitioners are consolidated
herewith: Jeana L. Yeager, docket No. 15968-99; Dale A.
Rinehart, docket No. 15969-99; Jeana L. Yeager, docket No. 7007-
00.
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Penalty
Docket No. Year Deficiency Sec. 6662
20185-98 1994 $46,894 $9,379
15968-99 1995 29,264 5,853
15969-99 1995 28,765 5,753
15969-99 1996 53,869 10,774
7007-00 1996 27,032 5,406
The issue addressed in this opinion is whether petitioner Dale A.
Rinehart’s (Mr. Rinehart) horse breeding activity was an activity
not engaged in for profit for 1994, 1995, and 1996. (A separate
opinion will address the issues, previously tried and briefed, of
whether petitioner Jeana L. Yeager had cancellation of
indebtedness income for 1995, whether petitioner Jeana L. Yeager
is entitled to relief pursuant to sections 662 or 6015, and
whether petitioners are liable for penalties pursuant to section
6662(a).)
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts, the stipulation of settled issues,3 and
the attached exhibits are incorporated herein by this reference.
At the time they filed the petitions, petitioners resided in
Campbell, Texas.
2
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.
3
All concessions by the parties are accepted by the Court,
and they will be incorporated into the decisions to be entered
when all other issues are resolved.
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Cattle Activities
Around 1969, Mr. Rinehart purchased a ranch southwest of
Celina, Texas (Celina ranch), for $800 per acre. At this time,
he also purchased a number of polled4 Hereford cattle. Mr.
Rinehart intended to breed registered polled Herefords and build
up a herd of cattle (polled Hereford breeding activity). In
1971, he sold the Celina ranch for $1,600 per acre. He also sold
his herd of polled Herefords for a profit.
In 1971, Mr. Rinehart purchased a ranch in Van Alstyne,
Texas (Van Alstyne ranch). He bought the Van Alstyne ranch
because it was larger and had better facilities for raising
cattle than the Celina ranch. At this time, Mr. Rinehart also
purchased a herd of registered Herefords.
In 1971 or 1972, Mr. Rinehart began a Hereford breeding
activity on the Van Alstyne ranch. In 1977, when his bull died,
he ended the Hereford breeding activity. Even though the
Hereford breeding activity was profitable overall, Mr. Rinehart
decided not to continue the Hereford breeding activity because
the cattle market was declining.
Initial Horse Activity
In 1978, Mr. Rinehart and his then wife Donna Jean Rinehart5
got into the quarter horse industry (initial horse activity).
4
“Polled” Herefords have no horns.
5
Around 1978, Mr. Rinehart married Donna Jean Rinehart.
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Mr. Rinehart chose to specialize in cutting horses because it was
the part of the quarter horse industry that was most familiar to
him. Mr. Rinehart had been involved with cutting horses since he
was 7 years old and had used cutting horses in his cattle
activities. Prior to 1978, Mr. Rinehart had received training
about cutting horses from various trainers.
In 1978, Mr. Rinehart’s business plan for the initial horse
activity was to purchase “foundation bred”6 broodmares for
breeding to outside stallions until he accumulated a herd of
approximately 20 broodmares. At that time, he also would buy
young stallions, train them, show them to build their names, and
breed them to his own broodmares.
In 1981 or 1982, Mr. Rinehart attended a cutting horse
seminar taught by two of the top National Cutting Horse
Association (NCHA)7 riders of all time. He attended this seminar
to further his education and his ability to train and show
cutting horses in competitions. Mr. Rinehart was trained on how
to cut cattle, on proper techniques, on principles of cutting,
and how to train horses to be performance cutting horses.
6
A foundation bred horse is a horse descended from the
first horses registered with the American Quarter Horse
Association (AQHA).
7
During the years in issue, Mr. Rinehart was a member of
the NCHA.
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Divorce, Bankruptcy, and End of the Initial Horse Activity
In 1986, Mr. Rinehart and Donna Jean Rinehart divorced. As
a result of the divorce, Donna Jean Rinehart received 27 of the
horses they owned. These 27 horses included the best broodmares.
Also during the mid-1980s, Mr. Rinehart filed for
bankruptcy. In 1986, Bedford National Bank seized and sold by
judicial foreclosure 21 of Mr. Rinehart’s horses, and MBank
Sherman, N.A., foreclosed upon and later sold 18 of Mr.
Rinehart’s horses. In 1986, after the divorce and foreclosures,
Mr. Rinehart ended the initial horse activity.
Startup of New Horse Breeding Activity
In 1990, Mr. Rinehart decided to start another cutting horse
activity (the horse breeding activity). Mr. Rinehart leased an
arena in Royce City, Texas, to train the few horses he still
owned after the divorce and foreclosures. In 1991, he purchased
a ranch in Campbell, Texas (Campbell ranch), for $350,000. Mr.
Rinehart moved to the Campbell ranch because it was a “full
service facility” for a horse breeding and training operation--it
had an indoor arena, stallion barn, breeding facilities, and a
training area. Additionally, the Campbell ranch had cross
pastures, cross fences, and “special use facilities”. Another
reason Mr. Rinehart moved to the Campbell ranch was that it was a
high visibility property--the Campbell ranch was located
alongside a divided highway that was the main artery between
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Tulsa, Oklahoma, and Houston, Texas.
Mr. Rinehart erected a promotional sign outside the front
entrance of the Campbell ranch. The sign had the horse breeding
activity’s phone number and advertised his two premier stallions.
It also had a fiberglass horse on the top of it that was painted
to match the color of one of his premier stallions.
Mr. Rinehart had a business plan for the horse breeding
activity. Instead of relying on young stallions that did not
have established reputations and attempting to build a name for
them, as in the initial horse activity, Mr. Rinehart purchased
higher quality stallions with established breeding records that
matched up to the bloodlines/lineages in his broodmares. He bred
these horses to one another, rather than using outside stallions,
and also bred his stallions with outside mares.
At the time he purchased the Campbell ranch, Mr. Rinehart
purchased a champion cutting horse stallion, named Smooth Herman,
as the foundation for the horse breeding activity. Smooth Herman
had sired several champion offspring and had won several cutting
horse champion titles.
Mr. Rinehart planned to breed Smooth Herman daughters to a
son of Doc Bar.8 Crossing a Doc Bar son with a Smooth Herman
8
Doc Bar was a prominent horse in the cutting horse
industry. He was the number one paternal grandsire and number
two maternal grandsire of all time.
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daughter resulted in an “outcross”.9 Mr. Rinehart was
outcrossing these two bloodlines in an attempt to get “hybrid
vigor”.10
After researching the market, in 1992 Rinehart purchased a
stallion named Doc City. Doc City was the second youngest then
existing son of Doc Bar.
After inserting Doc City into his breeding program, Mr.
Rinehart discovered that his mares were not getting pregnant
because Doc City had a breeding problem (he was not ejaculating
semen into the mares). This was unexpected because over the
previous 13 years Doc City sired approximately 85 horses.
Mr. Rinehart sought advice from veterinary experts at the
University of Pennsylvania and the University of Colorado--
universities which had done extensive breeding research. Mr.
Rinehart decided to have Doc City evaluated by the University of
Pennsylvania. The University of Pennsylvania determined that Doc
City could only be used for very limited breeding. In fact, Doc
City produced only two foals for Mr. Rinehart before the horse
9
In the cutting horse industry, there are prominent traits
associated with certain bloodlines/lineages. In attempting to
improve the breed, horses descended from different bloodlines
with complementary traits are mated. This is termed
“outcrossing”. The purpose of outcrossing is to mate one horse
with desired traits to another horse with different desired
traits so the resultant offspring will have traits superior to
its parents (the sire and dam).
10
Hybrid vigor results in the best of both bloodlines in
the foal.
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died in 1997.
While Doc City was being evaluated, Mr. Rinehart attempted
to replace Doc City with another son of Doc Bar. By that time,
however, all of Doc Bar’s sons were too old to be used
effectively in Mr. Rinehart’s breeding program. Therefore, Mr.
Rinehart decided to purchase a grandson of Doc Bar named
Makingyourmark.
Makingyourmark was a son of Doc O’lena and Bar Socks Babe.
Doc O’lena was the most predominant producing son of Doc Bar, and
Bar Socks Babe was one of the top ten producers of cutting
horses.
Horse Breeding Operations
Horse breeding is difficult work. During the years in
issue, Mr. Rinehart: (1) Mucked (cleaned out) stalls, (2) cut,
bailed, and hauled hay, (3) performed minor surgery on his
horses, (4) fixed leaky pipes, and (5) checked the stallions,
mares, and foals on a daily basis for injuries and illnesses so
that they could be treated immediately.11
Mr. Rinehart, as part of his planned breeding program,
determined which stallion to breed to which mare approximately 1
year in advance. He based his decisions on the horses’
bloodlines and past breeding performance.
11
Mr. Rinehart had blood testing equipment on site so he
could diagnose and treat illnesses quickly.
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Horse Breeding Methods: Live Cover and Artificial Insemination
From 1991 through 1994 or 1995, the breeding method used by
Mr. Rinehart was “teasing” the mares (to determine which mares
were in heat) and doing “live cover” (where the stallion and mare
have intercourse). Mr. Rinehart had a special facility on the
Campbell ranch for teasing the mares.
Around 1994, Mr. Rinehart started using artificial
insemination breeding. Mr. Rinehart gained knowledge of equine
artificial insemination techniques through studying, reading
books, and working with veterinarians while they performed
artificial insemination.
After learning about equine artificial insemination, Mr.
Rinehart purchased artificial insemination equipment. Mr.
Rinehart had the following equipment on the Campbell ranch for
use in his artificial insemination breeding program: (1) Horse
stocks that could be used to palpitate several mares at a time,
(2) a phantom mare (also known as a dummy mare) with an
artificial vagina that was used to collect the stallions’ semen,
(3) a laboratory, (4) incubators, (5) a microscope, (6) a
refrigerator, and (7) cryogenic equipment.
Artificial insemination made it possible for his stallions
to breed with more mares than when Mr. Rinehart used live cover.
As part of his artificial insemination program, Mr. Rinehart set
up a detailed schedule for use during breeding season showing
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when to collect his stallions’ semen. This allowed him to
maximize the opportunity to fertilize his mares.12
In the fall of 1996, Mr. Rinehart met Dr. John Allen, a
practicing veterinarian for 30 years and specialist in equine
reproduction.13 After some discussions, Mr. Rinehart decided to
have Dr. Allen work at the Campbell ranch. At this time, the
artificial insemination program included sonograms performed by
Dr. Allen. The sonograms allowed Mr. Rinehart to determine
better when the mares were ready for breeding and whether they
were pregnant. Since Dr. Allen joined Mr. Rinehart’s horse
breeding activity, the pregnancy rate of Mr. Rinehart’s breeding
program increased from a rate of 40 to 45 percent to a rate of 85
to 90 percent.
The Horse Breeding Activity’s Records
Mr. Rinehart maintained a ledger with handwritten monthly
expenses of the horse breeding activity until January 1994.
Starting in 1993, Mr. Rinehart began keeping records for the
horse breeding operation on a computer. Mr. Rinehart kept a
register report, cash-flow report, itemized category report,
12
Mr. Rinehart’s mares were in heat between 7 and 9 days.
The stallions’ semen lives only 48 hours after ejaculation.
Setting a schedule of when to collect semen and inseminate the
mares allowed him to maximize the chances of fertilization.
13
Dr. Allen’s expertise in equine breeding included such
areas as fertility, sterility, normal breeding management,
artificial insemination, and embryo transfers.
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chart of monthly income and expenses, and tax summary report.
These records detailed the date of each transaction, the check
number, a description of the payee, the category of the expense,
and the amount of the expenses. There was also a space to write
additional notes regarding the expense.
During the years in issue, Mr. Rinehart also kept
computerized records of foaling dates. The foaling records
listed the name of the mare and stallion mated, the breeding
dates, the due date, the birth date, the color, the lineage, and
the sex of each foal. There was also a space for comments. Mr.
Rinehart also kept records of planned breeding of stallions with
specific mares.
Additional computerized records kept by Mr. Rinehart for the
years in issue include records of the horses purchased, sold, and
that died, and records of the maintenance14 performed on each of
his horses broken down by stallions, mares, and geldings.15
Before, during, and after the years in issue, Mr. Rinehart
prepared and filed with the American Quarter Horse Association
(AQHA)16 stallion breeding reports for his stallions. He also
14
The “maintenance” performed on the horses included
shoeing, worming, giving inoculations, trimming hoofs, and
floating teeth.
15
The maintenance records also contained the
lineage/pedigree of each horse.
16
During the years in issue, Mr. Rinehart was a member of
the AQHA.
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maintained a stallion breeding file for his own records. This
file contained a copy of the AQHA stallion breeding report,
breeding schedules, monthly breeding reports by stallion and mare
(broken down by stallions he owned, mares he owned, and outside
mares), and equine breeding records for each mare broken down by
day and month for each breeding season.
Mr. Rinehart maintained a separate file, broken down by
horse, for each of the horses he owned. These files contained
earnings reports, show records, racing records, sire’s get
records, registration records, pedigree/lineage records, news
articles, veterinary records, advertisements, notes, invoices,
and purchase and sale records.
Mr. Rinehart used standardized forms that are used in the
horse breeding industry. These included stallion breeding
contracts, training contracts, mare foaling reports, AQHA
stallion breeding reports, AQHA registration applications, AQHA
transfer reports, and AQHA lease authorization forms. The
stallion breeding contract outlined the breeding procedures and
what was expected from the client and Compass R Ranch.17
Mr. Rinehart maintained files for his breeding and training
contracts. Additionally, Mr. Rinehart provided copies of the
contracts to the clients. Within these files, Mr. Rinehart
17
Mr. Rinehart operated the horse breeding activity under
that name “Compass R Ranch”.
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maintained invoice records that include the breeding record,
maintenance records for the horse of each client, and forms
indicating compliance with Coggins testing.18
Mr. Rinehart also maintained the following files: Feeds
Info (which included nutritional information), Semen Log,
Reproduction Info (which included breeding and artificial
insemination materials), Bayer Eav-1 Vaccine (which included
breeding and medical materials), Stall Panels = Priefert Mfg. Co.
Inc. (which included invoices for horse breeding equipment), and
Manure Spreader-Hesston.
Mr. Rinehart also kept extensive records regarding his
artificial insemination program. Additionally, Mr. Rinehart
built a database on his mares’ breeding habits.
Additional Resources
Mr. Rinehart’s library of books included breeding and
genetics books, AQHA rules and regulations, veterinary books,
management and efficiency books, foaling books, and therapy and
rehabilitation books. Some of his books also dealt with the
economic aspects of horse businesses.
Mr. Rinehart consulted with experts on various aspects of
the horse breeding business including showing, breeding, and
selling the horses. Over the years, Mr. Rinehart hired
professional trainers to train his horses.
18
This tests for equine sickness.
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Additional Background
Mr. Rinehart advertised the horse breeding activity in trade
publications, local horse association publications, and at horse
shows. Mr. Rinehart gave away baseball caps, pens, and other
promotional items with the Compass R Ranch name on it. Mr.
Rinehart wore to horse shows jackets embroidered with the logo of
the Compass R Ranch and with the names of his stallions. Mr.
Rinehart wrote articles to publicize the Compass R Ranch.
Mr. Rinehart had stationery and business cards that bore the
name Compass R Ranch.
From 1991 through 1999, Mr. Rinehart did not show many of
his horses; instead, he concentrated on building up a broodmare
band and increasing his stock of offspring of each stallion.
That way he had an inventory of horses of varying ages and
pedigrees to sell in order to provide purchasers with a variety
of choices. As part of the horse breeding activity, Mr. Rinehart
also culled some of his horses.
During the years in issue, Mr. Rinehart sold seven horses.
This was an increase from the previous years, 1991 through 1993,
when he sold no horses. Mr. Rinehart sold his horses for the
following total amounts: $2,441 in 1994, $4,945 in 1995, $5,960
in 1996, $14,929 in 1997, and $15,360 in 1998.
During the years in issue, Mr. Rinehart was a pilot. He
worked an average of only 5 days a month. On December 1, 2000,
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at age 60,19 he retired. One of the reasons Mr. Rinehart started
the horse breeding activity was to have a source of income during
his retirement, which he anticipated to be in 2000, or in case he
lost his job before he retired.
OPINION
Section 183(a) provides generally that, if an activity is
not engaged in for profit, no deduction attributable to such
activity shall be allowed except as provided in section 183(b).
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.”
The U.S. Court of Appeals for the Fifth 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
purpose and intent of realizing an economic profit independent of
tax savings. Westbrook v. Commissioner, 68 F.3d 868, 875 (5th
Cir. 1995), affg. T.C. Memo. 1993-634.
The expectation of profit need not have been reasonable;
however, the taxpayer must have entered into the activity, or
continued it, with the objective of making a profit. Hulter v.
19
Age 60 was the mandatory retirement age.
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Commissioner, 91 T.C. 371, 393 (1988); sec. 1.183-2(a), Income
Tax Regs.
Whether the requisite profit objective exists is determined
by looking at all the surrounding facts and circumstances.
Keanini v. Commissioner, 94 T.C. 41, 46 (1990); sec. 1.183-2(b),
Income Tax Regs. Greater weight is given to objective facts than
to a taxpayer's mere statement of intent. Thomas v.
Commissioner, 84 T.C. 1244, 1269 (1985), affd. 792 F.2d 1256 (4th
Cir. 1986); sec. 1.183-2(a), Income Tax Regs. Petitioners have
the burden of proof. Rule 142(a).20
Section 1.183-2(b), Income Tax Regs., provides a list of
factors to be considered in the evaluation of a taxpayer's profit
objective: (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 losses with respect to the
activity; (7) the amount of occasional profits, if any, from the
20
Cf. sec. 7491(a), effective for court proceedings
arising in connection with examinations commencing after July 22,
1998. Petitioners do not contend that their examination began
after July 22, 1998, or that sec. 7491 is applicable to their
case.
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activity; (8) the financial status of the taxpayer; and (9)
elements of personal pleasure or recreation. This list is
nonexclusive, and the number of factors for or against the
taxpayer is not necessarily determinative, but rather all facts
and circumstances must be taken into account, and more weight may
be given to some factors than to others. Id.; cf. Dunn v.
Commissioner, 70 T.C. 715, 720 (1978), affd. 615 F.2d 578 (2d
Cir. 1980).
As an initial matter, respondent contends that Mr.
Rinehart’s testimony regarding the horse breeding activity was
not credible and that his “uncorroborated” testimony should be
disregarded. We disagree. Other witnesses corroborated Mr.
Rinehart’s testimony regarding the horse breeding activity. We
found Mr. Rinehart’s testimony regarding this particular issue to
be credible.21
Manner in Which the Activity Is Conducted
The fact that a taxpayer carries on the activity in a
businesslike manner and maintains complete and accurate books and
records may indicate a profit objective. Sec. 1.183-2(b)(1),
Income Tax Regs. The evidence established that Mr. Rinehart kept
complete and accurate books and records and that he operated the
horse breeding activity in a businesslike manner.
Mr. Rinehart had a business plan for the horse breeding
21
This does not mean we find Mr. Rinehart’s testimony
regarding other issues presented in this case to be credible. We
make no such finding herein.
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activity. See Phillips v. Commissioner, T.C. Memo. 1997-128
(holding that a business plan need not be in written form and can
be evidenced by the taxpayer’s actions). When he began the horse
breeding activity, Mr. Rinehart moved from the Van Alstyne ranch,
which was set up for raising cattle, to the Campbell ranch, which
was set up for horse breeding and training. Mr. Rinehart kept a
library of books on the Campbell ranch to have at his disposal.
He advertised and publicized the horse breeding activity.
Changing operating methods or adoption of new techniques in
a manner consistent with an intent to improve profitability may
also indicate a profit motive. Sec. 1.183-2(b)(1), Income Tax
Regs. During the years in issue, Mr. Rinehart changed his
breeding program from live cover to artificial insemination.
This made it possible for his stallions to breed with more mares
and for him to maximize the opportunity to fertilize his mares.
This provided Mr. Rinehart with additional horses to sell and/or
breed.
We conclude that this factor indicates that petitioners had
the requisite profit motive.
Expertise of Mr. Rinehart and His Advisers
A taxpayer’s expertise, research, and study of an activity,
as well as his consultation with experts, may be indicative of a
profit intent. Sec. 1.183-2(b)(2), Income Tax Regs. Respondent
concedes that Mr. Rinehart has extensive expertise in horse
breeding. Mr. Rinehart consulted with experts on various aspects
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of the horse breeding business including showing, breeding, and
selling the horses. Over the years, he hired professionals to
train his horses. When Doc Bar was not producing foals, Mr.
Rinehart sought advice from veterinary experts and had the
stallion evaluated by experts. In 1996, Mr. Rinehart added the
services of a specialist in equine reproduction, Dr. Allen, to
the horse breeding activity. We conclude that this factor is
indicative of the requisite profit motive.
Time and Effort Expended by Mr. Rinehart
Mr. Rinehart was engaged in all aspects of the horse
breeding activity including: (1) Hiring and firing all labor,
(2) purchasing of mares and stallions, (3) breeding and raising
the horses, (4) training of the horses, (5) culling the horses,
(6) maintaining the horses, (7) advertising the activity, and (8)
promoting the activity. Respondent concedes that Mr. Rinehart
spent significant amounts of time in carrying on the horse
breeding activity. This factor is indicative of the requisite
profit motive.
The Expectation That Assets May Appreciate in Value
A number of experts testified at trial. Internal Revenue
Service (IRS) real estate appraiser Armando Rodriguez concluded
that as of December 31, 1996, the value of the Compass R Ranch
was $406,000. Paul Bierschwale, a real estate appraiser,
concluded that as of December 31, 1996, the value of the Compass
R Ranch was $500,000. Respondent argues that we should accept
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the valuation proposed by Mr. Rodriguez; petitioner argues that
we should accept the valuation proposed by Mr. Bierschwale. Both
reports, however, conclude that by the close of the last taxable
year in issue (1996) the Campbell ranch increased in value from
its purchase price. The only dispute between the parties is to
whether value increased by $56,000 or $150,000. The Campbell
ranch increased in value by at least $56,000, and this supports
Mr. Rinehart’s expectation that the assets used in the activity
would appreciate in value and petitioners’ contention that the
horse breeding activity was engaged in for profit.22
Additionally, IRS economist Roderick Moss testified that he
thought Mr. Rinehart’s horse breeding activity could be
profitable in the future. Accordingly, we conclude that this
factor favors petitioners for the years in issue.
Mr. Rinehart’s Success in Similar or Dissimilar Activities
The uncontradicted evidence establishes that Mr. Rinehart
enjoyed success in two previous cattle activities--the polled
Hereford breeding activity and the Hereford breeding activity.
This is indicative of the requisite profit motive.
History of Income or Loss
Mr. Rinehart incurred hundreds of thousands of dollars in
22
We note that the parties submitted evidence regarding
the valuation of petitioners’ herd of horses. The factual and
expert evidence, however, concerns the value of the horses in
2000--a year well beyond the years in issue.
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losses from 1994 through 1996; however, in 1995 Mr. Rinehart
reduced the amount of his losses from the horse breeding activity
by approximately $25,000 from 1994, and in 1996 Mr. Rinehart
again reduced the amount of his losses from the horse breeding
activity by approximately $25,000 from 1995.
A record of substantial losses over several years may be
indicative of the absence of a profit motive. 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)(6),
Income Tax Regs., however, provides that a series of losses
during the startup phase of an activity may not necessarily be an
indication that the activity is not engaged in for profit.
Mr. Rinehart admitted that during 1986 through 1989 he could
not make a profit from the horses he owned. After the divorce
and bankruptcy, he ended the initial horse activity and went into
a “holding period” where he kept the few horses he still had, but
he did not train, show, or breed them. In 1990, Mr. Rinehart
reentered the cutting horse industry and started up the horse
breeding activity.
This Court has recognized that the startup phase of a horse
breeding activity is 5 to 10 years. Engdahl v. Commissioner, 72
T.C. 659, 669 (1979). We believe that the years in issue, 1994
through 1996, encompassed a startup period. See Phillips v.
Commissioner, supra; see also Engdahl v. Commissioner, supra at
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669. As Mr. Rinehart's losses were sustained during the startup
phase of the horse breeding activity, we conclude that the losses
sustained are not an indication that the horse breeding activity
was not engaged in for profit.
Elements of Personal Pleasure
The absence of personal pleasure or recreation relating to
the activity in question may indicate the presence of a profit
objective. Sec. 1.183-2(b)(9), Income Tax Regs. The mere fact
that a taxpayer derives personal pleasure from a particular
activity does not, per se, demonstrate a lack of profit motive.
During the years in issue, the Campbell ranch was not used
for recreational or social entertaining. Petitioners did not
ride the horses they owned for pleasure. The “pleasure” Mr.
Rinehart derived from his involvement in the horse breeding
activity was not the enjoyment associated with recreation; it was
the satisfaction associated with a job or occupation.
Additionally, many of the duties performed by petitioner were not
activities that provided personal pleasure or recreation.
Accordingly, this factor does not weigh against petitioners.
Conclusion
We note that Mr. Rinehart previously litigated in this Court
whether the horse breeding activity was an activity not engaged
in for profit for the years 1992 and 1993. Rinehart v.
Commissioner, T.C. Memo. 1998-205 (Rinehart I). Each taxable
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year, however, stands on its own and must be separately
considered. United States v. Skelly Oil Co., 394 U.S. 678, 684
(1969); Pekar v. Commissioner, 113 T.C. 158, 166 (1999).
At the previous trial, Mr. Rinehart appeared pro se, his
trial lasted approximately 3 hours, and the only witness for the
taxpayer was Mr. Rinehart. In the instant case, Mr. Rinehart was
represented by counsel, evidence was presented over 3 full days,
and additional witnesses corroborated Mr. Rinehart’s testimony
regarding the horse breeding activity. In Rinehart I, Mr.
Rinehart stipulated that he was not involved with any other
activity similar to the horse breeding activity, that he did not
possess adequate records of income and losses for the horse
breeding activity, that he did not keep adequate records on each
of his horses, and that he received personal pleasure and
enjoyment from the horse breeding activity. The evidence in this
case clearly established that these stipulations do not apply to
the years here in issue. Accordingly, we have reached our
decision herein in light of the voluminous new evidence presented
to the Court.
The evidence established that Mr. Rinehart maintained
adequate records, operated the horse breeding activity in a
businesslike manner, had extensive expertise about horse
breeding, expended a significant amount of time on the horse
breeding activity, had a reasonable expectation that the assets
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used in the activity would appreciate in value, and had success
in other breeding activities. Furthermore, Mr. Rinehart
sustained the losses in issue during the startup phase of the
horse breeding activity. Accordingly, we conclude that Mr.
Rinehart engaged in the horse breeding activity during 1994,
1995, and 1996 with the primary purpose and intent of making a
profit within the meaning of section 183.
Our holdings in this opinion will be incorporated into the
decisions to be entered in these cases when all other issues are
resolved.