T.C. Memo. 2003-233
UNITED STATES TAX COURT
MICHAEL G. BUNNEY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 2081-02. Filed August 4, 2003.
John Alan Cohan, for petitioner.
Lorraine Y. Wu, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COHEN, Judge: Respondent determined deficiencies in
petitioner’s Federal income taxes and an addition to tax as
follows:
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Addition to Tax
Year Deficiency Sec. 6651(a)(1)
1997 $19,780 --
1998 4,980 $186.05
1999 21,222 --
The issue for decision is whether petitioner is entitled to
deduct claimed losses reported on Schedule F, Profit or Loss from
Farming, from his horse activity for the years in issue.
Petitioner presented neither evidence nor argument concerning the
addition to tax and is thus deemed to have conceded that issue.
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.
FINDINGS OF FACT
Some of the facts have been stipulated, and the stipulated
facts are incorporated in our findings by this reference.
Petitioner resided in La Jolla, California, at the time he filed
the petition in this case.
Petitioner received an undergraduate degree in marketing
from San Diego State University. He received a master of
business administration with a specialization in finance from
National University. Petitioner has been employed with several
public and privately held companies since he was 21 with
positions ranging from sales representative to chief operating
officer and executive vice president. Petitioner spent 3 years
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of active duty in the Navy and 23 years in the Naval Reserves,
retiring at the rank of captain. Petitioner has taught courses
in marketing, sales management, business planning, small business
management, computer science, aeronautics, and accounting at
various colleges in southern California.
Petitioner was married prior to the years in issue and was
granted a Judgment of Dissolution of the marriage on August 17,
1992. Petitioner’s daughter, Sarah A. Bunney, was born on
March 13, 1983.
During 1997, petitioner was employed by Time Warner
Entertainment and Video Home Sales Services, Inc. Petitioner’s
wages as reported on his Forms W-2, Wage and Tax Statement,
totaled $99,962 in 1997. During 1998, petitioner was employed by
Winnebago Software Co. (Winnebago) and Verio-San Diego, Inc. In
1998, petitioner traveled to northern California and Sun Valley,
Idaho, as part of his employment. Petitioner’s wages as reported
on his Forms W-2 totaled $34,739 in 1998. During 1999,
petitioner was employed by Winnebago and Pulse Engineering, Inc.
As a part of his employment in 1999, petitioner traveled to
Singapore; China; Germany; Toronto, Canada; Boston,
Massachusetts; New York City, New York; and Eden Prairie,
Minnesota. Petitioner’s wages as reported on his Forms W-2
totaled $122,385 in 1999.
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The Horse Activity
Petitioner began riding horses when he was 8 years old and
has always had an interest in horses. In 1990, he developed an
interest in “reining” horses, a type of western riding sport.
Petitioner engaged in the horse activity under the name M&S
Performance Horses (M&S). At the outset, petitioner neither
obtained a business license nor filed a fictitious name statement
for M&S. During the years in issue, petitioner operated M&S to
breed, train, sell, and compete horses.
Petitioner researched the horse activity by going to reining
competitions, reading books and publications about the industry,
and attending clinics. In 1992, petitioner purchased his first
breeding stallion, an American paint horse, Bandits Lucky Doc.
On November 23, 1992, petitioner prepared a business plan for
M&S, including an income statement and an estimate of revenues
and expenses.
Over the next few years, M&S changed direction due to a
change in the breeding rules for reining horses. As a result of
this change, petitioner began to purchase high-quality broodmares
to breed with horses in southern California. Petitioner did not
update his business plan to reflect the change in the direction
of the business. Petitioner sold Bandits Lucky Doc in 1996.
Petitioner employed Manuel Campos (Campos) as a trainer for
6 years. Campos’s business, Manuel Campos Performance Horses
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(Campos Horses), had about 15 to 20 full-time clients, with 3 of
them engaging in breeding or training as a business. When
petitioner first became a client of Campos Horses, he owned a
breeding stallion and was breeding paint horses. Petitioner also
took riding lessons from Campos.
From January 1, 1995, through December 31, 1996, petitioner
was a member of the National Reining Horse Association (Reining
Association). Petitioner let his membership expire at the end of
1996. Petitioner was not listed with the Reining Association as
a trainer or breeder during the years in issue. In March 2001,
petitioner signed a declaration with the Reining Association
stating that he had not trained or assisted in training for
remuneration for the prior 5 years. Neither petitioner nor M&S
was listed with the Reining Association as having collected any
lifetime earnings or points from Reining Association approved
shows. Petitioner’s daughter, however, has ridden horses in
reining competitions in the youth categories. Petitioner’s
daughter earned $4.81 in lifetime earnings and 18.50 points in
Reining Association approved shows as of December 31, 2002.
Petitioner’s Business Records
Petitioner maintained his business records using the
computer software program known as Quicken. Petitioner created
with the Quicken program a list of expenses for the years in
issue. Petitioner did not maintain records of any bills from
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veterinarians for services provided to M&S. Campos Horses
occasionally would provide bills and invoices for services
performed, as petitioner requested.
Petitioner did not receive or maintain bills of sale or
purchase records for all of the horses he owned. Petitioner did
not receive or maintain registration documents or transfer
reports to establish the number and identities of the horses he
owned during the years in issue. Petitioner did not consistently
provide a bill of sale to customers who purchased his horses.
The retained copies of bills of sale showed either petitioner or
petitioner and his daughter as the sellers.
Petitioner kept advertising and promotional materials on his
computer. Petitioner prepared flyers and business cards on his
computer advertising Bandits Lucky Doc for breeding. Of the
advertisements that petitioner kept, none of them listed M&S or
petitioner as the seller or breeder of the horse advertised. In
2000, petitioner used the name “Three Colts West Performance
Horses” to promote a horse on a flyer. In 2001, petitioner
placed three advertisements in Performance Horse Magazine under
his name without reference to M&S.
Petitioner distributed business cards at competitions and
shows in order to advertise Bandits Lucky Doc. M&S did not have
stationery with its own name or logo. Instead, almost all
correspondence was prepared under petitioner’s name or under
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petitioner’s and petitioner’s daughter’s names. Several letters
were prepared under the heading of “Olympic Equine Enterprises”
or “Three Colts West Performance Horses”. Petitioner did not
retain correspondence sent to M&S from potential clients or other
third parties.
Until 1996, petitioner insured Bandits Lucky Doc.
Petitioner did not insure any of the horses that he owned during
the years in issue. In 1996, petitioner prepared an inventory of
some of the equipment used by M&S in order to have the equipment
covered under his homeowner’s insurance policy. Some of the
equipment was stored at an offsite trainer’s facility.
Petitioner did not have a dedicated telephone line for M&S
and instead used a pager, a cellular telephone, and his home
telephone line. Petitioner occasionally used his employers’
telephone numbers for M&S. In 2000, petitioner opened a
dedicated bank account for M&S with Union Bank of California. On
March 23, 2000, petitioner filed a fictitious business name
statement for M&S.
On May 15, 1996, in connection with custody and child
support proceedings, petitioner signed a declaration that was
filed with the Superior Court of California for the County of
San Diego. In the declaration, petitioner claimed that the
losses incurred by M&S should be considered to reduce his income
for purposes of calculating child support payments. Petitioner
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made a similar claim regarding losses from a consulting business,
The Graham Group (Graham). Petitioner estimated $2,050 in
monthly losses from M&S and $525 in monthly losses from Graham.
On October 21, 1999, petitioner filed an Income and Expense
Declaration with the Superior Court. Petitioner estimated
monthly expenses of $3,482 for his daughter’s “pet supplies and
associated expenses”. On June 16, 2000, petitioner filed a
second Income and Expense Declaration estimating monthly expenses
of $3,588 for pet supplies for “daughter’s horses”. On May 15,
2001, petitioner filed a Responsive Declaration to Order to Show
Cause or Notice of Motion with the Superior Court. Petitioner
stated in the declaration that he paid 100 percent of the
expenses related to his daughter’s three horses, totaling over
$1,600 per month.
Federal Tax Returns
Petitioner filed Forms 1040, U.S. Individual Income Tax
Return, for 1997 through 1999. Petitioner listed his occupation
on the returns as “Manager: Equine Business”. Attached to each
of the Forms 1040 was a Schedule F reporting a net farm loss each
year for petitioner’s horse activity. Petitioner described his
horse activity on the Schedules F as “equine breeding, training,
and sales”.
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From 1993 through 2000, petitioner reported the following
gross receipts and losses with respect to the horse-related
activity:
Year Gross Income Expenses (Loss)
1993 ($11,000) $14,380 ($25,380)
1994 (10,350) 40,797 (51,147)
1995 (2,125) 104,738 (106,863)
1996 -0- 80,332 (80,332)
1997 (9,000) 82,065 (91,065)
1998 1,000 62,972 (61,972)
1999 2,900 94,474 (91,574)
2000 13,700 106,550 (92,850)
Total ($14,875) $586,308 ($601,183)
Petitioner has never realized a profit from the horse activity.
Petitioner filed Form 4868, Application for Automatic
Extension of Time to File U.S. Individual Income Tax Return, for
1998, extending the due date for the return until August 15,
1999. Petitioner did not request a further extension of time to
file. On August 26, 1999, petitioner filed his return for 1998.
OPINION
At the outset, we note that petitioner’s briefs did not
comply with Rule 151(e) in that his proposed findings of fact
recite testimony from trial and rely on documents that were not
admitted into evidence. Thus his briefs are unreliable and
unhelpful. The factual assertions not based on evidence will be
disregarded.
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The Horse Activity
Respondent determined that petitioner’s horse activity was
not an activity engaged in for profit within the meaning of
section 183. Under section 183(a), if an activity is not engaged
in for profit, no deductions attributable to the activity shall
be allowed except as provided in section 183(b). Section
183(b)(1) allows only those deductions that are not dependent
upon a profit objective, such as taxes. Section 183(b)(2) allows
the deductions that would be allowable if the activity were
engaged in for profit, but only to the extent that gross income
attributable to the activity exceeds the deductions permitted by
section 183(b)(1). An “activity not engaged in for profit” is
defined in section 183(c) 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) or section 212.”
Under section 183(d), in the case of an activity consisting
in major part of the breeding, training, showing, or racing of
horses, if the gross income derived from the activity exceeds the
deductions for any 2 of 7 consecutive taxable years, then the
activity shall be presumed to be engaged in for profit unless the
Commissioner establishes to the contrary. See Golanty v.
Commissioner, 72 T.C. 411, 425 (1979), affd. without published
opinion 647 F.2d 170 (9th Cir. 1981). Because M&S has operated
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at a loss since it began in 1992, the presumption does not apply
in this case.
The Court of Appeals for the Ninth 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,
predominant, or principal purpose and intent of realizing an
economic profit independent of tax savings. Wolf v.
Commissioner, 4 F.3d 709, 713 (9th Cir. 1993), affg. T.C. Memo.
1991-212; Indep. Elec. Supply, Inc. v. Commissioner, 781 F.2d
724, 726 (9th Cir. 1986), affg. Lahr v. Commissioner, T.C. Memo.
1984-472; see Prieto v. Commissioner, T.C. Memo. 2001-266, affd.
59 Fed. Appx. 999 (9th Cir. 2003). The taxpayer’s expectation
need not be a reasonable one, but the profit objective must be
bona fide. Golanty v. Commissioner, supra at 425-426; sec.
1.183-2(a), Income Tax Regs. In determining whether the
requisite intention to make a profit exists, greater weight is to
be given to the objective facts than to the taxpayer’s self-
serving characterization of his intent. Indep. Elec. Supply,
Inc. v. Commissioner, supra at 726; sec. 1.183-2(a), Income Tax
Regs.
Section 1.183-2(b), Income Tax Regs., sets forth a
nonexclusive list of factors to be considered in determining
whether the taxpayer has the requisite profit objective. The
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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 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, that are
earned; (8) the financial status of the taxpayer; and
(9) elements of personal pleasure or recreation. These factors
are not intended to be exclusive, and no one factor or majority
of the factors need be considered determinative. Golanty v.
Commissioner, supra at 426-427; sec. 1.183-2(b), Income Tax Regs.
In this case, the predominant factors weighing against petitioner
are whether petitioner carried on the activity in a businesslike
manner, petitioner’s history of losses, and the elements of
personal pleasure involved. None of the other factors supports
his position.
Petitioner argues that he conducted his horse activity in a
businesslike manner. Maintaining complete and accurate books and
records, conducting the activity in a manner substantially
similar to comparable businesses that are profitable, and making
changes in operations to adopt new techniques or abandon
unprofitable methods are factors that may indicate that a
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taxpayer conducted the activity for profit. Engdahl v.
Commissioner, 72 T.C. 659, 666-667 (1979); sec. 1.183-2(b)(1),
Income Tax Regs.
Petitioner did not maintain accurate and complete books and
records for M&S. Petitioner testified that it was not his
practice to use bills of sale or purchase agreements when horses
changed ownership. The documents that petitioner provided as
bills of sale were computer-generated, and petitioner admitted to
printing them from his computer hard drive in preparation for
trial. Petitioner testified that it was not the general practice
in the industry to provide bills of sale and that the important
documents were the registration document and transfer report. At
the time of trial, however, petitioner was unable to provide
registration documents for any horse that he owned, and he did
not have copies of transfer reports for any horses that he
purchased or sold during the years in issue. Petitioner did not
maintain records of the breeding of any mares.
The materials that petitioner provided as evidence of his
advertising were also computer-generated and were printed in
preparation for trial. Petitioner provided no evidence of
original advertisements used by M&S. Petitioner had no record of
correspondence from other persons. The correspondence he
provided was also computer-generated and was prepared for trial.
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Petitioner had no records of bills or invoices for any
expenses he incurred on behalf of M&S. Petitioner provided a
list of expenses that was prepared using the Quicken software
program. The expense report was prepared and printed solely for
trial.
Petitioner did not maintain records for the purpose of
decreasing expenses or increasing profits. Almost all of
petitioner’s evidence regarding his record keeping was printed
from his computer in preparation for trial. Petitioner provided
no credible evidence of conducting a business of horse breeding,
and there is no reliable evidence that he was breeding any horses
after selling Bandits Lucky Doc.
A taxpayer’s history of income or loss with respect to an
activity may indicate the presence or absence of a profit
objective. See Golanty v. Commissioner, 72 T.C. at 426; Kuberski
v. Commissioner, T.C. Memo. 2002-200; sec. 1.183-2(b)(6), Income
Tax Regs. The magnitude of the activity’s losses in comparison
with its revenues may be an indication that the taxpayer did not
have a profit objective. McKeever v. Commissioner, T.C. Memo.
2000-288. A continuous series of losses during the startup stage
will not necessarily be deemed indicative that the activity was
not engaged in for profit. Sec. 1.183-2(b)(6), Income Tax Regs.
The cumulative loss, however, should not be of such a magnitude
that an overall profit on the entire operation could not possibly
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be achieved. See Bessenyey v. Commissioner, 45 T.C. 261, 274
(1965), affd. 379 F.2d 252 (2d Cir. 1967).
From 1992 until 2000, M&S had cumulative losses totaling
$601,183. Petitioner claims that it takes time to reach a
profitable level in a horse breeding business and that M&S was
still in the startup phase. Petitioner has not, however,
provided any evidence or plan that he could ever recoup his prior
losses or make the business profitable. Petitioner did not
provide any evidence that he changed his business plan in order
to make the business profitable. The magnitude of M&S’s
continuing losses in comparison to the revenues M&S received
negates a profit objective.
Elements of personal pleasure or recreation from an activity
may indicate that the activity was not engaged in for profit.
Sec. 1.183-2(b)(9), Income Tax Regs. Petitioner stated in
documents filed with the Superior Court that he supported his
daughter’s interest through the years by providing for the costs
of maintaining her horses and paying for riding competitions.
Petitioner has provided no credible evidence that he owned any
horses other than those used by his daughter for recreational
purposes.
Based on the preponderance of the evidence, and particularly
the large, recurring, and unlikely to be recouped losses, we
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conclude that petitioner’s horse activity was not engaged in for
profit.
To reflect the foregoing,
Decision will be entered
for respondent.