Giles v. Comm'r

T.C. Memo. 2005-28

UNITED STATES TAX COURT

ELIZABETH GILES, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 10918-02. Filed February 17, 2005.

Dwight M. Montgomery, Tracie Pham, and B. Paul Husband, for

petitioner.1

Michael S. Hensley, for respondent.

1
Dwight M. Montgomery (Montgomery) and Tracie Pham
petitioned the Court on behalf of petitioner. Montgomery
represented petitioner by himself at her ensuing trial on
Dec. 15, 2003. On Jan. 14, 2004, Montgomery withdrew from the
case, and B. Paul Husband (Husband) entered his appearance on
behalf of petitioner. Husband prepared both of petitioner’s
briefs.
 - 2 -

MEMORANDUM FINDINGS OF FACT AND OPINION

LARO, Judge: Petitioner petitioned the Court to redetermine

deficiencies of $7,191 and $6,040 in her 1997 and 1998 Federal

income taxes. Following petitioner’s concession as to a

procedural matter concerning the notice of deficiency, we are

left to decide as to those years whether petitioner’s activity of

breeding and showing horses (horse activity) was an “activity not

engaged in for profit” under section 183.2 We hold it was.

Unless otherwise indicated, section references are to the

applicable versions of the Internal Revenue Code, and Rule

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

FINDINGS OF FACT

I. Background

Some facts were stipulated. We incorporate herein by this

reference the parties’ stipulation of facts and the exhibits

submitted therewith.3 Petitioner resided at 18500 Falling Water

Way, Riverside, California (Falling Water Way property), when her

2
As discussed herein, petitioner showed her horses at
various competitions. The parties use the term “showing”
interchangeably with the term “competing”, and so do we.
3
In addition to the stipulations, petitioner’s opening
brief asks the Court to take “judicial notice” of documents that
were filed in this case and statements made in prior Opinions of
this Court. We give those documents and statements proper
consideration without regard to “judicial notice” as that term is
used in Fed. R. Evid. 201.
 - 3 -

petition to this Court was filed. She was almost 60 years of age

at the time of her trial.

Petitioner is single, and she filed as such on each of her

Federal income tax returns for 1988 through 2002. She has an

individual retirement account (IRA) for which she deducted

contributions of $2,000 for each of the years from 1988 through

1992. The record does not disclose whether she made any other

contributions to the IRA.

II. Petitioner’s Dental Practice

Petitioner is a dentist. She graduated from dental school

in 1981, and she has practiced dentistry ever since. She started

her own dental practice in 1983, and she has continued to date to

work in or for that practice.

In or about 1987, petitioner incorporated her dental

practice as Elizabeth Giles, D.D.S., Inc. (Giles Inc.). She is

the sole shareholder of Giles Inc., and she is one of its

employees. From 1988 through 2002, she worked 4 days a week as a

dentist for Giles Inc., for a total of 36 hours per week, and she

received wages from Giles Inc. in the following amounts:

Year Wages

1988 $110,863
1989 108,000
1990 126,194
1991 111,515
1992 108,287
1993 108,456
1994 114,611
1995 109,086
1996 105,453
 - 4 -

1997 96,283
1998 89,250
1999 120,500
2000 106,250
2001 138,250
2002 89,250
Total 1,642,248

As of the date of her trial, she had no imminent plans to stop

practicing dentistry.

Since 1996, Giles Inc. has operated out of a building in

Rialto, California. Petitioner personally owns that building and

the land thereunder, both of which she purchased in 1996 at a

total cost of $136,445 and which she has leased to Giles Inc.

since 1996. During each of the years 1996, 1997, 1998, 1999,

2001, and 2002, Giles Inc. paid petitioner rent of $24,000 as to

this lease; Giles Inc. paid petitioner rent of $22,000 in 2000.

For 1997 through 2002, petitioner reported on her Federal income

tax returns that she had realized net income from this lease of

$6,382, $6,052, $7,944, $6,659, $7,202, and $5,225, respectively.

For 1996, petitioner reported on her Federal income tax return

that she had realized from the lease a $12,357 net loss stemming

primarily from her payment of $16,950 in expenses for repairs.

Giles Inc. pays a bookkeeping service to maintain its books

and records in accordance with applicable laws and regulations.

The bookkeeping service has established for Giles Inc. a complete

and accurate bookkeeping system that the bookkeeping service uses

to prepare financial statements for Giles Inc. and to prepare
 - 5 -

Giles Inc.’s Federal and State tax returns. The record does not

contain any of Giles Inc.’s financial statements or indicate a

fair market value for Giles Inc. (or a fair market value for

petitioner’s interest in Giles Inc.).

III. Falling Water Way Property

Petitioner purchased the Falling Water Way property in 1983.

The Falling Water Way property is approximately 1-1/2 acres in

size and includes the house in which petitioner lives, a barn, an

arena (added by petitioner in August 1989 at a cost of $7,797) in

which to train horses, four stalls in which to keep horses, and

some pens. Petitioner believed during the relevant years that

the design of the Falling Water Way property allowed her to keep

a maximum of six horses on the property. As of the time of

petitioner’s trial, the fair market value of the Falling Water

Way property was not more than $400,000.

Petitioner has paid mortgage interest and property taxes as

to the Falling Water Way property in each year that she has owned

it. She deducted the full amount of these items on her

Schedules A, Itemized Deductions.

IV. Petitioner’s Horse Activity

Petitioner enjoys horses and has been involved with them

throughout her entire life. In 1985, she joined the Arabian

Horse Association, the California Arabian Horse Association, the

United States Dressage Federation, and the Los Angeles Dressage
 - 6 -

Federation (collectively, associations). She also in that year

hired a trainer. The record does not establish whether

petitioner has ever been an active participant in any of the

associations or the purpose of this trainer.

In 1988, petitioner purchased a horse named Feyras Raehele

for $11,000. Feyras Raehele was the first horse that petitioner

ever owned, and petitioner showed and bred this horse during

1988. Petitioner also for 1988 began attaching to her Federal

income tax return a Schedule C, Profit or Loss From Business, on

which she deducted expenses related to Feyras Raehele. (See the

appendix for a list of the specific expenses that petitioner

claimed as deductions for 1988 and for each year thereafter until

2002. Other than the names of these expenses, which for the most

part are the names given the expenses by petitioner on her

Federal income tax returns, the record contains little to no

information on the specifics of the expenses.) She reported on

the 1988 Schedule C that she had a business named “Falling Water

Arabians”, that its “principal business” was “Equine Investment”,

and that its address was that of the Falling Water Way property.

She also reported on the 1988 Schedule C that this business had

realized $95 of gross income during that year and that she was

entitled to deduct with respect thereto $27,782 of expenses

(including $7,195 of depreciation on $35,975 of assets inclusive
 - 7 -

of Feyras Raehele, a $21,300 portable shelter, $1,975 of

improvements, and a $1,700 saddle and tack).

In 1989 through 2002, petitioner acquired seven more horses,

two by purchasing them and five through breeding as discussed

infra. She reported on her Schedules C for those years that the

name of her horse business was “Falling Water Arabians”, and she

reported on her 1989 through 1992 Schedules C that the address of

this business was that of the Falling Water Way property.4 On

her 1989 through 1991 Schedules C, she reported that the

“principal business” of Falling Water Arabians was “Horses”. On

her 1992 through 2002 Schedules C, she reported that the

“principal business” of Falling Water Arabians was both

“Breeding” and “Competing Horses”.

During the subject years, petitioner did much of the

feeding, cleaning, grooming, and training of her horses, which in

those years numbered four and three, respectively, and she did

all of the horses’ worming and vaccinations.5 She spent 30 hours

per week with the horses, consisting primarily of time spent on

the 3 days of the week that she did not work for Giles Inc. but

also including time spent on each of the other 4 days of the

4
The 1993 through 2002 Schedules C left blank the lines for
the address of Falling Water Arabians.
5
The record does not reveal the frequency or number of
times that petitioner wormed or vaccinated any of her horses or
the amount of time that she devoted to those services.
 - 8 -

week.6 She has never decreased the 36 hours per week that she

has worked as a dentist to devote more time to the horse

activity, and she has never increased the 30 hours per week that

she has devoted to the horse activity. She acknowledges that the

raising of horses is a physical activity that will be more

difficult for her to perform as she gets older.

Petitioner did not maintain a separate bank account for the

horse activity, and she has never had business cards for the

horse activity. Nor did she keep many records for the horse

activity. The records which she kept for the horse activity

consisted primarily of minimal pedigree, registration, health,

breeding, and competition documents relating to some (but not

all) of the eight horses which were part of that activity.

V. Petitioner’s Horses

A. Overview

Petitioner has throughout her life owned a total of eight

horses (the eight horses referenced above), one of which was

stillborn and another one of which died 9 months after birth.

The names of the seven horses which survived birth are Feyras

Raehele, Kart Blanche, Silent Reign, Borissa, VT Kartel, Bogaz,

and Censuous. Following her sales of Silent Reign and Bogaz in

6
The record does not reveal how much of the 30 hours per
week for 1998 was attributable to time that petitioner spent with
a horse named Silent Reign. As noted below, petitioner sold
Silent Reign on Dec. 31, 1997, but continued to keep it at the
Falling Water Way property.
 - 9 -

1997 and 2001, respectively, petitioner as of the time of her

trial owned four horses, all of which are Arabian mares. As to

the seven horses which survived birth, petitioner keeps and kept

Feyras Raehele, Silent Reign, and Borissa at the Falling Water

Way property; the record does not indicate where petitioner keeps

or kept the other four horses.

Petitioner does not intend to sell any of the four horses

that she owns, and she has only occasionally shown three of her

eight horses; i.e., Feyras Raehele in 1988 and Kart Blanche and

Bogaz in multiple years thereafter. She has bred only two of her

eight horses; i.e., Feyras Raehele in 1988 and Borissa in 1990,

1991, 1997, and 2000, and she intends in the future to breed only

one of her horses; i.e., Borissa. She received consideration

only for the sale of Bogaz; as noted below, she sold Silent Reign

to her daughter for no reported consideration.

B. Feyras Raehele

Feyras Raehele is a purebred Arabian mare that was foaled on

May 19, 1979, and that is or was registered with the Arabian

Horse Registry of America, Inc., as purebred Arabian horse No.

0193012. Its parents are Prince Tazzraf and Feyra Diba, both of

which at the time of Feyras Raehele’s registration were

registered with the Arabian Horse Registry of America, Inc., and

had lineage that included many other horses that were then so

registered.
 - 10 -

Petitioner purchased Feyras Raehele in January 1988 for

$11,000, and she showed it during that year in at least one

competition.7 She also during 1988 bred Feyras Raehele because

the opportunity arose for her to pay $5,000 to breed it and any

other mare an unlimited number of times with a stallion named

GoKart that had previously commanded a breeding fee of $15,000.

Petitioner considered this opportunity to be a good chance for

her to breed Feyras Raehele with a respectable stallion at a

significantly reduced fee. She paid the $5,000 breeding fee in

1988, and she deducted this payment as an expense for 1988.

Petitioner’s 1988 breeding of Feyras Raehele with GoKart produced

Kart Blanche. This was the only time that petitioner has bred

Feyras Raehele, and it was the only time that petitioner has bred

a horse other than Borissa.

Petitioner continues to own Feyras Raehele, and she keeps it

at the Falling Water Way property. As of the time of

petitioner’s trial, the fair market value of Feyras Raehele was

not more than $10,000. The record does not indicate the amount

of income, if any, that petitioner has realized from her

ownership of Feyras Raehele.

7
The record does not contain information on any show in
which Feyras Raehele has competed, or whether Feyras Raehele has
competed in more than one show.
 - 11 -

C. Kart Blanche

Kart Blanche is a purebred Arabian mare that was foaled on

April 21, 1989, from the just-mentioned breeding of Feyras

Raehele. Kart Blanche is or was registered with the Arabian

Horse Registry of America, Inc., as purebred Arabian horse No.

0428977. Its parents are GoKart and Feyras Raehele, both of

which at the time of Kart Blanche’s registration were registered

with the Arabian Horse Registry of America, Inc., and had lineage

that included some other horses that were then so registered.

Petitioner has never bred Kart Blanche. Petitioner showed Kart

Blanche from 1990 to 2000 at 34 competitions, and Kart Blanche

won 3 of those competitions.

Petitioner continues to own Kart Blanche, and its fair

market value as of the time of her trial was not more than

$35,000. The record does not indicate the amount of income, if

any, that petitioner has realized from her ownership of Kart

Blanche.

D. Silent Reign

Petitioner purchased Silent Reign in 1989 for $3,500.

Silent Reign has never been bred, shown, or otherwise used for

profit in the horse activity. Petitioner reported on her 1997

Federal income tax return that on December 31, 1997, she sold

Silent Reign to her daughter for no consideration. She reported

on that return that she had claimed $3,339 of depreciation on
 - 12 -

Silent Reign, that her adjusted basis in Silent Reign was $161

($3,500 purchase price less $3,339 of claimed deprecation), and

that she was entitled to recognize a $161 ordinary loss on this

sale. The parties do not dispute that petitioner is entitled to

deduct this reported loss as reported.

Petitioner continues to keep Silent Reign at the Falling

Water Way property. Petitioner’s 1997 through 2002 Federal

income tax returns do not specifically report her receipt of any

compensation for this service.

E. Borissa

Borissa is a purebred Arabian Polish mare that was foaled on

February 24, 1982, and that is or was registered with the Arabian

Horse Registry of America, Inc., as purebred Arabian horse No.

0268206. Its parents are Borexpo and Psyche, neither of which at

the time of Borissa’s registration was registered with the

Arabian Horse Registry of America, Inc., and the lineage of which

included no other horse that was then so registered.

Petitioner “leased” Borissa in 1989 for $1,000 in order to

avail herself of her continued right to breed mares in exchange

for the $5,000 breeding fee mentioned above, and she purchased

Borissa in 1990 for $2,500.8 Petitioner has bred Borissa a total

of four times. She first bred Borissa in 1990 while she was

8
The record does not elaborate on this lease or otherwise
allow us to discern its terms.
 - 13 -

leasing it. This first breeding produced VT Kartel. She bred

Borissa a second time in 1991. This breeding, which apparently

also was connected with petitioner’s payment of the $5,000

breeding fee,9 produced Bogaz on May 19, 1991.10 She bred Borissa

a third time between July 7 and September 30, 1997, in the sense

that she paid a $3,000 breeding fee to the Bishop Lane Farm to

board, care for, and breed (including possibly by artificial

insemination) Borissa with a named stallion.11 This breeding

produced the referenced horse that was stillborn in 1998. She

then bred Borissa a fourth and final time in 2000. This final

breeding produced Censuous in 2001.

Petitioner continues to own Borissa, and she keeps it at the

Falling Water Way property. As of the time of petitioner’s

trial, Borissa’s fair market value was not more than $20,000.

Borissa is the only horse that petitioner has bred since 1989,

9
Although the contract underlying the $5,000 breeding fee
refers only to GoKart, and the stallion that helped produce Bogaz
was not GoKart, petitioner deducted no other breeding fees from
1988 until 1997.
10
Although the record does not indicate the period of
gestation for a horse such as Borissa, we recognize that the
length of this pregnancy was 20 weeks at the most. Given that
the parties have stipulated that Bogaz was the product of a 1991
breeding of Borissa and that the record establishes that Bogaz
was foaled on May 19, 1991, we find the relevant dates of this
pregnancy accordingly.
11
Petitioner also paid as to this breeding a $250 fee for
the transportation of semen. She deducted the total breeding fee
of $3,250 ($3,000 + $250) for 1997.
 - 14 -

and it is the only one of her horses that she will breed in the

future.

F. VT Kartel

VT Kartel was a purebred Arabian stallion that was foaled in

1990 from the first breeding of Borissa. VT Kartel experienced

medical complications contemporaneously with its birth, and it

died in 1991 9 months after its birth.

VT Kartel was or is registered with the Arabian Horse

Registry of America, Inc., as purebred Arabian horse No. 0449954.

Its parents were GoKart and Borissa, both of which at the time of

VT Kartel’s registration were registered with the Arabian Horse

Registry of America, Inc., but the lineage of which included no

other horse that was then so registered.

G. Bogaz

Bogaz is a purebred Arabian stallion that was foaled on

May 19, 1991, from the second breeding of Borissa. Bogaz is or

was registered with the Arabian Horse Registry of America, Inc.,

as purebred Arabian horse No. 0468432. Its parents are Pegaz and

Borissa, both of which at the time of Bogaz’s registration were

registered with the Arabian Horse Registry of America, Inc., but

the lineage of which included no other horse that was then so

registered.

Petitioner had Bogaz gelded. She showed Bogaz from 1992 and

2000 at 31 competitions. Bogaz won one of those competitions but
 - 15 -

did not earn significant amounts of money as a show horse.12

Petitioner sold Bogaz in 2001 for $20,000.

H. Censuous

Censuous was foaled in 2001 from the fourth breeding of

Borissa.

VI. The Showing of Petitioner’s Horses

Petitioner showed Feyras Raehele in 1988 at least once, but

she did not show Feyras Raehele during any other year. From 1988

through 2000, she showed Kart Blanche and Bogaz at a total of 65

competitions, each of which was held by the International Arabian

Horse Association. The specific numbers of times that petitioner

has shown Kart Blanche and Bogaz through 2000 are as follows:

Year Kart Blanche Bogaz Total

1990 2 0 2
1991 0 0 0
1992 0 1 1
1993 6 0 6
1994 7 0 7
1995 5 5 10
1996 3 13 16
1997 2 1 3
1998 2 5 7
1999 3 3 6
2000 4 3 7
Total 34 31 65

12
The record does not indicate the amount of income, if
any, that petitioner has realized from showing Bogaz. Nor does
the record indicate the specific amount of expenses that
petitioner incurred during and as a result of her ownership of
Bogaz, or whether those expenses were greater than or less than
$20,000.
 - 16 -

The record does not indicate the amount of income, if any,

that petitioner earned from any of these competitions.

VII. Relevant Financial Data

The attached appendix lists the gross income, specific

operating expenses, depreciation, total expenses, and net income

(loss) that petitioner reported for the horse activity on her

1988 through 2002 Schedules C. With the exception of $20,000

that petitioner received in 2001 from the sale of Bogaz, we know

nothing about the specific source of the other items of reported

gross income. While some of those other items of income may have

been prize money earned at shows, petitioner reported some of the

amounts of these other items net of cost of goods sold, which

indicates to us that not all of those amounts were prize money

from the shows.

From 1988 to 2002, petitioner reported on her Federal income

tax returns the following amounts of total income (exclusive of

income (loss) from the horse activity), income (loss) from the

horse activity, total income, and taxable income.

Total income Income
(exclusive of income (loss)
or (loss) from the from the Total Taxable
Year horse activity) horse activity income income

1988 $111,854 ($27,687) $84,167 $56,874
1989 108,078 (28,736) 79,342 50,593
1990 126,236 (37,973) 88,263 56,944
1991 113,487 (28,136) 85,351 49,945
1992 109,003 (29,545) 79,458 45,438
1993 109,536 (43,422) 66,114 36,195
1994 116,888 (34,072) 82,816 55,677
 - 17 -

1995 110,881 (38,203) 72,678 40,981
1996 94,609 (37,313) 57,296 27,896
1997 105,051 (24,215) 80,836 48,895
1998 95,693 (21,068) 74,625 45,228
1999 129,362 (22,777) 106,585 78,961
2000 112,940 (17,649) 95,291 63,531
2001 145,474 209 145,683 113,860
2002 94,486 (27,072) 67,414 44,953
Total 1,683,578 (417,659) 1,265,919 815,971

Petitioner projected at trial that the horse activity also would

lose money for 2003.

VIII. Gavilan Hills Property

Gavilan Hills is an area in California near Riverside, Lake

Elsinore, and Corona, California. In or about October 1990,

petitioner purchased 11.53 acres of vacant, unimproved land in

Gavilan Hills (Gavilan Hills property) at a cost of $70,000. The

Gavilan Hills property is approximately 10 miles from the Falling

Water Way property. Petitioner has never developed the Gavilan

Hills property, and she has never kept any of her horses there.

During the relevant years, she rode one or more of her horses on

the Gavilan Hills property as a change of pace from riding it (or

them) round and round in the arena on the Falling Water Way

property.

Petitioner purchased the Gavilan Hills property aspiring to

sell the Falling Water Way property, to build a house on the

Gavilan Hills property, to move her residence to the Gavilan

Hills property, and to design the Gavilan Hills property so that

she could continue operating the horse activity on the Gavilan
 - 18 -

Hills property and possibly expand that activity to include the

boarding of horses. At or around the time that she bought the

Gavilan Hills property, she abandoned this aspiration when she

realized that she could not sell the Falling Water Way property

at the price that she believed was necessary to fulfill her

aspiration. Petitioner now intends to sell the Gavilan Hills

property undeveloped.

Petitioner has paid property taxes for the Gavilan Hills

property during each year that she has owned it. She has not

claimed any of those taxes on the Schedules C that she filed for

the horse activity.

OPINION

This is yet another case of a high-salaried taxpayer

claiming that she may reduce the income taxes payable on her

salary by deducting losses incurred in a pastime that is

allegedly engaged in for profit. We must decide whether

petitioner’s horse activity was “an activity not engaged in for

profit” within the meaning of section 183 during 1997 and 1998.

If it was, petitioner may not deduct for those years the amounts

of losses greater than her income from that activity. Although

petitioner argues in brief that respondent bears the burden of

proof pursuant to section 7491(a)(1), petitioner’s counsel (on

behalf of petitioner) conceded at trial that petitioner bears the

burden of proof. Petitioner also made a similar concession in
 - 19 -

her reply brief when she opted not to object to a proposed

finding in respondent’s opening brief that petitioner bears the

burden of proof on the basis of her counsel’s concession. See

Rule 151(e)(3) (“In an answering or reply brief, the party shall

set forth any objections, together with the reasons therefor, to

any proposed findings of any other party”); see also Jonson v.

Commissioner, 118 T.C. 106, 108 n.4 (2002) (the failure to object

to a proposed finding of fact may be treated as a concession of

that proposed finding), affd. 353 F.3d 1181 (10th Cir. 2003);

Morgan v. Commissioner, T.C. Memo. 2000-231 (same), affd. 23 Fed.

Appx. 813 (9th Cir. 2001). We hold on the basis of these

concessions that petitioner bears the burden of proof.13

Section 183, which applies to activities engaged in by

individuals or S corporations, generally limits the deductions

for an “activity not engaged in for profit” to the amount of

gross income received from the activity. Sec. 183(a) and (b).

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

“any activity other than one with respect to which deductions are

13
Even if the applicability of sec. 7491(a)(1) had been at
issue, we would have concluded that it did not apply. Petitioner
has not in this proceeding presented “credible evidence” on the
substantive issue at hand. See Higbee v. Commissioner, 116 T.C.
438, 442 (2001); see also Blodgett v. Commissioner, F.3d
(8th Cir. Jan. 12, 2005), affg. T.C. Memo. 2003-212. Nor has she
proven that she complied with the requirements of sec.
7491(a)(2)(A) and (B) to substantiate items, to maintain required
records, and to cooperate fully with respondent’s reasonable
requests. See Weaver v. Commissioner, 121 T.C. 273, 275 (2003).
 - 20 -

allowable for the taxable year under section 162 or under

paragraph (1) or (2) of section 212.”14 Pursuant to the

jurisprudence of the Court of Appeals for the Ninth Circuit, the

court to which an appeal of this case most likely lies, an

activity is engaged in for profit if the taxpayer’s “predominant,

primary or principal objective” in engaging in the activity was

to profit. Wolf v. Commissioner, 4 F.3d 709, 713 (9th Cir.

1993), affg. T.C. Memo. 1991-212. In this context, the term

“profit” denotes economic profit, independent of tax savings.

Id.; Antonides v. Commissioner, 91 T.C. 686, 693-694 (1988),

affd. 893 F.2d 656 (4th Cir. 1990).

Petitioner, as noted above, bears the burden of proving that

she entered into and during each year in issue remained in the

horse activity with a predominant, primary, or principal

14
Sec. 162 deals with “trade or business expenses” which
are “ordinary and necessary expenses paid or incurred * * * in
carrying on any trade or business”. Sec. 212(1) and (2) deals
with expenses for the “production or collection of income” or
“management, conservation, or maintenance of property held for
the production of income”. Deductions are generally allowable
under sec. 162 for the expenses of carrying on an activity which
constitutes a trade or business of the taxpayer. See sec. 162;
sec. 1.183-2(a), Income Tax Regs. To be engaged in such a trade
or business, “the taxpayer must be involved in the activity with
continuity and regularity”, and “the taxpayer’s primary purpose
for engaging in the activity must be income or profit”.
Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987); see also
Warden v. Commissioner, T.C. Memo. 1995-176, affd. without
published opinion 111 F.3d 139 (9th Cir. 1997).
 - 21 -

objective of earning a profit.15 Rule 142(a)(1); Welch v.

Helvering, 290 U.S. 111, 115 (1933); Wolf v. Commissioner, supra

at 713; Beck v. Commissioner, 85 T.C. 557, 570 (1985). Whether

the requisite profit objective exists must be resolved on the

basis of all surrounding facts and circumstances. Golanty v.

Commissioner, 72 T.C. 411, 426 (1979), affd. without published

opinion 647 F.2d 170 (9th Cir. 1981); sec. 1.183-2(b), Income Tax

Regs. A taxpayer’s objective of profit need not be reasonable,

but it must be bona fide. Golanty v. Commissioner, supra at 426.

While the analysis of a taxpayer’s objective in engaging in an

activity focuses on the taxpayer’s subjective intent, the finder

of fact need not rely solely upon the taxpayer’s statement of

intent but may resort to objective facts to decide the true

intent. See Indep. Elec. Supply, Inc. v. Commissioner, 781 F.2d

724, 726 (9th Cir. 1986), affg. Lahr v. Commissioner, T.C. Memo.

1984-472; Dreicer v. Commissioner, 78 T.C. 642, 645 (1982), affd.

without opinion 702 F.2d 1205 (D.C. Cir. 1983); sec. 1.183-2(a),

Income Tax Regs.; see also Wolf v. Commissioner, supra at 713.

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

nonexclusive list of nine factors to consider in ascertaining a

taxpayer’s objective in engaging in an activity. These factors

are: (1) The manner in which the taxpayer carries on the

15
Sec. 183(d) provides a statutory reversal of the burden
of proof if a taxpayer meets specified criteria. Petitioner does
not meet those criteria.
 - 22 -

activity; (2) the expertise of the taxpayer or his advisers;

(3) the time and effort spent 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; (8) the

financial status of the taxpayer; and (9) elements of personal

pleasure or recreation. None of these factors is controlling in

and of itself, and a decision as to a taxpayer’s intent is not

governed by a numerical preponderance of the factors. Golanty v.

Commissioner, supra at 426; Allen v. Commissioner, 72 T.C. 28, 34

(1979); sec. 1.183-2(b), Income Tax Regs.

Petitioner relies primarily on her testimony to establish

both her proposed findings of disputed facts and her objective as

to the horse activity. We give petitioner’s uncorroborated

testimony limited weight for that purpose. See Ruark v.

Commissioner, 449 F.2d 311, 312 (9th Cir. 1971), affg. per curiam

T.C. Memo. 1969-48; Clark v. Commissioner, 266 F.2d 698, 708-709

(9th Cir. 1959), affg. in part and remanding T.C. Memo. 1957-129;

Tokarski v. Commissioner, 87 T.C. 74, 77 (1986). Our perception

of petitioner while viewing her testifying at trial coupled with

our review of the record leads us to discount her uncorroborated

testimony. For the most part, she testified generally, vaguely,
 - 23 -

and/or in reply to leading questions asked by her counsel during

direct examination. Portions of her testimony also were

inconsistent with other portions, with stipulated facts, and/or

with documentary evidence. We illustrate the inconsistencies in

petitioner’s testimony through seven examples. First, she

testified that she purchased her first horse, Feyras Raehele, in

1985. We find (and she has stipulated) that she purchased her

first horse, Feyras Raehele, in 1988. Second, she testified that

she purchased Feyras Raehele while she was going to dental

school. Per her own admission, she completed dental school in

1981, 7 years before the actual year in which she purchased

Feyras Raehele and 4 years before the year that she testified was

the year in which she purchased Feyras Raehele. Third, she

testified that she “contributed” Silent Reign to her daughter

under an agreement whereby her daughter would breed Silent Reign

and she and petitioner would split the profits. She reported on

her 1997 Federal income tax return that she sold Silent Reign to

her daughter during 1997 and that she was entitled to recognize a

$161 ordinary loss on this sale. Fourth, she testified that she

sold Bogaz in 2000 and that she purchased the Gavilan Hills

property in 1991 for $7,000. The record establishes that she

sold Bogaz in 2001 and that she purchased the Gavilan Hills

property in 1990 for $70,000. Fifth, she testified that during

the subject years she did all of the training of her horses. On
 - 24 -

her Federal income tax returns for those respective years, she

reported that she had paid $1,518 and $1,645 of “training”

expenses during those years. Sixth, she testified in one setting

that she currently owns three horses; she then testified in

another setting that she currently owns four horses. She also

first testified that she keeps breeding papers on most of her

horses, but then, in reply to a question asked three questions

later, testified that she keeps breeding papers on all of her

horses. Seventh, she repeatedly referred to incorrect dates, and

she specifically acknowledged during her testimony that her

memory is poor.

We now turn to the nine enumerated factors and discuss them

seriatim.

1. Manner in Which the Activity Is Conducted

The fact that a taxpayer carries on an activity in a

businesslike manner may indicate that the activity is engaged in

for profit. Sec. 1.183-2(b)(1), Income Tax Regs. Subfactors to

consider in deciding whether a taxpayer has conducted an activity

in a businesslike manner include (1) whether the taxpayer

maintained complete and accurate books and records for the

activity, (2) whether the taxpayer conducted the activity in a

manner substantially similar to those of other comparable

activities that were profitable, and (3) whether the taxpayer

changed operating procedures, adopted new techniques, or
 - 25 -

abandoned unprofitable methods in a manner consistent with an

intent to improve profitability. Engdahl v. Commissioner,

72 T.C. 659, 666-667 (1979); sec. 1.183-2(b)(1), Income Tax Regs.

Petitioner argues that this factor favors her. She asserts

that she kept accurate books and records for the horse activity

and that she changed her business behavior to reflect the

marketplace. She claims that her books and records were accurate

in that respondent has not challenged the substantiation of the

expenses reported on her Schedules C for the subject years. She

claims that she acted in a businesslike manner by (1) leasing

Borissa before buying it and buying Borissa only after concluding

that its foal, VT Kartel, was of “excellent” quality,

(2) breeding only her best mare on account of space limitations,

(3) not breeding any of her horses from 1992 through 1996,

because she believed that the market included too many bad

Arabian horses, but showing her horses during that period to

increase their value, (4) resuming her breeding activity in 1997

when she believed that Arabian horses were again in demand, and

(5) using written business plans for the horse activity.

We evaluate this factor by analyzing the three subfactors

mentioned above.

A. Maintaining Complete and Accurate Books and Records

The failure to keep financial records such as journals,

ledgers, income and expenses reports, income statements, and
 - 26 -

projections indicates a lack of businesslike operations.

Surridge v. Commissioner, T.C. Memo. 1998-304. The failure to

maintain a separate bank account or to prepare a budget also

indicates a lack of businesslike operations. Id.

Petitioner did not maintain a separate bank account for the

horse activity, and we do not find on the basis of credible

evidence that she kept a separate set of books and records for

the activity. We also do not find on the basis of credible

evidence that petitioner, as to the horse activity, prepared

financial statements, profit and loss projections, budgets,

break-even analyses, or marketing surveys, each of which may aid

a taxpayer in cutting expenses, increasing profits, and

evaluating the overall performance of an activity, Golanty v.

Commissioner, 72 T.C. at 430, or that she prepared a business

plan for the horse activity as it would pertain to the subject

years. While petitioner did retain some records on the horse

activity, we do not find on the basis of credible evidence that

she ever used those records or the data reflected therein to

evaluate or improve that activity’s financial performance. See

Burger v. Commissioner, 809 F.2d 355, 359 (7th Cir. 1987), affg.

T.C. Memo. 1985-523; Connolly v. Commissioner, T.C. Memo.

1994-218, affd. without published opinion sub nom. Redd v.

Commissioner, 58 F.3d 635 (5th Cir. 1995).
 - 27 -

Petitioner points the Court to a one-page fill-in-the-blanks

form with seven headings (including one for the name of the

business and another one for the year) that she alleges is a

legitimate and sufficient business plan for the horse activity.

We disagree with this assertion. This form on its face refers

specifically to 1991, and we are unable to find that petitioner

ever used this form to guide her in the horse activity as to any

year, not even as to 1991. The claim of usefulness of the form

as a business plan also suffers from the fact that (1) neither it

nor petitioner’s testimony specifies when it was prepared, (2)

petitioner never filled in a line on the form that references the

manner in which revenue in the activity may increase, although

the activity in its 3 years of existence from 1988 through 1990

had generated minimal revenues and had experienced losses

totaling almost $100,000, and (3) petitioner failed to conduct

the horse activity consistently with lines on the form that were

filled in. As to the latter, the form states that petitioner

will (1) sell the Falling Water Way property, (2) start showing

Silent Reign, (3) build on the Gavilan Hills property, and

(4) “breed, show, sell”. Petitioner has never done any of the

first three enumerated items. Nor as to the fourth enumerated

item has she consistently bred, shown, and/or sold her horses

from 1991 to date. While petitioner did show two of her horses

occasionally from 1992 to 2000, she did not show any of her
 - 28 -

horses in 1991, the purported year of the plan. Moreover, while

petitioner did breed one of her horses in 1991, she declined to

breed any of them again until 1997. She also did not sell a

horse for consideration until 2001.

Petitioner also relies erroneously on her assertion that

respondent did not challenge her substantiation of the expenses

reported on the subject returns. Respondent in the notice of

deficiency did reflect such a challenge as to the amounts of

those expenses that equaled the amounts of the reported losses.16

The notice of deficiency states specifically as to those expenses

that “it has not been established that the claimed expenses were

incurred or, if incurred, paid by you during the taxable year for

ordinary and necessary business purposes or that any claimed

amount qualifies as an allowable deduction under the provisions

of the Internal Revenue Code.” Moreover, even if respondent had

declined to make this challenge, it would not have meant as

petitioner would have it that she kept and used books and records

for the horse activity in a businesslike fashion. See Golanty v.

Commissioner, supra at 430; Burger v. Commissioner, T.C. Memo.

1985-523; accord McKeever v. Commissioner, T.C. Memo. 2000-288

(taxpayers’ ability to substantiate claimed expenses does not

16
In other words, respondent for each of the subject years
allowed petitioner to deduct her claimed expenses up to the
amount of the gross income from the activity that she reported
for that year.
 - 29 -

necessarily mean that they kept or used books and records in a

businesslike fashion); Steele v. Commissioner, T.C. Memo. 1983-63

(checks were not businesslike records although they sufficed to

substantiate claimed expenses). Although a taxpayer such as

petitioner need not maintain a sophisticated cost accounting

system for any or all of her purported business activities, she

is expected to keep records that enable her to make informed

business decisions as to the activity, see Burger v.

Commissioner, 809 F.2d at 359, and otherwise allow her to cut

expenses, increase profits, or evaluate the activity’s overall

performance, see Sullivan v. Commissioner, T.C. Memo. 1998-367,

affd. without published opinion 202 F.3d 264 (5th Cir. 1999);

Abbene v. Commissioner, T.C. Memo. 1998-330; Steele v.

Commissioner, supra. Petitioner presented no credible evidence

that she used any record to implement cost-saving measures or to

improve profitability.

B. Conducting the Activity Similarly to Comparable
Businesses Which Are Profitable

The fact that a taxpayer operates an activity similarly to a

comparable business which is profitable indicates that the

taxpayer had a profit objective as to the activity.

Petitioner did not conduct the horse activity similarly to

the manner in which she understood that comparable businesses

conducted their horse breeding activities. As to other breeders,

petitioner testified that most of them “just breed away”.
 - 30 -

Petitioner not only did not “just breed away”; she rarely bred

her horses at all. The record indicates, and we find as a fact,

that petitioner has bred only two of her seven horses that

survived birth, the first in 1988 and the second only four times

in approximately 14 years. Although petitioner attempted to

rationalize the minimal breeding of her horses by testifying that

she endeavored to breed her horses only with “national champions”

in order to improve the value of the foals, she contradicted that

testimony shortly after giving it by testifying that she aimed to

breed her horses either with national champions or with simply

“good horses”. We do not find that all, or in fact any, of the

horses which petitioner used to breed her mares were “national

champions”.

We also are unpersuaded by petitioner’s assertion that her

minimal breeding was due to her belief that the design of the

Falling Water Way property allowed her to breed only one of her

horses at a time. Although the Falling Water Way property has

only four stalls in which to keep horses, petitioner acknowledges

in her reply brief that horses can also be kept in the pens. We

also note that even if the Falling Water Way property did limit

petitioner’s keeping of horses on the property to a maximum of

six, an assumption that the record does not allow us to find as a

fact, she has never owned six horses at one time and she has

never kept more than three horses on the Falling Water Way
 - 31 -

property. Moreover, of the 5 horses that petitioner maintained

during the subject years, one (Bogaz) was a gelding that she

maintained for 10 years before selling it and another (Silent

Reign) was a horse that she kept at the Falling Water Way

property for more than 5 years after selling it.

C. Changing Methods To Improve Profitability

A change of operating methods, adoption of new techniques,

or abandonment of unprofitable methods may also indicate a profit

objective. Sec. 1.183-2(b)(1), Income Tax Regs.

Petitioner alleges that she changed her method of operation

for the better when she stopped breeding horses from 1992 through

1996 on account of a depressed market and started breeding them

again in 1997 when she sensed that the market had improved. We

find no credible evidence to support petitioner’s claim that the

market for Arabian horses was depressed from 1992 through 1996 or

that it changed favorably for her in 1997. In addition, while

petitioner testified that she was making her horses well known

from 1992 through 1996 by showing them, she sold for

consideration only one of her horses after that period and that

was not until 5 years after the period ended.

Petitioner also alleges that she attempted to improve the

horse activity’s profitability by causing a reduction in the

operating expenses of the horse activity for the 4-year period

from 1997 through 2000, when compared to the 4-year period from
 - 32 -

1993 through 1996. We are unpersuaded by this allegation. While

the horse activity’s operating expenses did in fact decrease

during the second 4-year period, this decrease was not due to any

special effort made by petitioner. It was due primarily to a

decrease during the latter 4-year period of the horse activity’s

boarding/training expenses. From 1993 to 1996, petitioner began

showing Kart Blanche and Bogaz more frequently than in prior

years. Given that these two horses were relatively young as of

January 1, 1993, and that they had received minimal training

beforehand, the need for them to train for the shows, and hence

the training expenses, were naturally greater during the earlier

4-year period.17 As the horses were trained, their training

expenses obviously declined. Such a decline occurred naturally

and did not result from any special effort by petitioner to

change operating methods, adopt new techniques, or abandon

unprofitable methods.18

17
We note that petitioner deducted “training” expenses for
1988, then deducted “boarding and training” expenses for 1989
through 1996, and then deducted “training” expenses for 1997
through 2002. We understand the deduction of “boarding/training”
to include the cost of boarding the horse at the training
facility as part of its training.
18
In the same vein, we also reject petitioner’s assertion
that she personally learned to train horses from 1992 through
1996 and thus was able to reduce expenses by training her horses
after 1996. Petitioner’s 1997 through 2002 Federal income tax
returns claim deductions for training in the total amount of
$17,276.
 - 33 -

Petitioner also claims that she undertook to decrease the

horse activity’s operating expenses by learning in 1993 and 1994

to perform some basic veterinary services. Even assuming that

petitioner learned to perform these services as claimed, an

assumption that is not supported by the credible evidence in the

record, such efforts did not effectively decrease the horse

activity’s veterinary expenses. Petitioner’s tax returns from

1988 through 2002 show that the horse activity’s veterinary

expenses have remained fairly constant throughout all of the

years of the horse activity’s operation.19

D. Conclusion

We conclude on the basis of our analysis of the just-

discussed three subfactors that petitioner did not carry on the

horse activity in a businesslike manner. This factor favors

respondent.

2. Petitioner’s Expertise

A taxpayer’s expertise, research, and study of the accepted

business, economic, and scientific practices of an activity, as

well as his or her consultation with experts, may be indicative

of a profit objective. Sec. 1.183-2(b)(2), Income Tax Regs.

19
Nor are we persuaded that petitioner acted in a
businesslike fashion by first leasing Borissa and buying it only
after ascertaining that its foal was of “excellent” quality. We
know little about this lease. Moreover, given that VT Kartel
experienced medical complications beginning with its birth and
died 9 months later, the facts at hand would appear to disprove
petitioner’s claim that VT Kartel was an “excellent” foal.
 - 34 -

Petitioner asserts that she is a lifelong experienced

businesswoman who before starting the horse activity read books,

viewed videos, and consulted with experts consisting of her

sister, her (petitioner’s) daughter, a professional horse

trainer, and an individual who bred and judged horses in Europe.

Petitioner also asserts that she joined relevant trade

associations in 1985 and that she was knowledgeable of some

veterinarian services and the training and showing of horses.

Petitioner concludes that this factor weighs in her favor. We

disagree.

The mere fact that petitioner may have aspired to breed

horses does not necessarily mean that she entered into the horse

activity with the requisite profit objective. The credible

evidence in the record does not establish that petitioner read or

viewed the referenced materials or consulted with her so-called

experts before entering into the horse activity in 1988. While

petitioner testified generally that she did, she discredited that

testimony by also testifying that these happenings were not until

3 years after she bought her first horse. She also did not

specify or otherwise elaborate on the referenced books or videos,

other than to say that they were breeding and training books and

veterinarian manuals, or the advice that she purportedly received

from the trainer, the breeder/judge, or her sister and daughter;

e.g., was it general advice regarding showing and promoting
 - 35 -

horses, did it include specific business advice on how to start

and operate a horse breeding business profitably, did she follow

the advice? Nor is there credible evidence in the record that

any of these purported experts were actually experts on anything

related to the conduct of the business of breeding and showing

horses (or even on the conduct of a business in general). While

petitioner did testify generally that her daughter is a certified

public accountant, we know nothing else about her daughter’s

practice of public accounting (e.g., what is her specialty) or,

more specifically, whether she is an expert on the subject of

horse breeding and showing. We also note as to this daughter

that each of petitioner’s 1988 through 2002 tax returns appears

to have been prepared by someone else.

Of course, petitioner has over the years acquired some sort

of hands-on experience on the subject of horse breeding from the

point of view of a horse breeder. The record, however, does not

reflect that she has ever acquired any knowledge of the business

or economic aspects of horse breeding so as to be prepared for

the economic realities of a horse breeding and showing business.

We find nothing credible to suggest that she prepared for the

economic aspects of the activity by study or consultation with

experts, nor has she shown that, before starting the activity,

she had any idea of what her ultimate costs might be, how she

might achieve any degree of cost efficiency, the amount of
 - 36 -

revenue she could expect, or what risks might impair the

production of these revenues. She also has not established that

she undertook a basic investigation of the factors that affected

the profitability of a horse breeding and showing activity. See

Vallette v. Commissioner, T.C. Memo. 1996-285; Underwood v.

Commissioner, T.C. Memo. 1989-625; see also McKeever v.

Commissioner, T.C. Memo. 2000-288 (taxpayer’s background as a

lifelong horsewoman did not provide sufficient expertise as to

the economic aspects of a horse pursuit to indicate a profit

objective). As in Daley v. Commissioner, T.C. Memo. 1996-259,

petitioner apparently started her horse activity with little

concept of the expenses involved or of the steps required to

achieve cost efficiency and an eventual profit and has continued

to operate the activity in the same manner. See also Rinehart v.

Commissioner, T.C. Memo. 1998-205. While a taxpayer need not

prepare for an activity by making a formal market study, he or

she should at least undertake a basic investigation of the

factors that would affect profit. Underwood v. Commissioner,

supra; Burger v. Commissioner, T.C. Memo. 1985-523.

This factor favors respondent.

3. Time and Effort Spent Conducting the Activity

The fact that a taxpayer devotes much of his or her personal

time and effort to an activity may indicate a profit objective,

especially where the activity does not involve substantial
 - 37 -

personal or recreational aspects. McKeever v. Commissioner,

supra; Daley v. Commissioner, supra. A taxpayer’s withdrawal

from another occupation to devote his or her time and effort to

an activity also may indicate a profit objective. Burleson v.

Commissioner, T.C. Memo. 1983-570; sec. 1.183-2(b)(3), Income Tax

Regs.

Petitioner asserts that she performs almost all of the work

in the horse activity and that she spends 30 hours a week working

in this activity.20 Petitioner concludes that this factor

“clearly” weighs “heavily” in her favor. We disagree.

First, petitioner presented no documentary evidence to

support her claim that she spent 30 hours per week working on the

horse activity, and we find that the referenced 30 hours includes

all of the time that petitioner spent with her horses, including

time that was personal or recreational to her. We thus discount

her testimony that 100 percent of the time that she spent with

her horses was for business. We also note that this testimony is

somewhat incredible on its face. Petitioner was deeply involved

with horses before starting the horse activity in 1988, and she

bought her first horse because she missed the pleasure of being

with horses. It is quite a stretch for her now to ask us to

believe that her only involvement with horses since 1988 has been

20
Although petitioner testified generally that she budgeted
“at least” 30 hours a week to spend with her horses, she argues
in her brief that she spent a flat 30 hours.
 - 38 -

on a business basis. Such is especially so given the fact that

she repeatedly referred to her horses throughout her testimony as

her “babies”, even in the case when she was referring to one of

her horses that was relatively old.21

Second, petitioner has never decreased the 36 hours per week

that she works in her dental practice to devote more time to the

horse activity, and she has never increased the 30 hours per week

that she spends with her horses.22 The dental practice is an

established business, and petitioner claims that the horse

activity is a business in its startup phase. By her own

admission, however, she works fewer hours per week in her

self-described startup business than she does in her established

business. Given her claim and our finding that she spends time

in the horse activity on each day of the week, it also appears

that she spends on each of the days that she is not working as a

dentist less time in the horse activity than the average 9 hours

per day that she works as a dentist.23 We recognize that 30

21
Feyras Raehele, Kart Blanche, and Borissa were 24, 24,
and 21 years old, respectively, in the year of petitioner’s
trial.
22
Although petitioner did take some time off from her
dental practice, we find no credible evidence in the record from
which to conclude that any of this time that she spent in the
horse activity was an increase to her regular 30 hours per week.
23
In other words, if petitioner had devoted 9 hours a day
to the horse activity on each of the 3 days every week that she
did not work as a dentist, she would have spent on those 3 days
(continued...)
 - 39 -

hours a week is a considerable amount of time to spend on an

activity, especially for an individual such as petitioner who

works professionally 36 hours a week and who performs most of the

tasks of the horse activity which may be viewed as mundane and

not recreational; e.g., feeding, washing, and worming the horses.

Such time and apparently mundane tasks, however, are just as much

a part of a horse breeding and showing hobby as they are of a

horse breeding and showing business.

This factor favors respondent.

4. Expectation That Assets Will Appreciate in Value

A taxpayer’s expectation that assets such as land and other

tangible property used in an activity may appreciate in value to

create an overall profit may indicate that the taxpayer has a

profit objective as to that activity. Sec. 1.183-2(b)(4), Income

Tax Regs. An overall profit is present if net earnings and

appreciation are enough to recoup losses sustained in prior

years. Bessenyey v. Commissioner, 45 T.C. 261, 274 (1965), affd.

379 F.2d 252 (2d Cir. 1967).

Petitioner argues that this factor profoundly supports her

position. According to petitioner, the appreciation in the value

of the horses, land, and other property used in the horse

23
(...continued)
27 of the 30 hours that she devoted to the horse activity. This
leaves only a total of 3 hours to be attributed to the other 4
days of the week.
 - 40 -

activity exceeds the sum of the taxable losses incurred in the

activity. We disagree. With the possible exception of evidence

establishing that Bogaz was bred by petitioner and then sold by

her 10 years later for $20,000, petitioner has presented no

credible evidence that any of the assets used in the horse

activity (or for that matter any property that she owns) has

appreciated in value.24 Nor does the record contain any credible

evidence as to the specific fair market value of any of her

assets (but for Bogaz). While petitioner asks the Court to find

that the fair market values of Borissa, Feyras Raehele, Kart

Blanche, and the Falling Water Way property are the amounts which

the parties stipulated that the fair market values of those

assets were “not more than”, we decline to do so.25 The fact

that the value of an asset is “not more than” a stipulated amount

does not mean that it is equal to that amount or, for that

matter, that it is even close to that amount.

Petitioner focuses especially on the Gavilan Hills property

and states that this property supports her claim of a profit

24
In fact, petitioner’s reporting that she received no
consideration on her sale of Silent Reign would indicate that
Silent Reign had lost all of its $3,500 value during the time
that she owned it.
25
We also decline petitioner’s invitation to consider the
values reported on her depreciation schedules as the fair market
values of those depreciable assets at any time and decline to
presume that the fair market value of VT Kartel, had it not died,
would have as of the time of her trial been greater than her
proffered $35,000 fair market value of Kart Blanche.
 - 41 -

objective. We disagree. Petitioner purchased the Gavilan Hills

property aspiring to sell the Falling Water Way property, build

and move her residence on and to the Gavilan Hills property, and

design the Gavilan Hills property so that she could continue her

horse activity and possibly expand that activity to include the

boarding of horses. She conceded through her testimony, however,

that she abandoned this aspiration incident to her purchase of

the Gavilan Hills property. As to the fact that she sometimes

rode her horses on the Gavilan Hills property, we do not believe

that this action, which we view to be more pleasure than

business, serves to characterize that property as a business

asset. Nor do we believe that the Gavilan Hills property is

properly construed as an asset of the horse activity merely

because petitioner envisioned that she could someday sell it and

invest the proceeds in the development of a new location for the

horse activity or the start of a new horse boarding activity.

This factor favors respondent.

5. Taxpayer’s Success in Similar or Dissimilar Activities

Although an activity is unprofitable, the fact that a

taxpayer has previously converted comparable activities from

unprofitable to profitable enterprises may show a profit

objective. Sec. 1.183-2(b)(5), Income Tax Regs.

Petitioner notes that she successfully established her

dental practice and argues that this factor weighs in her favor.
 - 42 -

We disagree. Although petitioner has been a successful

entrepreneur in the dental profession, the record does not reveal

that her work in that profession had any bearing on her ability

to conduct the horse activity profitably. See Haladay v.

Commissioner, T.C. Memo. 1990-45 (“wholesale sporting goods

business is sufficiently dissimilar from farming that even if * *

* [the taxpayer’s] business had been a consistently profitable

one, a conclusion that the farming activity should have been

equally profitable would not be warranted.”); see also Dodge v.

Commissioner, T.C. Memo. 1998-89 (taxpayers, who had business

expertise, failed to show that such expertise was used in their

horse activity), affd. without published opinion 188 F.3d 507

(6th Cir. 1999). Moreover, the record does not establish that

she conducted her horse activity in a businesslike manner similar

to that of her dental practice.

This factor favors respondent.

6. Activity’s History of Income and/or Losses

The fact that a taxpayer incurs a series of losses beyond an

activity’s startup stage may indicate the absence of a profit

objective as to that activity unless the losses can be blamed on

unforeseen or fortuitous circumstances beyond the taxpayer’s

control. Sec. 1.183-2(b)(6), Income Tax Regs.; cf. Golanty v.

Commissioner, 72 T.C. at 427 (horse breeding activity may be

engaged in for profit despite consistent losses during the
 - 43 -

startup phase). We previously have found that the startup phase

for an Arabian horse breeding business may be between 5 and 10

years. See Engdahl v. Commissioner, 72 T.C. at 669; see also

Phillips v. Commissioner, T.C. Memo. 1997-128 (“a period of 5 to

10 years for the startup phase of an Arabian breeding operation

is not unreasonable”).

Petitioner argues that this factor weighs in her favor.

According to petitioner, she has suffered numerous setbacks in

her horse activity including a depressed market in the Arabian

horse industry from 1992 to 1996, lack of space, a drop in the

value of her home, which she planned to sell to raise capital to

develop the Gavilan Hills property, stillborn foals, and mares

not conceiving. Taking into account these setbacks, petitioner

states, she was still in the startup phase of the horse activity

during the subject years. Petitioner also states that her losses

from the horse activity have diminished over the years.

We disagree with petitioner that this factor weighs in her

favor. First, as noted above, we find no credible evidence in

the record to support petitioner’s claim of a depressed market

from 1992 to 1996, a drop in the value of her home, or the

failure of bred mares to conceive. Nor do we believe that the

financial results of the horse activity are attributable to

petitioner’s claim of lack of space or the stillborn foal. The

horse activity has lost money in every year of its operation,
 - 44 -

except for 2001 when it reported a small profit of $209 on

account of the sale of Bogaz. As to its entire existence though

2002, the horse activity reported gross income totaling $42,291,

expenses totaling $459,950, and net losses totaling $417,659.26

The magnitude of the horse activity’s losses in comparison to its

gross income is an indication that petitioner lacked a profit

objective as to that activity. See Burger v. Commissioner,

809 F.2d at 359; Dodge v. Commissioner, T.C. Memo. 1998-89.

Such an indication is especially glaring given that none of

petitioner’s explanations for her history of losses adequately

explains the magnitude and duration of those losses and that the

record does not include any credible evidence to suggest that

petitioner ever expected to recoup any of those losses. The fact

that the horse activity suffered losses year after year and that

petitioner took no meaningful action to reverse the tide supports

a finding that she was indifferent as to whether the losing trend

could be reversed. Ranciato v. Commissioner, 52 F.3d 23, 25-26

(2d Cir. 1995), vacating T.C. Memo. 1993-536.

This factor favors respondent.

7. Amounts of Occasional Profits

The amount of profits earned in relation to the amount of

losses incurred, the amount of the investment, and the value of

26
Petitioner also admitted at trial that she was most
likely going to report a net loss for 2003.
 - 45 -

the assets in use may indicate a profit objective. See sec.

1.183-2(b)(7), Income Tax Regs. Absent actual profits, the

opportunity to earn substantial profits in a highly speculative

venture may be sufficient to indicate that the activity is

engaged in for profit. See id.; see also Dawson v. Commissioner,

T.C. Memo. 1996-417 (taxpayer’s belief that a champion horse

could generate a substantial amount of revenue and

correspondingly large profits may be probative of a profit

objective).

Petitioner speculates that an Arabian stallion could earn

substantial income through stud/breeding fees or syndication.

Thus, petitioner concludes, the possibility of earning a large

ultimate profit in the horse activity justifies her pursuit.

Petitioner notes that she recognized a profit in 2001 by selling

a “home-bred gelding” and states that the asset value of her

activity also has appreciated over the course of its operation.

Petitioner argues that this factor favors her. We disagree.

First, petitioner acknowledges in her brief that the record lacks

evidence concerning the number of mares that a stallion can breed

each year and the syndicated values of purebred Arabian

stallions. While she asks the Court to draw a “logical inference

that Arabian stallions could earn substantial income, and/or be

syndicated (have ownership divided) for profit potential of a
 - 46 -

quite substantial nature”, we decline to draw such an inference

on the basis of the record at hand.

Second, the horse activity has incurred 15 years of large

losses and only had a profit, minimal at that, in a single year.

Petitioner has not persuaded us that the horse activity has a

chance either to make a profit in the future or to recoup the

losses which it has incurred to date. She acknowledged during

her testimony that showing horses is not a viable way to earn

income, and her advertising expenses for the horse activity have

been minimal. She also has shown Kart Blanche since 1990, but

has never offered it for sale, and sold Bogaz 9 years after first

showing it. While she claims that the horse activity may someday

earn a speculative profit from stud/breeding fees or syndication

of an Arabian stallion, this claim is not supported by the record

before us. Nor is this claim sufficient in this case to outweigh

the absence of any meaningful profit in any year of the horse

activity’s operation (or for that matter any profit at all except

for the year of the sale of Bogaz). Although petitioner

testified that the nonoccurrence of certain events would have

resulted in her reporting a profit for some of the years of the

horse activity’s operation, we are unpersuaded that such would

have been the case.

This factor favors respondent.
 - 47 -

8. Taxpayer’s Financial Status

The fact that a taxpayer does not have substantial income or

capital from sources other than an activity may indicate that the

activity is engaged in for profit. See sec. 1.183-2(b)(8),

Income Tax Regs. The fact that a taxpayer does have substantial

income from sources other than an activity, on the other hand,

may indicate that the activity is not engaged in for profit. The

latter is especially true where losses from the activity generate

substantial tax benefits or where there are personal or

recreational elements involved. Sec. 1.183-2(b)(9), Income Tax

Regs.

Petitioner asserts that she is an upper middle class

individual who has invested a substantial portion of her income

in the horse activity for the purpose of securing a source of

retirement income and that the amount of this investment is

inconsistent with the pursuit of a hobby. Petitioner concludes

that this factor weighs in her favor. We disagree. Petitioner

had a steady and substantial stream of cash/income from

activities other than the horse activity; e.g., her work as a

dentist and her leasing of property to Giles Inc. Her financial

status allowed her to participate in the horse activity, an

otherwise expensive recreational activity that allowed her to

enjoy her lifelong pleasure of interacting with horses, while at

the same time receiving a subsidy for this activity from the
 - 48 -

fisc; i.e., petitioner used her reported losses from the horse

activity to reduce significantly her taxable income in every year

but one, which in turn reduced her income tax liability for those

years. Contrary to petitioner’s assertion, we do not believe

that she engaged in the horse activity to obtain a source of

retirement income. In addition to the fact that she has an IRA,

she owns valuable assets in the form of the Gavilan Hills

property, her established dental practice, and the land and

building on and in which her dental practice is located.

This factor favors respondent.

9. Elements of Personal Pleasure

The presence of personal pleasure or recreation from an

activity may indicate the absence of a profit objective. See id.

The mere fact that a taxpayer derives personal pleasure from an

activity, however, does not necessarily mean that he or she lacks

a profit objective with respect thereto. A profit objective may

be present in the latter case if the activity is truly engaged in

for profit as evidenced by other factors. Jackson v.

Commissioner, 59 T.C. 312, 317 (1972).

Petitioner asserts that the horse activity is neither

recreational nor pleasurable to her because (1) she devotes 30

hours per week to the mundane jobs of feeding, maintaining,

grooming, and training her horses and (2) she never rides her

horses recreationally. Petitioner concludes that this factor
 - 49 -

overwhelmingly weighs in her favor. We disagree.27 First, as

noted above, we find from a factual point of view that petitioner

rides her horses recreationally and that the 30 hours per week

that she spends with her horses includes this recreational time.

Thus, even if we were to agree with petitioner that her

referenced jobs were all “mundane”, we would not agree that all

of her time was spent performing these jobs. See also Dodge v.

Commissioner, T.C. Memo. 1998-89 (substantial time that the

taxpayers spent in their horse breeding activity did not indicate

a profit objective because the taxpayers, who were skilled

riders, derived recreational benefit from the time they spent

with their horses); Ballich v. Commissioner, T.C. Memo. 1978-497

(substantial time that the taxpayers spent on breeding and

showing their dogs indicated that the activity was a “labor of

love” rather than an undertaking to derive profit).

Second, contrary to petitioner’s claim, the record shows

that during the subject years she did not perform all of the work

in the horse activity. Petitioner deducted for those respective

years expenses of (1) $1,330 and $714 for outside services,

(2) $1,518 and $1,645 for training, (3) $1,382 and $1,453 for

27
We note at the start that we disagree with petitioner’s
statements in brief that a finding of personal pleasure requires
that we find evidence of parties at the Falling Water Way
property or social activities involving her horses.
 - 50 -

veterinary services, and 4) $2,135 and $2,450 for farrier

(blacksmith) services.

We also believe that it is evident that petitioner gains

personal pleasure from the horse activity. She testified that

she was compelled to buy her first horse because she had been

away from horses for awhile. She also admittedly rode her horses

during the relevant years in the wilds of the undeveloped (and

most likely scenic) 11.53 acres of the Gavilan Hills property.

To our minds, such riding on that property was more conducive to

pleasure than to pure training, the latter of which most likely

could have been done in the arena that petitioner had purchased

(or built) approximately 1 year before purchasing the Gavilan

Hills property. We also note that petitioner throughout her

testimony repeatedly referred to her horses as her “babies” and

opted not to dispose of her “babies” even when they were aged,

unable to breed, expensive to maintain, and/or unprofitable.28

This factor favors respondent.

10. Additional Factor

Petitioner did not on any of her 1988 through 2002 Schedules

C deduct interest or taxes paid as to the Falling Water Way

property and the Gavilan Hills property. We consider this fact

28
For example, she has kept Feyras Raehele at the Falling
Water Way property but has not bred it since 1988, and she has
kept Silent Reign at that property even though she sold it to her
daughter in 1997.
 - 51 -

to indicate that petitioner did not intend that either of those

properties be considered part of the horse activity.

11. Conclusion

We conclude that petitioner did not engage in the horse

activity during the subject years with a predominant, primary, or

principal profit objective. We reach this conclusion having

considered the aforementioned 10 factors, all contentions

presented by the parties, and the unique facts and circumstances

of this case. All arguments made by petitioner but not discussed

herein are without merit.

Decision will be entered

for respondent.
 - 52 -

APPENDIX
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Total

Gross income 95 3,508 224 0 3,000 3,200 4,080 2,500 3,024 260 500 900 1,000 20,000 0 42,291

Advertising 742 0 0 0 0 0 0 0 1,837 25 0 0 0 0 0 2,604
Car & truck 1,715 0 154 102 0 271 0 35 0 0 0 0 0 0 0 2,277
Parking 0 0 0 0 0 0 75 0 0 0 0 0 0 0 0 75
Trailering 0 0 0 0 0 0 0 0 1,386 0 497 0 0 0 0 1,883
Trailer space 0 0 0 0 0 0 0 0 0 0 390 105 204 225 0 924
Dues/subscriptions 50 150 135 245 65 190 876 60 155 303 502 230 207 185 609 3,962
Freight 50 0 125 0 0 0 0 0 0 0 0 0 0 0 0 175
Costumes 0 0 770 47 63 2,233 1,033 553 1,018 384 0 0 0 0 0 6,101
Nonhealth insurance 170 336 0 0 45 40 0 0 0 0 0 0 0 0 27 618
Mort. interest 0 655 832 0 0 0 0 0 0 0 0 0 0 0 0 1,487
Nonmort. interest 2,113 3,838 2,983 1,844 1,013 62 0 0 0 0 0 0 0 0 0 11,853
Repairs & maint. 0 0 0 0 0 0 2,666 1,379 75 992 0 353 685 0 435 6,585
Blkt., laun. & rep. 0 0 0 0 0 0 0 0 0 40 66 0 0 0 0 106
Vehicles/M&E rent 0 0 0 0 0 0 0 520 335 870 0 0 0 0 0 1,725
Other prop. rent 0 0 0 0 0 0 0 0 0 1,025 624 0 0 0 418 2,067
Taxes & licenses 0 0 0 0 0 0 376 0 0 0 0 0 0 0 623 999
Legal/prof. serv. 0 150 0 0 0 0 895 0 350 0 0 0 0 0 0 1,395
Supplies 896 0 0 0 0 0 0 4,357 1,649 4,011 6,287 6,014 3,264 3,157 3,853 33,488
Travel 332 0 1,937 140 303 2,898 538 444 2,396 0 0 0 0 0 469 9,457
Ded. meals/enter. 0 0 0 0 0 271 75 96 0 0 0 0 0 0 0 442
Board & care 200 0 0 0 0 0 0 0 0 0 0 0 0 0 0 200
Boarding/training 0 2,862 6,099 3,170 10,236 16,996 11,581 8,195 7,380 0 0 0 0 0 0 66,519
Training 5,054 0 0 0 0 0 0 0 0 1,518 1,645 3,388 4,135 4,315 2,275 22,330
Care provider 0 0 0 0 0 0 505 0 0 0 0 0 0 0 0 505
Breeding fees 5,000 0 0 0 0 0 0 0 0 3,250 0 0 0 0 0 8,250
Feed 1,240 3,144 4,063 4,541 2,341 3,308 0 0 0 0 1,764 3,319 2,129 3,302 3,482 32,633
Feed & bedding 0 0 0 0 0 0 3,454 3,348 2,524 3,606 0 0 0 0 0 12,932
Shavings 0 0 0 0 0 0 0 0 0 0 0 0 0 808 993 1,801
Registration fees 0 78 176 1,959 2,478 5,147 0 0 0 0 0 0 0 150 0 9,988
Entry fees 0 0 0 0 0 0 160 5,669 6,269 1,221 0 0 0 2,182 1,646 17,147
Cleaning & maint. 0 60 462 490 460 1,473 0 0 0 0 0 0 0 0 0 2,945
Tailoring & Mater. 0 0 0 0 0 0 0 0 0 0 0 528 91 0 0 619
Mare lease fee 0 1,000 0 0 0 0 0 0 0 0 0 0 0 0 0 1,000
Shoeing 0 605 615 510 1,314 1,650 965 1,909 2,715 0 0 0 0 0 0 10,283
Farrier 0 0 0 0 0 0 0 0 0 2,135 2,450 2,317 2,576 2,446 2,655 14,579
Fly control 0 0 0 0 0 0 0 0 0 288 0 0 0 160 0 448
Futurity/sweepstakes 0 0 0 0 0 0 0 0 0 1,576 0 0 0 115 0 1,691
Horse lodging 0 0 0 0 0 0 0 0 0 295 0 0 0 0 0 295
Shipping 0 0 0 0 0 0 0 0 0 0 0 250 0 0 0 250
Awards program 0 0 0 0 0 0 0 0 0 0 0 0 0 0 95 95
Show fees 1,623 723 2,185 822 653 349 2,909 5,719 5,377 115 5,144 2,364 3,127 346 2,174 33,630
Photography 0 0 0 0 0 0 360 169 0 0 0 0 0 0 0 529
Tack supplies 0 1,803 2,482 2,542 1,623 3,790 1,920 1,038 3,379 0 0 0 0 0 0 18,577
Vet. services 222 1,304 3,410 1,803 2,434 899 5,322 2,377 1,272 1,382 1,453 2,614 1,731 947 3,101 30,271
Vet. supplies 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2,518 2,518
Licenses 154 0 0 0 0 0 0 0 0 0 0 0 0 0 0 154
Promotion 0 34 135 0 0 0 0 0 0 0 0 0 0 0 0 169
Outside services 0 0 0 0 0 0 125 2,103 1,160 1,330 714 2,195 0 170 370 8,167
Misc. 1,026 1,515 29 60 524 0 285 343 0 0 0 0 0 0 0 3,782

Operating exp. 20,587 18,257 26,592 18,275 23,552 39,577 34,120 38,314 39,277 24,366 21,536 23,677 18,149 18,508 25,743 390,530
Deprec. 7,195 13,987 11,605 9,861 8,993 7,045 4,032 2,389 1,060 109 32 0 500 1,283 1,329 69,420
Total exp. 27,782 32,244 38,197 28,136 32,545 46,622 38,152 40,703 40,337 24,475 21,568 23,677 18,649 19,791 27,072 459,950

Net inc. (loss) (27,687) (28,736) (37,973) (28,136) (29,545) (43,422) (34,072) (38,203) (37,313) (24,215) (21,068) (22,777) (17,649) 209 (27,072) (417,659)