COOPER v. COMMISSIONER

T.C. Summary Opinion 2005-97

UNITED STATES TAX COURT

LARRY T. COOPER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 16331-04S. Filed July 21, 2005.

Larry T. Cooper, pro se.

Thomas L. Fenner, for respondent.

DEAN, Special Trial Judge: This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code.

Unless otherwise indicated, section references are to the

Internal Revenue Code, as in effect for the year in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure. The decision to be entered is not reviewable by any

other court, and this opinion should not be cited as authority.
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Respondent determined for 2001 a deficiency in petitioner’s

Federal income tax of $22,5831 and additions to tax under

sections 6651(a)(1), 6651(a)(2), and 6654(a) of $2,944, $1,570,

and $575, respectively.

The issues for decision are whether: (1) Petitioner’s wife2

engaged in her horse barrel-racing activities3 in 2001 with the

primary objective of making a profit; (2) petitioner is liable

for an addition to tax under section 6651(a)(1) for failure to

timely file an income tax return; (3) petitioner is liable for an

addition to tax under section 6651(a)(2) for failure to timely

pay tax; and (4) petitioner is liable for an addition to tax

under section 6654(a) for failure to pay estimated income tax.

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

The stipulated facts and the exhibits received into evidence are

incorporated herein by reference. At the time the petition in

this case was filed, petitioner resided in Willis, Texas.

Background

During 2001, petitioner was employed in automotive sales and

earned wages of $97,890.64 from Wright Motor Co., Inc. His wife,

1
These figures are rounded to the next dollar.
2
Petitioner’s wife, Stephanie Cooper, was not listed on the
notice of deficiency, and therefore is not a party to this case.
3
Horse barrel-racing is a timed rodeo event in which a
participant must ride a complete circle around each of 3 barrels
and return to the starting point with the fastest time to win.
 - 3 -

Stephanie Cooper (Mrs. Cooper), pursued dog breeding and horse

barrel-racing activities resulting in losses of $882 and $15,920,

respectively.

Since she was 2 years old, Mrs. Cooper has enjoyed riding

horses. Mrs. Cooper, who was 38 years old at the time of trial,

stopped riding after she graduated from high school and did not

resume riding until 1999. Petitioner’s wages financed his wife’s

riding activities.

During 2001, Mrs. Cooper was a district director for the

National Barrel Horse Association for whom she heard grievances

and complaints. She also applied to be a member of the

Professional Rodeo Riders Society, an affiliation that could have

helped her obtain sponsors for her riding activities. Mrs.

Cooper failed to follow through with the application process.

Mrs. Cooper had competition winnings of $1,740.70 during

2001. She also gave free riding lessons to friends,

acquaintances, and fellow competitors.

Mrs. Cooper did not keep documentation regarding her

activities and time spent in those activities during 2001.

Mrs. Cooper’s 2001 expenses for her horse barrel-racing

activities were reported as follows:
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Car and truck expenses $5,231
Depreciation and section 179 expense 1,268
Office expense 68
Repairs and maintenance 1,529
Travel 518
Meals and entertainment 101
Entry fees 2,261
Feed/hay 913
Vet/meds 2,513
Tack maintenance 2,053
Farrier 1,206

17,661

Petitioner failed to timely file a Federal income tax return

for 2001. Respondent prepared a substitute for return (SFR) for

2001. Respondent determined a deficiency in petitioner’s Federal

income tax and that petitioner is liable for additions to tax.

Petitioner had not yet filed a Federal income tax return for 2001

when the notice of deficiency was issued. Respondent had also

prepared SFRs for petitioner for 1999 and 2000. Respondent, in

preparing SFRs for petitioner, treated him as a single taxpayer.

On January 7, 2005, petitioner faxed to respondent an

unsigned joint Form 1040, U.S. Individual Income Tax Return, for

2001.4 Attached to the return were various schedules including:

(1) Schedule A, Itemized Deductions; (2) Schedule B, Interest and

Ordinary Dividends; and (3) two Schedules C, Profit or Loss From

Business. Respondent accepted all the items on the return except

for the ordinary loss of $15,920 claimed in connection with Mrs.

4
The parties agree that petitioner should be treated as
filing a joint return with his wife for 2001.
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Cooper’s horse barrel-racing activities. Respondent contends

that Mrs. Cooper’s horse barrel-racing activities were not

engaged in with the primary objective of earning a profit.

Discussion

The Commissioner’s determinations are presumed correct, and

generally, the taxpayer bears the burden of proving otherwise.

Welch v. Helvering, 290 U.S. 111, 115 (1933). Because

petitioners did not comply with the requirements of section

7491(a)(2), section 7491(a)(1) is inapplicable here. Under

section 7491(c), respondent has the burden of production with

respect to petitioner’s liability for the additions to tax.

A. Mrs. Cooper’s Horse Barrel-Racing Activities

Section 183(a) provides that “if * * * [an] activity is not

engaged in for profit, no deduction attributable to such activity

shall be allowed under this chapter except as otherwise provided

in this section.” Thus, to properly deduct certain expenses, a

taxpayer must engage in an activity with an actual and honest

objective of making a profit. See Dreicer v. Commissioner, 78

T.C. 642, 645-646 (1982), affd. without opinion 702 F.2d 1205

(D.C. Cir. 1983). Moreover, the Court of Appeals for the Fifth

Circuit, in which jurisdiction petitioner resides, has stated

that taxpayers whose activities are challenged under section 183

“bear the burden of proving that their activities * * * were

engaged in with the primary purpose of earning a profit.”
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Westbrook v. Commissioner, 68 F.3d 868, 876 (5th Cir. 1995),

affg. per curiam T.C. Memo. 1993-634 (emphasis added). If a

taxpayer engages in an activity without a profit objective,

deductions attributable to the activity are allowed only to the

extent of the income derived from the activity. Sec. 183(b)(2);

see Hager v. Commissioner, 76 T.C. 759, 781 (1981).

The determination of whether an activity is engaged in for

profit is to be made by reference to objective standards, taking

into account all the facts and circumstances of each case.

Brannen v. Commissioner, 78 T.C. 471, 506 (1982), affd. 722 F.2d

695 (11th Cir. 1984); Jasionowski v. Commissioner, 66 T.C. 312,

319 (1976); sec. 1.183-2(b), Income Tax Regs. Greater weight is

given to the objective facts than to the taxpayer’s own

statements of intent. Sec. 1.183-2(a), Income Tax Regs. The

burden of proof is on the taxpayer to show that he or she engaged

in an activity with the objective of realizing an economic

profit. Rule 142(a).

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

nonexclusive list of factors that should normally be taken into

account in determining whether the requisite profit objective has

been shown. The factors are: (1) 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; (4)

expectation that assets used in activity may appreciate in value;
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(5) the success of the taxpayer in carrying on 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, which are earned; (8) the financial status of

the taxpayer; and (9) elements of personal pleasure or

recreation. No single factor is determinative. Sec. 1.183-2(b),

Income Tax Regs.

The following discussion applies the nine factors to Mrs.

Cooper’s horse barrel-racing activities:

Factor (1): Manner in Which the Taxpayer Carried On the
Activity

Mrs. Cooper did not carry on her horse barrel-racing

activities in a businesslike manner. See sec. 1.183-2(b)(1),

Income Tax Regs. She failed to charge fees for riding lessons

she gave, and she failed to follow through with membership

affiliations that could help her obtain financial sponsorship for

her activities. Mrs. Cooper also failed to keep detailed records

of her activities for 2001. She did not present any evidence

that she developed a profit plan before she began her horse

barrel-racing activities or that she evaluated her activities in

an attempt to make them profitable.

Factor (2): The Expertise of the Taxpayer or His Advisers

Preparation for an activity by extensive study or

consultation with experts may indicate a profit motive where the

taxpayer conducts the activity in accordance with such study or
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advice. Sec. 1.183-2(b)(2), Income Tax Regs. Mrs. Cooper has

had an interest in horses for many years and is an avid rider.

She watched videos and read magazines to further her knowledge

about horses. She also held a leadership position with the

National Barrel Horse Association. However, her background and

interest in horses are not necessarily synonymous with expertise

in horse barrel-racing as a business.

Mrs. Cooper’s knowledge regarding barrel-horse competition

is not inconsistent with the pursuit of such an activity as a

hobby. She had no experience with the economics of a profitable

barrel-horse operation, and she did not make an extensive study

of the profit potential of training horses or of competing as a

horse barrel-racer. While a formal market study is not required,

her failure to make basic investigation of the factors that would

affect profit is indicative of a lack of profit objective.

Dunwoody v. Commissioner, T.C. Memo. 1992-721; Underwood v.

Commissioner, T.C. Memo. 1989-625; Burger v. Commissioner, T.C.

Memo. 1985-523, affd. 809 F.2d 355 (7th Cir. 1987).

Factor (3): The Time and Effort Expended by the Taxpayer in
Carrying On the Activity

The fact that the taxpayer devotes much of his or her

personal time and effort to carrying on an activity may indicate

a profit motive. Sec. 1.183-2(b)(3), Income Tax Regs. However,

the regulations effectively provide that time and effort are

somewhat discounted as a factor when the activity has substantial
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recreational aspects. Sullivan v. Commissioner, T.C. Memo. 1998-

367, affd. without published opinion 202 F.3d 264 (5th Cir.

1999).

Mrs. Cooper testified that she participated in horse shows

on holidays and every weekend, sometimes twice in one weekend.

Keeping and showing horses has strong recreational aspects,

especially given her long-term interest in horses. Although the

Court believes that Mrs. Cooper spent considerable time with her

horses, the Court finds that this factor is not dispositive.

Factor (4): The Expectation That Assets Used in the
Activity May Appreciate in Value

An expectation that assets used in the activity will

appreciate in value may indicate a profit objective. Sec. 1.183-

2(b)(4), Income Tax Regs. Mrs. Cooper briefly testified about a

horse, “Scooter”, she believed to be valued at $35,000 based on

training and winnings earned. During her subsequent testimony,

Mrs. Cooper stated that Scooter actually belongs to her mother.

She testified about two other horses but merely speculated about

their value.

Factor (5): The Success of the Taxpayer in Carrying On
Similar or Dissimilar Activities

A taxpayer’s past successes in similar or dissimilar

activities is relevant in determining a profit objective. Sec.

1.183-2(b)(5), Income Tax Regs. During 2001, Mrs. Cooper also

had a dog-breeding business which generated gross receipts of
 - 10 -

$6,700 and a loss of $882. Mrs. Cooper testified that she did

not report mileage expenses and the cost of purchasing a dog so

that the dog breeding business would seem more profitable.

Additionally, she used money she received from dog sales to fund

her horse activities.

No evidence was provided to demonstrate that petitioner

participated in Mrs. Cooper’s horse barrel-racing activities in

any manner other than providing financing. Thus, any success he

may have had as an automotive salesperson has no bearing on the

assessment of the horse barrel-racing activities.

Factors (6) and (7): Taxpayer’s History of Income or Losses
With Respect to the Activity and The Amount of Occasional
Profits, If Any, Which Were Earned

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

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

Regs. Unless explained by customary business risks or unforeseen

or fortuitous circumstances beyond the taxpayer’s control, a

record of continuous losses beyond the period customarily

required to attain profitability may indicate that the activity

is not engaged in for profit. Id.

Respondent prepared SFRs for petitioner’s accounts for 1999,

2000, and 2001. No allowances were made for any expenses

regarding Mrs. Cooper’s horse barrel-racing activities.

Respondent disallowed the loss claimed by petitioner on his

subsequently filed 2001 Form 1040. Petitioner has not yet filed
 - 11 -

returns for 2002 and 2003. Therefore, the Court has no

information in the record regarding the history of income or loss

from those activities.

Factor (8): The Financial Status of the Taxpayer

Petitioner had substantial income from his automotive sales

employment during the year in issue. Based on the record, it

appears he was financially capable of supporting the losses

generated by Mrs. Cooper’s horse barrel-racing activities.

Factor (9): Elements of Personal Pleasure or Recreation

The presence of personal motives in carrying on an activity

may indicate that the activity is not engaged in for profit,

especially where there are recreational or personal elements

involved. Sec. 1.183-2(b)(9), Income Tax Regs.; see also

Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987)(where the

Court stated that a hobby or amusement diversion does not qualify

as constituting a profit objective.)

Mrs. Cooper has been an avid rider of horses since early

childhood. Additionally, in conducting her horse-related

activities, she gave riding lessons without charge and failed to

pursue memberships that would have enabled her to obtain

independent financing of her activities. Based upon the facts

presented, the Court concludes that Mrs. Cooper engaged in her

horse barrel-racing activities primarily for recreation and

personal pleasure.
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The Court finds that Mrs. Cooper did not engage in her

horse-barrel racing activities in 2001 with the primary objective

of making a profit and therefore sustains respondent’s

determination that petitioner is not entitled to deduct any

amount in excess of the income derived from Mrs. Cooper’s horse-

related activities.

B. Additions to Tax

1. Section 6651(a)(1) and (2)

Under section 7491(c), the Commissioner has the burden of

production in any court proceeding with respect to the liability

of any individual for any penalty or addition to tax. Higbee v.

Commissioner, 116 T.C. 438, 446-447 (2001). In order to meet his

burden of production, the Commissioner must come forward with

sufficient evidence indicating that it is appropriate to impose

the addition to tax in the particular case. Id. at 446. Once

the Commissioner meets his burden of production, the taxpayer

must come forward with evidence sufficient to persuade a court

that the Commissioner’s determination is incorrect. Id. at 447.

Respondent determined that petitioner is liable for

additions to tax for: (1) Failure to timely file a return for

taxable year 2001 pursuant to section 6651(a)(1); and (2) failure

to make timely payment of tax pursuant to section 6651(a)(2).

Section 6651(a)(1) imposes an addition to tax for failure to

timely file a tax return. The addition to tax is equal to 5
 - 13 -

percent of the amount of tax required to be shown on the return

if the failure to file is not for more than 1 month. See sec.

6651(a)(1). An additional 5 percent is imposed for each month or

fraction thereof in which the failure to file continues, to a

maximum of 25 percent. See id. Section 6651(a)(2) provides for

an addition to tax of 0.5 percent per month, up to 25 percent for

failure to pay the amount shown or required to be shown on a

return. A taxpayer may be subject to both paragraphs (1) and

(2), in which case the amount of the addition to tax under

section 6651(a)(1) is reduced by the amount of the addition to

tax under section 6651(a)(2) for any month to which an addition

to tax applies under both paragraphs (1) and (2). The combined

amounts under paragraph (1) and paragraph (2) cannot exceed 5

percent per month. Sec. 6651(c)(1).

The additions to tax under section 6651(a)(1) and (2) are

imposed unless the taxpayer establishes that the failure to file

and/or pay was due to reasonable cause and not willful neglect.

United States v. Boyle, 469 U.S. 241, 245 (1985); Heman v.

Commissioner, 32 T.C. 479, 489-490 (1959), affd. 283 F.2d 227

(8th Cir. 1960). “Reasonable cause” requires the taxpayer to

demonstrate that he exercised ordinary business care and

prudence. United States v. Boyle, supra at 246. “Willful

neglect” is defined as a “conscious, intentional failure or

reckless indifference.” Id. at 245.
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Petitioner’s 2001 return was due on April 15, 2002. He

stipulated that the 2001 return was faxed to respondent January

7, 2005, after the notice of deficiency was issued. At trial,

Mrs. Cooper blamed their accountant for not preparing their

return timely. However, it appears from the record that

petitioner did not timely provide the accountant with the

relevant information with which he could prepare the return.

Under section 6651(g)(2), a return the IRS prepared under

section 6020(b) is treated as “the return filed by the taxpayer

for purposes of determining the amount of the addition” under

section 6651(a)(2). See Spurlock v. Commissioner, T.C. Memo.

2003-124. Respondent prepared an SFR for 2001 that meets the

requirements of section 6020(b).

Respondent has satisfied his burden of producing evidence to

show the additions to tax are appropriate. Petitioner has failed

to show that he had reasonable cause for failing to timely file

the 2001 return or for failing to pay the tax. Respondent’s

determination as to the section 6651(a)(1) and (2) additions to

tax is sustained.
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2. Section 6654(a)

Respondent also determined that petitioner is liable for an

addition to tax for failure to pay estimated tax pursuant to

section 6654(a).

Section 6654(a) provides that in the case of an underpayment

of estimated tax by an individual, there shall be added to the

tax an amount determined by multiplying the underpayment rate

established under section 6621 to the amount of the underpayment

for the period of the underpayment. Unless the taxpayer

demonstrates that one of the statutory exceptions applies,

imposition of the section 6654(a) addition to tax is mandatory

where prepayments of tax, either through withholding or by making

estimated quarterly tax payments during the course of the taxable

year, do not equal the percentage of total liability required

under the statute. See sec. 6654(a); Niedringhaus v.

Commissioner, 99 T.C. 202, 222 (1992).

The amount of the addition to tax under section 6654(a)

stated in the notice of deficiency is based on the SFR respondent

prepared for petitioner prior to the filing of the notice of

deficiency. Nothing in the record indicates petitioner made the

required amount of estimated tax payments for taxable year 2001,

and petitioner does not argue, and the record does not indicate,

that any of the statutory exceptions apply. Accordingly, the
 - 16 -

Court concludes that petitioner is liable for the addition to

tax.

Reviewed and adopted as the report of the Small Tax Case

Division.

Decision will be entered

under Rule 155.