RYAN v. COMMISSIONER

T.C. Summary Opinion 2005-118

UNITED STATES TAX COURT

N. THOMAS RYAN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 13239-02S. Filed August 10, 2005.

N. Thomas Ryan, pro se.

Francis Mucciolo and Michael D. Zima, for respondent.

PANUTHOS, Chief Special Trial Judge: This case was heard

pursuant to the provisions of section 7463 of the Internal

Revenue Code in effect when the petition was filed. The decision

to be entered is not reviewable by any other court, and this

opinion should not be cited as authority. Unless otherwise

indicated, all subsequent section references are to the Internal
 - 2 -

Revenue Code in effect at relevant times, and all Rule references

are to the Tax Court Rules of Practice and Procedure.

Respondent determined deficiencies in petitioner’s Federal

income taxes and additions to tax under section 6651(a)(1) and

(2) and section 6654(a), as follows:

Additions to Tax
Year Deficiency Sec. 6651(a)(1) Sec. 6651(a)(2)1 Sec. 6654(a)

1997 $37,341 $8,176 -- $1,629

1998 20,875 4,696 -- 664

1999 27,562 6,201 -- 967
1
The notice of deficiency did not include an amount for this addition.

After concessions1 by the parties, the issues for decision

are: (1) Whether petitioner’s horse training and breeding

activity during 1997, 1998, and 1999 was an activity not engaged

in for profit within the meaning of section 183; (2) whether

petitioner is entitled to joint filing status for married

individuals under section 1(a)(1) for 1997, 1998, and 1999; (3)

whether petitioner is entitled to long-term capital gain

treatment on the 1997 sale of approximately 700 shares of

securities; and (4) whether petitioner received nonemployee

compensation of $10,800 in 1997.

1
Petitioner concedes that he is liable for the additions
to tax under sec. 6651(a)(1) and sec. 6654(a) for the tax years
in issue. Respondent concedes that petitioner is not liable for
additions to tax under sec. 6651(a)(2) for the tax years in
issue.
 - 3 -

Some of the facts have been stipulated, and they are so

found. The stipulation of facts, the stipulation of settled

issues, and the attached exhibits are incorporated by this

reference. Petitioner resided in Brooksville, Florida, at the

time the petition was filed.

At the time the notice of deficiency was issued, petitioner

had not filed Federal income tax returns for 1997, 1998, and

1999. Respondent determined: (1) That petitioner received wage

income for each tax year in issue; (2) that petitioner was

entitled to a standard deduction for married filing separate

status; (3) that petitioner received income on the sale of

certain securities in 1997 which is taxable as short-term capital

gain rates; and (4) that petitioner received nonemployee income

in 1997.

Petitioner does not dispute that he received wage income in

the amounts determined by respondent. Petitioner does, however,

dispute the filing status, the characterization of capital gain

income, and a portion of the omitted nonemployee income.

Immediately before trial, petitioner submitted penciled returns

for the years in issue in which he claimed the following losses

for a horse breeding activity:
 - 4 -

Horse Breeding Activity

Gross
Year Income Expenses Loss1

1997 --- $28,884 ($28,884)
1998 --- 31,878 (31,878)
1999 --- 33,131 (33,131)
1
At trial, petitioner asserted that expenses (and losses) for
1997 and 1998 were $24,327.81 and $32,382.45, respectively.
Respondent asserts that the horse breeding activity did not

constitute an activity engaged in for profit under section 183,

and that petitioner is not entitled to those losses. For

convenience, we will combine our findings and discussion herein.

I. Burden of Proof

Generally, the burden of proof is on the taxpayer. Rule

142(a)(1). Under section 7491, the burden of proof shifts from

the taxpayer to the Commissioner if the taxpayer produces

credible evidence with respect to any factual issue relevant to

ascertaining the taxpayer’s tax liability. Sec. 7491(a)(1).

It appears that the examination of the years in issue

commenced after the effective date of section 7491. Petitioner

has conceded that he has not satisfied any of the criteria of

section 7491(a)(1) or (2). We conclude that the burden of proof

remains on petitioner for the years in issue.

II. General Background

Petitioner was employed as a full-time emergency room

physician during the tax years in issue. He received taxable
 - 5 -

wage income of $229,176 in 1997, $231,587 in 1998, and $276,600

in 1999. Petitioner worked for EMSA Contracting Services, Inc.

(EMSA), during 1997, 1998, and 1999, and for Florida EM-I Medical

Services, Inc. (EM-I), during 1999. He worked 12-hour shifts and

was scheduled to work 12 to 18 shifts each month.

In 1997, petitioner also worked part time as a medical

director for Florida Regional EMS (Florida EMS). In 1998 and

1999, petitioner worked for Health Central (HC).2

During the years in issue, petitioner was married to Janene

Ryan. Petitioner and his wife owned and bred horses.

III. Horse Activity

A. General

The deductibility of a taxpayer’s expenses attributable to

an income-producing activity depends upon whether that activity

was engaged in for profit. See secs. 162, 183, 212. Section 162

provides that a taxpayer who is carrying on a trade or business

may deduct ordinary and necessary expenses incurred in connection

with the operation of the business. Section 212 provides for a

deduction for expenses paid or incurred in connection with an

activity engaged in for the production or collection of income,

or for the management, conservation, or maintenance of property

held for the production of income.

2
The record is unclear regarding the nature of
petitioner’s work at HC.
 - 6 -

Section 183 specifically precludes deductions for activities

not engaged in for profit except to the extent of the gross

income derived from such activities. Sec. 183(a) and (b)(2).

For example, deductions are not allowable for activities that a

taxpayer carries on primarily as a sport or hobby or for

recreation. Sec. 1.183-2(a), Income Tax Regs. For a taxpayer’s

expenses in an activity to be deductible under section 162 or

section 212, and not subject to the limitations of section 183,

the taxpayer must show that he engaged in the activity with an

actual and honest objective of making a profit. Hulter v.

Commissioner, 91 T.C. 371, 392 (1988); Dreicer v. Commissioner,

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

(D.C. Cir. 1983); Hastings v. Commissioner, T.C. Memo. 2002-310.

Although a reasonable expectation of a profit is not required,

the taxpayer’s profit objective must be actual and honest.

Dreicer v. Commissioner, supra at 645; sec. 1.183-2(a), Income

Tax Regs. Whether a taxpayer has an actual and honest profit

objective is a question of fact to be resolved from all the

relevant facts and circumstances. Hulter v. Commissioner, supra

at 393; Hastings v. Commissioner, supra; sec. 1.183-2(a), Income

Tax Regs. Greater weight is given to objective facts than to a

taxpayer’s mere statement of intent. Dreicer v. Commissioner,

supra at 645; sec. 1.183-2(a), Income Tax Regs. The taxpayer

bears the burden of establishing the requisite profit objective.
 - 7 -

Rule 142(a); Keanini v. Commissioner, 94 T.C. 41, 46 (1990);

Hastings v. Commissioner, supra.

Petitioner is not entitled to a presumption that his horse

activity is engaged in for profit under section 183(d) because

petitioner’s gross income from his horse activity has not

exceeded deductions for any 2 years in the period of 7

consecutive taxable years ending with the first of the years in

issue. See sec. 183(d). The burden of proof has not shifted to

respondent. It remains on petitioner. See id.

B. Losses From the Horse Breeding Activity

Petitioner’s involvement with horses began in 1996, when he

and his wife purchased Nu Time Spot (NTS), an Appaloosa Stallion,

from a friend. Petitioner bought NTS as a foal. Petitioner

wanted to breed NTS but did not do so immediately, because foals

cannot be bred until they are at least 3 years old. Petitioner

also knew that prospective purchasers wanted older, well-trained

foals. Petitioner believed it was best to obtain broodmares and

breed foals.3 Petitioner and his wife hoped to sell the foals

and offer NTS as a stud.

Regulations promulgated under section 183 provide the

following nonexclusive list of factors which normally should be

considered in determining whether an activity was engaged in for

3
Petitioner had five broodmares and two 2-year-old foals
at the time of trial.
 - 8 -

profit: (1) The manner in which the taxpayer carried on the

activity; (2) the expertise of the taxpayer or his advisers; (3)

the time and effort expended by the taxpayer in carrying on the

activity; (4) the expectation that the assets used in the

activity may appreciate in value; (5) the success of the taxpayer

in carrying on other similar or dissimilar activities; (6) the

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. Sec. 1.183-2(b),

Income Tax Regs. No single factor, nor the existence of even a

majority of the factors, is controlling, but rather it is an

evaluation of all the facts and circumstances in the case, taken

as a whole, that is determinative. Golanty v. Commissioner, 72

T.C. 411, 426-427 (1979), affd. without published opinion 647

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

1. The Manner in Which the Taxpayer Carried On the
Activity

The fact that a taxpayer carries on the activity in a

businesslike manner and maintains complete and accurate books and

records may indicate a profit objective. Sec. 1.183-2(b)(1),

Income Tax Regs.

Petitioner did not keep adequate and accurate records of his

horse breeding activity. He did not describe measures he took

for bookkeeping or discuss a method for recording information
 - 9 -

that would indicate that he carried on the activity in a

businesslike manner. A taxpayer is required to maintain records

sufficient to substantiate deductions that he claims on his tax

return. Sec. 6001; sec. 1.6001-1(a), Income Tax Regs.

Petitioner did not file tax returns for the years in issue, nor

did he seek the advice of an accountant or bookkeeper to maintain

books or records.4

Petitioner commingled the financial affairs of the horse

breeding activity with his personal finances. He paid all the

expenses of the horse activity from his personal account and

maintained no separate financial accounts for the horse activity.

The commingling of funds is an indication that the activity is a

hobby rather than a business for profit. See Ballich v.

Commissioner, T.C. Memo. 1978-497.

To the extent petitioner maintained records of his business

activity, the records were disorganized. He placed canceled

checks and receipts from his horse breeding activity in a box or

in Ziploc bags. Petitioner would store the box or bags in his

4
When this case was first called for trial at a prior
session of this Court, petitioner requested a continuance so that
he could prepare returns for the years in issue. Petitioner’s
request was granted, and the case was scheduled on the next
calendar. One week before trial, petitioner submitted Federal
income tax returns to respondent. Then, at trial, petitioner
requested another continuance in order to adjust the farm
expenses claimed. The request for continuance was denied, and
the trial was held at a date later in the session.
 - 10 -

house, barn, or garage or other places. Petitioner retained some

canceled checks, but his records were incomplete.

Petitioner did not develop a business plan. He never

consulted an accountant or purchased accounting software for his

horse breeding activity. Petitioner did not prepare a written

analysis of the time it would take him to break even or make a

profit.

Petitioner’s wife met with two people in the horse breeding

business. She discussed the financial aspects of their

respective operations and the feasibility of entering into the

horse breeding business. Petitioner did not present any evidence

as to how these discussions affected the conduct of the activity.

Petitioner did not conduct the horse training and breeding

activity in a businesslike manner. This factor weighs against

petitioner.

2. The Expertise of the Taxpayer or His Advisers

A taxpayer’s expertise and extensive study of an activity’s

accepted business and economic practices, or consultation with

experts, may indicate a profit objective. Sec. 1.183-2(b)(2),

Income Tax Regs.

Petitioner did not consult with experts to become

knowledgeable about techniques of training and breeding horses,

nor did he learn the economics of the activity. As previously

indicated, petitioner’s wife spoke with two persons about the
 - 11 -

financial aspects of their respective horse breeding activities.

However, petitioner did not elaborate on those conversations

regarding the advice, if any, or on the economic aspects of horse

training and breeding. Petitioner and his wife may have received

some advice on the economic aspects of horse breeding, but the

facts do not indicate that petitioner received any specific

business advice on how to start and operate a horse breeding

business.

Petitioner’s wife has handled, ridden, and cared for horses

all of her life. Apparently, Mrs. Ryan had gained substantial

experience in the training, breeding, health, and maintenance of

horses since leaving high school. Mrs. Ryan’s experience is not

the same as knowledge of the financial aspects of creating a

profitable horse breeding program. See McKeever v. Commissioner,

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

horsewoman did not provide sufficient expertise on the economic

aspects of a horse pursuit to indicate a profit objective). This

factor weighs against petitioner.

3. The Time and Effort Expended by the Taxpayer in
Carrying On 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

personal or recreational aspects. Id.
 - 12 -

From 1997 through 1999, petitioner worked twelve to eighteen

12-hour shifts each month as a full-time emergency room

physician. Petitioner also worked part time for other medical-

related entities in addition to his full-time work. Petitioner

worked approximately 180 hours each month.

Nevertheless, petitioner spent some of his time working with

his wife in the maintenance and care of their horse breeding

activity. He traveled to horse shows with his wife. He

purchased feed and cleaned, bathed, brushed, and fed the horses.

He took care of the horse farm and ran errands that benefited the

horses. Petitioner’s wife, however, did most of the work

regarding the care of the horses. Petitioner did not use the

horses for more than minimal personal or recreational use. This

factor weighs in petitioner’s favor.

4. The Expectation That the Assets Used in the
Activity May 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).
 - 13 -

Petitioner indicated that his primary expectation for a

profit came from the anticipated appreciation in the value of his

horses. He failed to explain the basis of that expectation.

Petitioner knew that it was unlikely that he and his wife would

earn a profit from their horse breeding activity because they

purchased NTS as a foal, and NTS physically could not breed with

a mare for at least 3 years. Petitioner asserted that it would

be another 3 years after NTS was ready for breeding before

petitioner would sell any of the stallion’s foals. This 6-year

timeframe does not include the mare’s 11-1/2 month-gestation

period. Petitioner knew that the sale of a horse from his

breeding activity would not occur until, at least, more than 7

years into the activity.

Furthermore, the record shows that petitioner’s horse

breeding activity produced a history of losses. Petitioner

reported substantial losses for 1997, 1998, and 1999. There is

no record of any receipts for the years in issue or years

following. This factor weighs against petitioner.

5. The Success of the Taxpayer in Carrying On Other
Similar or Dissimilar Activities

Although an activity is unprofitable, the fact that a

taxpayer has previously converted comparable activities from

nonprofitable to profitable enterprises may show a profit

objective. Sec. 1.183-2(b)(5), Income Tax Regs.
 - 14 -

Neither petitioner nor his wife has ever been involved in

any other entrepreneurial ventures. This is a neutral factor.

6. The Taxpayer’s History of Income or Losses With
Respect to the Activity

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 (horsebreeding activity may be

engaged in for profit despite consistent losses during the

startup phase).

Petitioner attributes part of his losses to a depressed

market due to the September 11, 2001, terrorist attacks.

Petitioner testified that, before 2001, he could have received

$10,000 to $20,000 dollars for a 3-year-old foal, but in 2004,

petitioner believed that a 3-year-old foal would yield a maximum

of $10,000 to $12,000 dollars. Petitioner had several years of

losses because he did not have any 3-year-old foals to sell.

Petitioner had losses totaling $93,893 for tax years 1997,

1998, and 1999 combined. While the events of September 11, 2001,

may have depressed the market, petitioner did not make any sales

or have any foals available for sale during the years in issue.

There is no evidence of any gross receipts from this activity at
 - 15 -

any time before or after the years in issue. This factor weighs

against petitioner.

7. The Amount of Occasional Profits, if any, Which Are
Earned

The amount of profits earned in relation to the amount of

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

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 speculated that he could have earned substantial

income through breeding NTS. Petitioner purchased NTS because he

was a special stallion, one of two grandchildren of a 10-time,

world champion, Appaloosa horse. When petitioner purchased NTS,

he believed that this stallion could sire foals ranging in value

from $5,000 to $20,000, depending on the foal’s age. Yet

petitioner provided no proof of the Appaloosa breed’s ability to

command a price of $5,000 to $20,000 per foal. This factor

weighs against petitioner.
 - 16 -

8. The Financial Status of the Taxpayer

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 received approximately $229,176 in 1997, $231,587

in 1998, and $276,600 in 1999 in wages from his work as an

emergency room physician. Petitioner averaged $244,000 per year

as a full-time wage earner over the 3-year tax period. The

salary or income for each tax year in question, which petitioner

hoped to offset by claimed losses, indicates that the activity is

not one engaged in for profit. This factor weighs against

petitioner.

9. Elements of Personal Pleasure or Recreation

The absence of personal pleasure or recreation relating to

the activity in question may indicate the presence of a profit

objective. Sec. 1.183-2(b)(9), Income Tax Regs. The mere fact

that a taxpayer derives personal pleasure from an activity,
 - 17 -

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.

Petitioner derived some pleasure from the horse breeding

activity (he enjoyed the horses and attended horse shows and

other events with his wife), but we do not find that the

enjoyment rose to the level of recreational activity. Petitioner

did not ride the horses for recreational purposes, although his

wife rode them when she showed the horses at certain horse-

related events. This factor is neutral.

On the basis of the above analysis, we conclude that

petitioner is not entitled to the claimed losses resulting from

his horse breeding activity.

IV. Filing Status

In order to qualify for rates applicable to “Married

Individuals Filing Joint Returns”, an individual must make a

joint return with his or her spouse pursuant to section 6013.

Sec. 1(a)(1). Joint filing status is not permitted unless a

joint return is filed and made a part of the record before the

case is submitted to the Court for decision. Phillips v.

Commissioner, 86 T.C. 433, 441 n.7 (1986), affd. in part and

revd. in part 851 F.2d 1492 (D.C. Cir. 1988); Gudenschwager v.

Commissioner, T.C. Memo. 1989-6 (“If a taxpayer has not filed a
 - 18 -

return by the time his case is submitted for decision, it is too

late for the taxpayer to file a joint return and elect joint

filing status.”).

Petitioner submitted 1997, 1998, and 1999 Federal income tax

returns to respondent approximately 1 week before trial and

before the matter was submitted. On the 1997 and 1999 returns,

petitioner checked the box “married filing joint return”.5 The

returns were signed by petitioner, but not by his wife.

Under certain circumstances, Federal income tax returns may

be considered joint returns if one spouse signs the returns and

checks the box indicating that the returns are joint returns.

Sec. 1.6013-1(a)(2), Income Tax Regs.; see Heim v. Commissioner,

27 T.C. 270, 273 (1956) (where filing status on tax return

indicated married filing joint return, but the taxpayer’s wife

did not sign return, did not object to its filing, or did not

file a separate return herself, it was presumed that the joint

return was filed with the tacit consent of the wife), affd. 251

F.2d 44 (8th Cir. 1958). However, returns signed by just one

spouse will qualify as valid joint returns only if both spouses

intend to file joint returns. Gudenschwager v. Commissioner,

supra.

5
On the 1998 return, petitioner checked the box “married
filing separate returns”. Thus, it is clear petitioner did not
intend to file a joint return for 1998.
 - 19 -

The factors evidencing intent to file a joint return are:

Lack of reason for a refusal to file a joint return, the absence

of objections by the nonsigning spouse, the delivery of tax data

to the husband for the purpose of making the tax return, and the

apparent advantage in filing a joint return. Heim v.

Commissioner, supra.

The Federal income tax returns petitioner submitted to

respondent reported taxable wage income of $223,776 for 1997 and

$274,080 for 1999. Petitioner’s wife received wage income of

$6,288 in 1997 and $9,759 in 1999. The wage income petitioner

reported on the Federal income tax returns does not include the

wage income received by his wife. The returns reflect only

petitioner’s wage income for 1997 and 1999.

There is no evidence that petitioner’s wife intended to file

a joint return with petitioner for 1997 or 1999. We conclude

that petitioner is not entitled to joint filing status for any of

the years in issue. Respondent’s determination is sustained.

V. 1997 Sale of Stock

On November 26, 1997, petitioner sold 700 shares of Barnett

Banks, Inc. stock. Respondent determined in the notice of

deficiency that petitioner had short-term capital gain on the

sale of 700 shares of stock.

Petitioner received proceeds of $49,568 from the sale of the

700 shares of stock. The parties stipulated that petitioner had
 - 20 -

a cost basis of $17,843.15 (including brokerage fees and

commissions) on the first 541.4054 of the 700 shares sold.

Petitioner and respondent did not stipulate the cost basis for

the remaining 158.5946 shares sold. Petitioner substantiated his

claim that the 700 shares of stock were purchased during the

1980s. Petitioner presented credible testimony that he paid for

the stock through automatic deductions from his checking account

over a 5-year period. We are satisfied that petitioner purchased

the 700 shares of stock and held them for more than 1 year;

therefore, petitioner is entitled to long-term capital gain

treatment on the sale of the 700 shares of stock. See sec.

1222(3).

VI. 1997 Nonemployee Compensation

Respondent determined that petitioner received $10,800 in

nonemployee compensation from Florida EMS in 1997. The parties

stipulated that petitioner received nonemployee compensation in

1997 from Florida EMS of “at least” $5,400. Petitioner asserts

that Florida EMS mistakenly sent a duplicate Form 1099-MISC,

Miscellaneous Income, to respondent showing $5,400. Petitioner

presented credible testimony that he received Form 1099 income

during 1997 of $5,400, and not $10,800. Respondent did not

present a copy of a second Form 1099 showing $5,400, but rather
 - 21 -

relied on an IRPTR transcript6 of account reflecting receipt of

two Forms 1099 showing $5,400 each.

Petitioner credibly testified that the second Form 1099 was

a duplicate. At trial, petitioner accepted responsibility for

failing to file his Federal income tax returns and failing to

keep adequate records of the horse breeding activity. He agreed

to all omitted income, except the additional $5,400 reflected on

Form 1099. We conclude, on this record, that petitioner did not

receive additional other income of $5,400 as determined by

respondent.

Reviewed and adopted as the report of the Small Tax Case

Division.

To reflect the foregoing,

Decision will be entered

under Rule 155.

6
The document is a Certificate of Official Record,
Information Returns Master File Transcript. Respondent was
unable to provide any detail as to the source of the $5,400
reflected in the transcript.