T.C. Summary Opinion 2007-117
UNITED STATES TAX COURT
PAULA L. WILSON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
MICHAEL EDWARD RYAN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 22721-05S, 22747-05S. Filed July 11, 2007.
Scott P. Hendricks, for petitioners.
Catherine S. Tyson, for respondent.
FOLEY, Judge: This case was heard pursuant to section 74631
of the Internal Revenue Code in effect when the petitions were
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
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filed. Pursuant to section 7463(b), the decisions to be entered
are not reviewable by any other court, and this opinion shall not
be treated as precedent for any other case. The issue for
decision is whether petitioners are entitled to certain
deductions relating to their horse-breeding activity for 2002.
Background
At all relevant times, Paula Wilson and Michael Ryan
(collectively, petitioners) have been law enforcement officers.
In 1995, petitioners established Wilson Ryan Quarter Horses, a
horse training and breeding operation (the activity). Ms. Wilson
had significant experience in training horses (i.e., she began
training horses at age 9) and was responsible for the training of
petitioners’ horses.
Petitioners routinely woke up before 5:00 a.m. each day to
clean the horse stalls and feed the horses; returned from their
respective law enforcement duties at 5:00 p.m.; and fed, trained,
and cared for the horses late into the night. In addition,
petitioners kept continuous watch over the horses during breeding
and foaling seasons.
From 1995 through 2002, Ms. Wilson attended exhibitions and
advertised in trade magazines to promote Wilson Ryan Quarter
Horses. In addition, she consulted with trainers, doctors, and
nutritionists to care for the horses properly. Mr. Ryan
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maintained the books and records and tended to the horses when
Ms. Wilson was unavailable. Neither petitioner rode the horses
for pleasure.
In 1997, petitioners sold five horses for a profit.
Petitioners, however, believed that they needed to find a unique
type of horse to maximize their profit potential. They
researched several types of horses, concluded that Skipper W
horses were the best “all-around performance” horses, and in
October of 1996, bought Scotchcourt, a champion-bred Skipper W
mare. In 1997, Scotchcourt produced a stallion, Buzz, that
petitioners anticipated would become a profitable stud. After
developing severe medical problems, however, he was not able to
do so.
In 2000, petitioners sold their 10-acre farm and purchased a
75-acre farm. On the new farm, they maintained a hayfield to
feed the horses, three additional structures to house the horses,
and a barn with stalls and a riding area to facilitate the
breeding and training of the horses.
In September 2001, Ms. Wilson was injured while on duty as a
law enforcement officer and, as a result, could not train horses
for approximately 1 year. In the fall of 2002, Ms. Wilson
suffered a broken collarbone and was unable to train horses for
another year. In 2002, petitioners purchased a stallion, Scotch
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N Lark, and hoped that he would sire numerous offspring that
could be sold for profit. Scotch N Lark, however, died from an
undetectable illness. Despite the setbacks, petitioners’ herd
grew from 5 horses in 1997 to 41 horses in 2002.
On August 30, 2005, respondent sent each petitioner a notice
of deficiency relating to 2002. Respondent determined that the
activity was not engaged in for profit. On December 1, 2005,
while residing in Murphysboro, Illinois, each petitioner filed a
petition with the Court. On December 8, 2006, the cases were
consolidated for trial, briefing, and opinion.
Discussion
Section 183 limits the deductions relating to an activity
not engaged in for profit. Sec. 183(b). For purposes of section
183, a taxpayer engages in an activity for profit if he enters
into the activity with the actual and honest objective of making
a profit. The taxpayer's expectation of profit need not be
reasonable, but he or she must have a good faith objective of
making a profit. Allen v. Commissioner, 72 T.C. 28, 33 (1979);
sec. 1.183-2(a), Income Tax Regs.
Section 1.183-2(b), Income Tax Regs., sets forth a
nonexclusive list of nine factors to guide courts in analyzing a
taxpayer’s profit objective. The nine factors are: (1) The
manner in which the taxpayer carries on the activity; (2) the
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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, that are earned; (8) the
financial status of the taxpayer; and (9) the elements of
personal pleasure or recreation involved in the activity.
Having considered the factors listed in section 1.183-2(b),
Income Tax Regs., we hold that petitioners actually and honestly
intended to make a profit in the activity. Consequently, section
183 does not limit the deductions claimed by petitioners with
respect to the activity.2
Respondent contends that because petitioners have incurred
losses relating to the activity in each year, they did not have
the requisite profit objective. To the contrary, petitioners
honestly and actually believed that they would recoup their
2
Pursuant to sec. 7491(a), petitioners have the burden of
proof unless they introduce credible evidence relating to the
issue that would shift the burden to respondent. See Rule
142(a). Our conclusions, however, are based on a preponderance
of the evidence, and thus the allocation of the burden of proof
is immaterial. See Estate of Bongard v. Commissioner, 124 T.C.
95, 111 (2005).
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losses and ultimately make a profit. Sec. 1.183-2(b)(6), Income
Tax Regs. (stating that losses incurred during the initial phase
of a business are not necessarily an indication that the activity
was not engaged in for profit). Respondent contends that the
fact that petitioners have never conducted a successful horse-
breeding and training business indicates a lack of profit
objective. We conclude that this factor is outweighed by the
following factors.
Petitioners carried on the activity in a businesslike
manner. They advertised in trade magazines, attended seminars,
and kept records in a manner consistent with an intent to improve
profitability. In addition, they abandoned an unprofitable
method in a manner consistent with an intent to improve
profitability (i.e., determining that the Skipper W bloodline
would be more profitable). See sec. 1.183-2(b)(1), Income Tax
Regs. Petitioners did not ride the horses for pleasure. See
sec. 1.183-2(b)(9), Income Tax Regs. (stating that the presence
of personal pleasure may indicate the lack of a profit
objective).
Ms. Wilson had significant experience training horses, and
petitioners consulted with experts relating to the caring,
feeding, and training of horses. In addition, petitioners
regularly consulted with their accountant with respect to the
activity’s books and records. Petitioners, in addition to their
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law enforcement careers, devoted considerable time to, and
handled all material aspects of, the activity. Sec. 1.183-
2(b)(3), Income Tax Regs. (stating that the fact that a taxpayer
devotes substantial personal time and effort to carrying on an
activity may indicate an intention to derive a profit).
Petitioners expected their farm and herd to appreciate.
Furthermore, petitioners devoted all of their savings from their
law enforcement salaries to the activity. They are hardworking,
diligent, and levelheaded. We do not believe that they would
squander their hard-earned money on an extravagant hobby.
The fact that the taxpayers do not have substantial income
or capital from sources other than the activity may indicate that
the activity is engaged in for profit. See sec. 1.183-2(b)(8),
Income Tax Regs. Although petitioners suffered several setbacks
(e.g., the injuries suffered by Ms. Wilson, the death of Scotch N
Lark, etc.) that prevented them from making a profit, they
actually and honestly believed that their future earnings and
profit would be substantial.
Contentions we have not addressed are irrelevant, moot, or
meritless.
To reflect the foregoing,
Decisions will be entered
for petitioners.