T.C. Memo. 2008-203
UNITED STATES TAX COURT
RALPH THOMAS WHITECAVAGE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 788-06. Filed August 27, 2008.
Ralph Thomas Whitecavage, pro se.
Jonae A. Harrison, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
THORNTON, Judge: Respondent determined the following
deficiencies and penalty in petitioner’s Federal income taxes:
Accuracy-Related Penalty
Year Deficiency Sec. 6662(a)
2001 $1,590 --
2002 14,521 $2,904
2003 2,490 --
- 2 -
The issues for decision are: (1) Whether during 2001, 2002,
and 2003 petitioner engaged for profit in the activity of
breeding greyhounds for racing; and (2) whether petitioner is
liable for a section 6662 accuracy-related penalty for 2002.
All section references are to the Internal Revenue Code in
effect for the taxable years at issue, and all Rule references
are to the Tax Court Rules of Practice and Procedure.
FINDINGS OF FACT
The parties have stipulated some facts, which are so found.
When he petitioned the Court, petitioner resided in Arizona.
Petitioner was an auditor for the Internal Revenue Service
(IRS) for 21 years, including the years at issue. He was
stationed in the Yuma, Arizona, office of the IRS, where he
worked about 42.5 hours a week before retiring in 2006.
Petitioner resided on his property about 3 miles from Yuma.
In 1994 petitioner began breeding greyhounds there for the
purpose of entering them in dog races. Each year he bred a
litter of pups. Over 10 years he raised about 88 greyhounds.
Before 2002 petitioner kept his greyhounds in crates in his
garage; twice a day he would take them out for exercise. During
2002 petitioner built a 1,000-square-foot kennel and added a new
run and fencing.
Because of his full-time job at the IRS, petitioner could
not spend much time with the dogs during workdays, but he fed and
- 3 -
cleaned up after them mornings and evenings. Petitioner did not
hire any caretaker to tend the dogs while he was at work.
Petitioner would keep the pups on his property until they
were a little over 1 year old. Then he would send them to
Florida, Oklahoma, or New Mexico to train for racing on a track.
After being trained, petitioner’s greyhounds were taken to be
raced in Florida and Arizona. Petitioner received a percentage
of any winnings.
Not all the greyhounds survived training; petitioner “lost”
about 20 greyhounds because of bad training methods by the
trainers in the racing kennels. The greyhounds that survived
spent the rest of their racing lives on the track and generally
did not return to petitioner. Instead, at the end of their
racing lives the greyhounds generally would be “petted out”;
i.e., sent into an adoption program or to a veterinarian,
presumably to be euthanized. Petitioner received no money for
these dogs upon their retirement.
Before he commenced breeding greyhounds for racing,
petitioner did not consult an economist or other professional
business adviser. Although he received some racetrack winnings,
petitioner never realized a profit from breeding and racing
greyhounds. Petitioner ceased his greyhound activity in 2006,
the same year he retired from the IRS.
- 4 -
On Schedules C, Profit or Loss From Business, of his Forms
1040, U.S. Individual Income Tax Return, petitioner reported
losses from his greyhound activity as follows:
2001 2002 2003
Gross dog-race winnings $5,695 $3,746 $4,210
Total expenses 15,340 53,230 19,873
Net loss 9,645 49,484 15,663
By notice of deficiency respondent determined that these
reported losses were not allowable under section 183 because
petitioner’s greyhound activity was not entered into for profit.1
Respondent also determined that for 2002 petitioner was liable
for the section 6662 accuracy-related penalty, on the basis that
petitioner’s corrected income tax liability for 2002 was $20,513
rather than the $5,992 that petitioner had reported, giving rise
to a substantial understatement of income tax within the meaning
of section 6662(d).
OPINION
A. Petitioner’s Greyhound Activity
Under section 183(b)(2), if an individual engages in an
activity without the primary objective of making a profit,
deductions attributable to the activity are allowable only to the
extent of gross income from the activity. See Allen v.
Commissioner, 72 T.C. 28, 33 (1979). The critical inquiry is
1
Respondent allowed petitioner miscellaneous itemized
deductions equal to the amounts of gross income reported from the
greyhound activity.
- 5 -
whether making a profit is the taxpayer’s “predominant, primary,
or principal objective”. Wolf v. Commissioner, 4 F.3d 709, 713
(9th Cir. 1993), affg. T.C. Memo. 1991-212; Machado v.
Commissioner, T.C. Memo. 1995-526, affd. without published
opinion 119 F.3d 6 (9th Cir. 1997); Warden v. Commissioner, T.C.
Memo. 1995-176, affd. without published opinion 111 F.3d 139 (9th
Cir. 1997). Although the taxpayer need not have a reasonable
expectation of realizing a profit, he or she must have a bona
fide objective to do so. Burger v. Commissioner, 809 F.2d 355,
358 (7th Cir. 1987), affg. T.C. Memo. 1985-523; Golanty v.
Commissioner, 72 T.C. 411, 425-426 (1979), affd. without
published opinion 647 F.2d 170 (9th Cir. 1981); sec. 1.183-2(a),
Income Tax Regs. Whether the taxpayer has the requisite
objective to realize a profit is a question of fact, to be
resolved on the basis of all relevant circumstances, with greater
weight being given to objective factors than to mere statements
of intent. Dreicer v. Commissioner, 78 T.C. 642, 645-646 (1982),
affd. without opinion 702 F.2d 1205 (D.C. Cir. 1983); Golanty v.
Commissioner, supra at 426. The taxpayer generally bears the
burden of establishing that the activity was engaged in for
profit.2 See Rule 142(a).
2
Petitioner has not claimed or shown that he meets the
requirements under sec. 7491(a)(1) to shift the burden of proof
to respondent as to any factual issue relating to his liability
for tax.
- 6 -
The regulations under section 183 provide a nonexclusive
list of factors to be considered in determining whether an
activity is engaged in for profit. The factors include: (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 the taxpayer spent in carrying on the activity; (4) the
expectation that assets used in the activity may appreciate in
value; (5) the taxpayer’s success in carrying on other
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 taxpayer’s financial status; and
(9) whether elements of personal pleasure or recreation are
involved. Sec. 1.183-2(b), Income Tax Regs.; see Golanty v.
Commissioner, supra at 426.
As discussed below, on the basis of all the evidence in the
record we conclude that petitioner did not engage in his
greyhound activity for profit within the meaning of section 183.
1. Manner in Which Petitioner Carried on the Activity
Petitioner did not carry on his greyhound activity in a
businesslike manner. He did not maintain complete and accurate
books and records regarding his greyhound activity, did not
maintain a written business plan, and did not contemporaneously
prepare budgets or financial analyses for his greyhound activity.
Although petitioner claims to have prepared a “cost analysis
- 7 -
plan”, at trial he acknowledged that this plan was prepared only
in the course of the audit and examination of the tax years at
issue. His substantiation of claimed expenses was spotty and
consisted largely of some canceled checks supported by his vague
testimony. He had no written contracts with the third parties
who trained, hauled, and raced his greyhounds.3
Petitioner was licensed with the Arizona Department of
Racing, at least for 2001; he alleges that he was also licensed
with the Texas Department of Racing and the Florida Department of
Racing. He also alleges that he had “some of the best blood
lines in Greyhound Racing in the State of Arizona.” Such
circumstances do not suffice to establish, however, that
petitioner conducted his greyhound activity in a businesslike
manner. This factor weighs against petitioner.
3
At trial petitioner indicated that he wished to call as a
witness Lonnie Boyle, who allegedly hauled petitioner’s dogs to
training sites and leased petitioner’s dogs to run under Mr.
Boyle’s kennel name. Petitioner stated that he expected to
elicit from Mr. Boyle testimony about the “mechanics of the
racing kennel” and “basically what happens to the dogs through
the racing end of it and what happens when it’s petted out.”
Having failed to subpoena Mr. Boyle, however, petitioner failed
to have him available at trial. The Court declined petitioner’s
request to continue the trial to receive Mr. Boyle’s testimony at
some later date. Insofar as it might be pertinent to our
analysis of whether petitioner engaged in his greyhound activity
for profit within the meaning of sec. 183, the subject matter of
Mr. Boyle’s expected testimony, as described by petitioner,
appears largely redundant of undisputed information already in
the record. Moreover, insofar as petitioner may have sought to
elicit expert testimony from Mr. Boyle, petitioner failed to
submit an expert report pursuant to Rule 143(f).
- 8 -
2. Expertise of Petitioner or Advisers
Preparation for an activity by extensive study of its
accepted business, economic, and scientific practices, or
consultation with those who are expert therein, may indicate a
profit motive if the taxpayer carries on the activity in
accordance with such practices. Sec. 1.183-2(b)(2), Income Tax
Regs. In analyzing profit motive, a distinction must be drawn
between expertise in the mechanics of an activity and expertise
in the business and economic aspects of an activity. See Burger
v. Commissioner, supra at 359. Failure to consult economic
experts or to develop an economic expertise may indicate a lack
of a profit motive. Id.
Although petitioner presumably acquired some knowledge about
the mechanics of greyhound breeding and racing before he
commenced his greyhound activity, he has not demonstrated that he
consulted economic experts or developed any personal economic
expertise as to how to make a profitable business of his
greyhound activity. This factor weighs against petitioner.
3. Time and Effort Expended in Activity
Time and effort expended in carrying on an activity may be
indicative of profit motive, particularly in the absence of
substantial personal or recreational elements associated with the
activity. Sec. 1.183-2(b)(3), Income Tax Regs. During the years
at issue, petitioner was a full-time IRS employee. At trial
- 9 -
petitioner acknowledged that his full-time IRS job limited the
time he could devote to the greyhound activity. Petitioner had
time to breed only one litter of pups annually. At trial he
conceded that for his greyhound activity to be profitable he
would have needed to breed at least three or four litters
annually. This factor weighs strongly against petitioner.
4. Expectation That Assets May Appreciate in Value
On brief petitioner contends that the expectation that one
or more of his greyhounds might become a winning “Stakes Dog” was
“a major component” in his decision to engage in his greyhound
activity. He claims that such a dog “could easily have an
expected value price of between $100,000 to $250,000.” The
evidence strongly suggests, however, that petitioner’s greyhounds
generally depreciated in value, being either “lost” during
training or else “petted out” at the end of their racing
careers.4 Insofar as the record shows, in all the years that
petitioner engaged in his greyhound activity, he never sold any
of his dogs. On the basis of the evidence in the record, we are
unpersuaded that petitioner had a bona fide expectation of making
a profit on his greyhound activity by selling his dogs at a price
that would generate sufficient income to offset past losses.
4
Petitioner claims that in 2000 one of his greyhounds won a
race but acknowledges that by 2001 the greyhound had “finished
her career” as a brood on his farm.
- 10 -
Petitioner claims that improvements made to his property in
2002, such as the addition of a kennel house, added “considerable
value” to his property. There is no evidence, however, that
petitioner held his property with a view of subsequently selling
it for a profit to defray the costs of his greyhound activity.
Accordingly, we do not take these improvements into account in
judging petitioner’s objective in conducting the greyhound
activity. See Golanty v. Commissioner, 72 T.C. at 430. In any
event, the evidence in the record does not establish either the
cost of the improvements or the extent to which they might have
added to the property’s value. This factor weighs against
petitioner.
5. Petitioner’s Success in Other Activities
If the taxpayer has engaged in similar activities in the
past and converted them from unprofitable to profitable
enterprises, it may tend to show that the current activity was
entered into for profit, even though it is presently
unprofitable. Sec. 1.183-2(b)(5), Income Tax Regs. Insofar as
the record reveals, petitioner has not engaged in other
activities similar to the greyhound activity by which we might
evaluate his success in those other activities.5 This factor is
neutral.
5
On brief, petitioner alleges that before going to work for
the IRS he worked in the hotel industry.
- 11 -
6. History of Income or Losses From Activity
Where losses continue beyond the period which is customarily
necessary to bring the operation to profitable status, it may be
an indication that the activity is not engaged in for profit.
Sec. 1.183-2(b)(6), Income Tax Regs. As of 2003 petitioner had
realized losses from his greyhound activity for 10 straight
years. This factor weighs against petitioner.
7. Amount of Occasional Profits
The amount and frequency of occasional profits earned from
the activity may be indicative of a profit objective. Sec.
1.183-2(b)(7), Income Tax Regs. Petitioner never realized a
profit from his greyhound activity. This factor weighs against
petitioner.
8. Petitioner’s Financial Status
Substantial income from sources other than the activity may
indicate lack of a profit motive, especially if there are
personal or recreational elements involved. Sec. 1.183-2(b)(8),
Income Tax Regs. During the years at issue, petitioner had a
full-time job with the IRS. This factor weighs against
petitioner.
9. Elements of Personal Pleasure
The presence of personal motives in carrying on an activity,
especially if recreational or personal elements are involved, may
indicate that the activity is not for profit. Sec. 1.183-
- 12 -
2(b)(9), Income Tax Regs. The mere fact that a taxpayer derives
pleasure from an activity, however, does not show a lack of
profit objective if the activity is conducted for profit as
evidenced by other factors. Id.
Certain aspects of petitioner’s activity, such as feeding,
grooming, and cleaning up after the greyhounds, generally might
not be considered pleasurable, even though they are not so
different from the duties of any pet owner. Ultimately, however,
it seems to us that petitioner’s activity of breeding greyhounds
for racing, although conducted by petitioner in a seemingly
inhumane manner (for many years keeping numerous dogs confined in
crates in his Yuma, Arizona, garage, while he worked a full-time
job at the IRS, sending the pups off to “training” that almost a
fourth of them would not survive, and ultimately casting off most
of the others for possible adoption or destruction)6 involved
recreational elements as are common to other forms of
recreational gambling, with those elements being enhanced by such
sense of sport or gamesmanship as might derive from having one’s
own dogs in the races. This factor weighs against petitioner.
On the basis of all the evidence, we conclude that
petitioner failed to establish that he engaged in his greyhound
6
In making these observations, we intend no inference as to
any finding of criminal liability of petitioner, an issue which
is beyond the purview of this Court.
- 13 -
activity with a predominant, primary, or principal objective to
make a profit within the meaning of section 183.
B. Section 6662 Accuracy-Related Penalty
Section 6662(a) and (b)(2) imposes a 20-percent
accuracy-related penalty on any portion of a tax underpayment
that is attributable to, among other things, any substantial
understatement of income tax, defined in section 6662(d)(1)(A) as
an understatement that exceeds the greater of 10 percent of the
tax required to be shown on the return or $5,000. Sec.
6662(d)(1). Petitioner’s understatement of tax for 2002
($14,521) exceeds $5,000 (which is greater than 10 percent of the
tax required to be shown on his 2002 return ($2,051)).
Respondent has satisfied his burden of production under section
7491(c).
The accuracy-related penalty does not apply with respect to
any portion of the underpayment if it is shown that the taxpayer
had reasonable cause and acted in good faith. Sec. 6664(c)(1).
Petitioner has not shown (or even expressly claimed) that he had
reasonable cause or acted in good faith with respect to his
understatements of income tax. Any such defense appears
especially problematic in the light of petitioner’s employment as
an IRS auditor.
- 14 -
Contentions advanced by the parties and not addressed herein
we conclude to be moot or without merit.7
Decision will be entered
for respondent.
7
In particular, petitioner states on brief that he
“believes” that he has been audited twice for tax years 2001 and
2002, the first time as part of an investigation by the U.S.
Treasury Inspector General for Tax Administration (TIGTA). He
appears to suggest that because of this purported TIGTA
investigation, the subsequent IRS examination which resulted in
the notice of deficiency that is the subject of this proceeding
was a second examination of petitioner’s books and records that
was prohibited pursuant to sec. 7605(b). Petitioner cites no
authority (and we are aware of none) for the proposition that
sec. 7605(b) applies to a TIGTA investigation of an IRS employee.
In any event, the evidence in the record does not establish that
respondent ever examined petitioner’s books and records in
connection with any TIGTA audit. To the contrary, according to
petitioner’s representations on brief, the TIGTA audit appears to
have been concluded upon the basis of an interview with
petitioner.