NO. 93-599
IN THE SUPREME COURT OF THE STATE OF MONTANA
1994
DENNIS and DARLENE LEAHY,
Petitioners and Appellants,
DEPARTMENT OF REVENUE, STATE OF
MONTANA, and the STATE TAX APPEAL BOARD,
Respondents and Respondents.
APPEAL FROM: District Court of the First Judicial District,
In and for the County of Lewis and Clark,
The Honorable Dorothy McCarter, Judge presiding.
COUNSEL OF RECORD:
For Appellants:
Thomas C. Morrison, Helena, Montana
For Respondents:
Paul Van Tricht, Tax Counsel, Montana Department of
Revenue, Helena, Montana
AUG 4 1994
D Submitted on Briefs: May 11, 1994
Decided: ~ugust 1994
4,
Filed:
Z .-h??dP2. P
d c'.
CLERK OF %UPASME COURT
STATE OF MONTANA
Ckerk
Justice James C. Nelson delivered the Opinion of the Court.
This is an appeal from a First Judicial District Court, Lewis
and Clark County, petition for judicial review of a State Tax
Appeal Board (STAB) hearing, concluding that the Petitioners'
(Leahysl)horse training operation was not run for profit. We
affirm.
The following are issues on appeal:
1. Did the District Court err in failing to open the record
and admit additional evidence?
2. Did the District Court err in failing to take judicial
notice of various evidentiary "factsM?
3. Did the District Court err in affirming the STAB'S
conclusion that the Leahysl operation was not an activity engaged
in for profit?
BACKGROUND
The Leahys live in Livingston, Montana, where Darlene has run
a horse training operation. Dennis is an airline pilot for United
Airlines. The Leahys were audited for tax years 1983 through 1987,
and the Department of Revenue (DOR) determined that the horse
training operation was not an activity engaged in for profit and
therefore, the DOR disallowed certain business expenses that Leahys
had claimed.
The DOR determination was appealed and a DOR hearing examiner
conducted a hearing on June 29, 1989. The hearing examiner
affirmed the DOR1s assessment in his order, dated November 17,
1989. The parties then stipulated to waive the formal hearing and
2
proceeded directly to the STAB. A hearing before the STAB was held
on July 24, 1991, and the STAB issued its Findings of Fact,
Conclusions of Law, Order and Opportunity for Judicial Review on
October 29, 1991, affirming the DOR1s decision. The Leahys were
represented at the STAB hearing by two nonlawyer CPAs but neither
of the Leahys appeared or testified at the hearing. The Leahys
filed their petition for judicial review of the STAB1sorder before
the First Judicial District Court on December 26, 1991. The
District Court filed its Order on Petition for Judicial Review on
September 1, 1993, affirming the decision of the STAB. This appeal
followed. Additional facts will be presented as necessary in the
body of the opinion.
STANDARD OF REVIEW
When reviewing an administrative agency's findings of
fact, this Court will defer to the agency's findings
unless they are clearly erroneous. Findings of fact are
clearly erroneous if they are not supported by
substantial credible evidence. Steer, Inc. v. Department
of Revenue (1990), 245 Mont. 470, 803 P.2d 601. Our
standard for reviewing legal conclusions of an agency or
a district court is simply to determine whether they are
correct. Steer, 803 P.2d at 603.
Westmoreland Resources v. Department of Revenue (Mont. 1994), 868
P.2d 592, 596-597, 51 St.Rep. 67, 70. Interstate Production Credit
v. DeSaye (1991), 250 Mont. 320, 820 P.2d 1285, expanded the
definition of "clearly erroneousv1
discussed in Steer, and in doing
so, developed a three-part test to determine if a finding was
clearly erroneous. DeSaye, 820 P.2d at 1287. The first prong of
the test, whether the findings are supported by substantial
credible evidence, is generally dispositive of whether a finding is
clearly erroneous.
1. ADMISSION OF ADDITIONAL EVIDENCE
Did the District Court err in failing to open the record and
admit additional evidence?
Leahys contend that they were misinformed about the reality of
proceedings before the STAB and therefore, evidence which was vital
to their case was excluded. They state that their nonlawyer
representatives were not equipped to handle the objections made by
the DOR to the evidence they proposed to be admitted. The Leahys
claim these objections were sustained by the STAB and they were
unfairly prevented from presenting their case. The DOR asserts
that the Leahys were fully aware of the factual and legal elements
necessary to prove their case and the Leahys should not be heard to
complain. Moreover, the DOR states that the STAB admitted all the
Leahyst testimony and evidence and the petitioners were represented
by competent tax professionals.
section 15-2-303(4), MCA (1991), now numbered 9 15-2-303(5),
MCA (1993), provides:
(4) Notwithstanding the provisions of 2-4-704 (1),
the court may, for good cause shown, permit additional
evidence to be introduced.
We discussed this srhsection in O'Neill v. Department of
Revenue (1987), 227 Mont. 226, 231, 739 P.2d 456, 459, and stated:
Under Section 15-2-303(4), MCA, the court reviewing
a STAB decision may, on its own initiative or upon motion
of a party, find good cause and allow additional evidence
to be introduced before the court. ...
We find that the showing of good cause under Section
15-2-303 (4), is permissive, not mandatory. Any legally
sufficient reason meets the good cause requirement of
Section 15-2-303 (4), MCA, and such sufEiciency lies
within the discretion o f the reviewing court. (Citations
omitted.)
In the instant case, the District Court, in its order on
Leahysl motion to add evidence, stated that " t h e primary reason
asserted for presenting additional evidence is that Petitioners
were not represented by counsel at the administrative hearing
before STAB, and that this reason does not constitute good cause
within the meaning of Section 15-2-303(4), MCA.I1 Whether there is
good cause to allow additional evidence to be introduced lies
within the discretion of the reviewing court. OqNeill,739 P.2d at
459. In this case, the District Court concluded there was not good
cause to open the record to additional evidence. We agree.
The Findings of Fact, Interpretations of Law, Opinion and
Order of the Department of Revenue Hearing Examiner, dated November
17, 1989, sets forth all issues which would be considered during
the hearing before the STAB. Moreover, the Leahys had over eight
months to prepare for the hearing before the STAB. The Leahys
chose as their representatives two CPAs who were well-qualified and
had a complete grasp of the issues which would be considered by the
STAB during the hearing; Leahys could have hired counsel to
represent them, had they chosen to do so. The Leahys had every
opportunity to adequately prepare forthe hearing and present their
case before the STAB.
Although the Leahys contend that evidence they attempted to
present during the STAB hearing was not admitted, a review of the
5
transcript shows that the evidence was admitted, albeit with
objection. There is nothing in the record to indicate that all
evidence submitted to the STAB during the hearing was not
considered by the STAB in its deliberations. Again, the Leahys
were given every opportunity to fully present their case.
The real problem at the hearing before the STAB was not with
the admission of evidence but with the failure of the Leahys to
appear and testify before the Board. Darlene was not available to
provide testimony necessary to the Leahys' case. The District
Court stated that the STAB was "clearly influenced by the fact that
Petitioners failed to appear to testify in person and that
Petitioners' representatives were not acquainted with Petitioners
during the tax years in question." The District Court quoted the
STAB:
[flacts and circumstances must indicate that an
intent for ~rofit must exist. Mrs. Leahy's credibility,
motivation and sincerity are key matters in this
determination. Yet she did not make herself available
for questioning by this Board or by the Department of
Revenue. Significantly, her absence prevented the
Department of Revenue from corroborating details, seeking
relevant information exclusively in the taxpayer's
possession (memory, thoughts, experiences), or from
discerning intent and credibility. All evidence and
testimony regarding her intent is therefore indirect
and/or hearsay. (Emphasis in original.)
The Leahys, themselves, failed to put forth the crucial evidence in
their case--Darlene Leahy's testimony.
It is not the obligation of the administrative agency or of
the District Court to second-guess litigants' decisions in their
preparation for and presentation of their case before the agency.
Furthermore, litigants are not entitled to reopen their case on
judicial review simply because, on 20/20 hindsight, they might have
benefited Erom better preparation, different representation or an
alternate theory or approach Erom that presented at the
administrative hearing. The administrative hearing is not simply
a "dry-runtv
for retrial in District court on judicial review with
more, better or different evidence.
The District Court determined there was not good cause to open
the record and allow additional evidence under !
j 15-2-303(5), MCA
(1993). In doing so, the District Court properly exercised its
discretion. OvNeill,739 P.2d at 459. We hold that the District
Court did not err in denying the Leahysv motion to present
additional evidence in support of their petition for judicial
review.
JUDICIAL NOTICE
Did the District Court err in failing to take judicial notice
of various evidentiary "factsM?
The Leahys contend that the District Court should have
judicially noticed a number of @lcomrnonly
known factsM during the
proceedings. The DOR counters that the District Court properly
refused to take judicial notice of these alleged facts because they
are Itsubject to reasonable dispute." We agree with the DOR.
The following are the alleged facts of which Leahys requested
the District Court to take judicial notice:
The Court may take judicial notice that STAB1s
procedural rules are judicial in nature, even though
informal and that STAB'S procedural rules allow taxpayers
to be formally represented at its hearing by persons who
are not qualified to practice law, by persons who are not
tested regarding their ability to understand the judicial
review process and by persons who may not understand the
intricacies of the judicial review process.
This Court may take iudicial notice that the Montana
citizens are protected by the Montana Code and the
Montana Constitution against persons who purport to
practice law but are not qualified to do so.
As incorporated by the STAB opinion, the MDOR
auditor did not believe the petitioner's 1987 medical
injuries were significant, because she had not claimed
any medical expense deductions and had no checks to show
that she had sustained any significant medical expenses.
Nevertheless, this Court can take iudicial notice that
most major corporations, such as the petitioner's
husband's employer, United Air Lines, cover their
employees and their families with medical insurance ....
The Court [may] take judicial notice that the
profitability of horse racing in the Helena area, in
recent years, has been fragile at best and it was for
this reason that the petitioner had become discouraged
and fearful that her hard work might not become
adequately rewarded.
STABmisperceivedthepetitioner's husband's role in
helping her establish her horse business. [STAB Op.
p.151 The petitioner's claimed deductions for interest
expense indirectly explain the source of capital she was
using to establish her business and this Court may take
iudicial notice that new business usually requires
initial start-up capital; whether sourced by spouse's
income or a bank loan.
As stated in petitioners' MEMORANDUM (OPENING)
BRIEF, under I.R.C. S, 183, horse breeders, horse racers,
horse showers, and horse trainers are presumed to be for
p r o f i t , if they have sustained a profit in any 2 out of
7 consecutive years. Petitioner started her horse
training business in 1983. She was audited by the I.R.S.
in her sixth and seventh year of business. Although
fortuitous circumstances intervened to prevent Mrs.
Leahy's horse training business frombecoming profitable,
the I.R.S. did not disallow her claimed losses, even
though making other changes to her return for 1988 and
1989. Even without supplementing the record, this Court
may take iudicial notice that a conscientious IRS revenue
[agent] would not have likely ignored raising a
substantial hobby loss issue, while scrutinizing a
taxpayer's return and raising other less significant
adjustments .
In order for a fact to be judicially noticed, it must be "one
not subject to reasonable dispute in that it is either (1)
generally known within the territorial jurisdiction of the trial
court or (2) capable of accurate and ready determination by resort
to sources whose accuracy cannot be reasonably questioned." Rule
The District Court, in its Order on Petition for Judicial
Review, addressed the issue of judicial notice of facts:
This Court, in an order dated January 27, 1993,
denied Petitioners1motion to introduce new evidence into
the record. In their briefs supporting the petition for
judicial review, Petitioners attempt to bring in much of
this sane evidence by asking the Court to take judicial
notice of various facts. ...
The Court declines to take judicial notice of the
various facts asserted by Petitioners, as they are not
facts that are generally known or capable of ready
determination in any accurate sources, as required by the
rules of evidence.
We agree with the District Court that the alleged facts sought
to be judicially noticed are not facts which are *Igenerally knownr1
nor are they "capable of accurate and ready determinati~n.~~
Moreover, many of the facts are argumentative and/or require
additional information to verify their truth.
460. For the most part, the alleged **factsl1
offered by Leahys
amount to nothing more than their own conclusory statements on the
evidence and the law. These are simply not the type of ttfactsat
which can be judicially noticed. As we stated in Holtz v. Babcock
(19641, 143 Mont. 341, 373, 390 P.2d 801, 802:
IN] either this f Clourt nor the district courts should be
required to assume the burden of informing themselves
under the doctrine of judicial notice of facts not within
the actual knowledge of the court. We think in this area
there is a difference between judicial knowledge and
actual knowledge and that the burden resting upon a
litigant to present his proof cannot be shifted to the
court under the doctrine of judicial notice.
Therefore, we hold that the District Court did not err when it
refused to take judicial notice of the alleged facts offered by the
Leahys.
3. DISALLOWANCE OF CLAIMED LOSSES
Did the District Court err in affirming the STAB'S conclusion
that the Leahys' operation was not an activity engaged in for
profit?
The Leahys argue that the STAB erred in concluding that their
horse training operation was not an activity engaged in for profit
and that the District Court erred in affirming the STAB. The DOR
contends that the District Court correctly affirmed the STAB
determination that the horse training operation was not engaged in
for profit.
As stated above, the standard of review of an agency's or
~istrict Court's findings of fact is whether they are clearly
erroneous; conclusions of law are reviewed to determine whether the
law was applied correctly. Westmoreland, 868 P.2d at 596-597.
Moreover, "[a] rebuttable presumption exists in favor of the agency
decision.'' Hoven, Vervick & Amrine v. Montana Com'r of Labor
(1989), 237 Mont. 525, 530, 774 P.2d 995, 998.
Initially, we determine the correct law to be applied to
determine whether the Leahys' horse training operation is an
activity engaged in for profit.
The determination of a taxpayer's Montana income tax
liability is primarily based upon the Federal Internal
Revenue Code. ...
Montana has adopted the Federal Internal Revenue
Code as the guide to be used to determine matters such as
income and expense for computation of Montana income tax.
Magnuson v. Montana State Board of Equalization (1973), 162 Mont.
Whether the Leahysl horse training operation was engaged in
for profit is determined by application of Federal Internal Revenue
Code ( I R C ) 183 and Tueas. Reg. 1.183-2. Section 183,
I.R.C., provides:
(a) GENERAL RULE. - In the case of an activity
engaged in by an individual or an S corporation, if such
activity is not engaged in for profit, no deduction
attributable to such activity shall be allowed under this
chapter except as provided in this section.
(b) DEDUCTIONS ALLOWABLE. - In the case of an
activity not engaged in for profit to which subsection
(a) applies, there shall be allowed-
(1) the deductions which would be allowable
under this chapter for the taxable year without regard to
whether or not such activity is engaged in for profit,
and
(2) a deduction equal to the amount of the
deductions which would be allowable under this chapter
for the taxable year only if such activity were engaged
in for profit, but only to the extent that the gross
income derived from such activity for the taxable year
exceeds that deductions allowable by reason of paragraph
(1)
( c ) ACTIVITY NOT ENGAGED I N FOR PROFIT DEFINED. -
For purposes of this section, the term "activity not
engaged in for profitw means any activity other than one
with respect to which deductions are allowable for the
taxable year under section 162 or under paragraph (1) or
paragraph (2) of section 212,
(d) PFtESUMPTION - If the gross income derived from
an activity for 3 or more of the taxable years in the
period of 5 consecutive taxable years which ends with the
taxable year exceeds the deductions attributable to such
activity (determined without regard to whether or not
such activity is engaged in for profit), then, unless the
Secretary establishes to the contrary, such activity
shall be presumed for purposes of this chapter for such
taxable year to be an activity engaged in for profit. In
the case of an activity which consists in major part of
the breeding, training, showing, or racing of horses, the
preceding sentence shall be applied by substituting " 2 "
for f13g1 1g711 I15l1.
and for
Vhe issue of whether a taxpayer engages in an activity with the
requisite intention of making a profit is one of fact to be
resolved on the basis of all the surrounding facts and
circumstances of the case and the burden of proving the requisite
intention is on the petitioner^.^^ Golanty v. Commissioner (19791,
72 T.C. 411, 426. The surrounding facts and circumstances are
evaluated using a nine element test developed primarily through
case law and listed in Treas. Reg. 1.183-2 (b) . These nine elements
include :
(1) Manner in which the taxpayer carries on the
activity.
(2) The expertise of the taxpayer or his advisors.
(3) The time and effort expended by the taxpayer in
carrying on the activity.
(4) Expectation that assets used in 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.
(9) Elements of personal pleasure or recreation.
Treas. Reg. 1.283-2(b). "Although no one factor [element] is
conclusive, a record of substantial losses over many years and the
unlikelihood of achieving a profitable operation are important
factors bearing on the taxpayer's true intention.l1 A.E. and Brenda
L. Boddy v . Commissioner (1984), 47 T.C. Memo 1381, 1386.
On judicial review, the District Court concluded that the STAB
opinion properly addressed and considered the nine element test in
determining that Leahysi horse training operation was not engaged
in for profit and that the STAB'S findings of fact were not clearly
erroneous and its conclusions of law were correct. We agree.
The first element which was considered by the STAB was the
manner in which the taxpayers carried on the horse training
activity. The STAB concluded that the Leahys did not keep adequate
records and carry on the activity in a business-like manner. This
assessment is supported by the record.
Darlene Leahy stated that before she moved to Montana, she
worked part-time preparing income tax returns. However, her own
records of the horse training operation were inadequate to verify
many of her expenditures. The monthly accounts were not supported
by documentary evidence such as cancelled checks or bills; many
checks did not identify the purpose for the payment. Many of the
checks for the operation were paid from Darlene's personal checking
account, even though she had a *'business1'
account. In short, the
records maintained by Darlene were not of the quality one would
expect from a person who had professional experience preparing
income tax returns.
Treas. Reg. 1.274-5, requires maintaining adequate records and
provides:
(c) Rules for substantiation. (1) In general. A
taxpayer must substantiate each element of an
expenditure (described in paragraph (b) of this section)
by adequate records or by sufficient ' evidence
corroborating his own statement except as otherwise
provided in this section.
(2) Substantiation by adequate records. (i) In
general. To meet the 'adequate records' requirements of
section 274(d), a taxpayer shall maintain an account
book, diary, statement of expense or similar record (as
provided in subdivision (ii) of this subparagraph) and
documentary evidence (as provided in subdivision (iii) of
this subparagraph) which, in combination, are sufficient
to establish each element of an expenditure specified in
paragraph (b) of this section.
...
(iii) Documentary evidence. Documentary evidence,
such as receipts, paid bills, or similar evidence
sufficient to support an expenditure shall be required
for ...
(b) Any other expenditure of $25 or more...A
document may be indicative of only one (or part of one)
element of an expenditure. Thus, a cancelled check,
together with a bill from the payee, ordinarily would
establish the element of cost. In contrast, a cancelled
check drawn payable to a named payee would not by itself
support a business expenditure without other evidence
showing that the check was used for a certain business
purpose
The records maintained by Darlene regarding the horse training
operation did not meet the standards set by Treas. Reg. 1.274-5.
Moreover, Darlene listed her occupation as "homemaker" during
the years 1983 through 1985, instead of the occupation of horse
trainer. She did not list any occupation during the years of 1986
and 1987 although she was still engaged in the horse training
activity, albeit to a limited extent.
Additionally, the STAB opinion states that the following
information was gleaned from the Leahyst tax records:
The enterprise in question during taxable years
1983-87 was identified as "Leahy Junction" on the 1983,
1985 and 1986 tax returns. It was not indicated for 1984
and was identified as "Leahy Junction Stables" for 1987.
The "principal business or professi~n~~the concern was
of
identified as "sales and service" on the 1983 and 1985
tax returns, was not identified for 1984, and identified
as "training servicew for 1986 and "services trainingr1
for 1987. No employer identification number or
proprietor social security number was listed for tax
years 1983, 1984 or 1987. Dennis Leahylssocial security
number was shown for the business for taxable years 1985
and 1986. No name of the proprietor of the business was
shown on the Leahys' 1983, 1984, or 1987 returns. For
1985 and 1986, the proprietor was stated to be Dennis
Leahy .
Thus, Leahysl tax returns demonstrate that the horse training
activity was not treated consistently in a businesslike manner.
The STAB and the District Court correctly determined that the
Leahys did not satisfy the first element of the nine element test.
The second element considered by the STAB was the expertise of
the taxpayer or her advisors. As part of her proof that she was an
expert in the field of horse training, Darlene stated that she was
licensed as a horse trainer in six states. Although Leahys*
representatives at the STAB hearing stated that they had
documentary evidence of her expertise in the form of copies of
licenses from various states, no evidence of such licenses was
offered or admitted for the STABt review. Therefore, the STAB had
s
no documentary evidence available to it to verify her claim and,
accordingly, it correctly determined that t h i s element was n o t
satisfied.
The third element of the test reviewed by the STAB was the
time and effort expended by the taxpayer in carrying on the h o r s e
training activity. Here, although the STAB determined that Darlene
put a considerable amount of her time into training horses, it
noted that she was not otherwise employed outside the home and that
most people will, in any event, spend time and effort on a pursuit
that they enjoy. Work with horses is an activity strongly
identified as a recreational activity; Montana has a considerable
number of !'hobby Earns1*which facilitate the owner's enjoyment of
15
horses. Accordingly, the STAB concluded that the amount of time
Darlene spent on horse training was of questionable merit in the
case. We agree, noting that this is one instance in which
testimony by Darlene about the element under consideration would
have been of considerable assistance to both the petitioners and
the STAB. Darlene, however, failed to testify at the hearing.
The fourth element the STAB considered had to do with the
expectation that assets used in the activity may appreciate in
value. The two assets discussed during the hearing were the
property upon which Darlene conducted the horse training operation
and a stallion she owned which she claimed to have purchased for
$2,800. Darlene stated during the course of the audit, and the
STAB noted, that the property upon which the horse training
activity was conducted had declined in value from the time it was
purchased in 1981.
Darlene produced a letter during the DOR audit stating that an
equine appraiser found the fair market value of the stallion to be
$20,000. However, there was no documentation as to the purchase of
the stallion for $2,800. Even if the purchase price could be
proven to be $2,800, the STAB correctly concluded that the
appreciation of the one stallion was insufficient to offset the
large annual losses from 1983 through 1987. See Boddy, 47 T.C.
Memo at 1387. The Leahys did not demonstrate that the assets used
in the horse training operation supported a claim that the activity
was engaged in for profit.
The fifth element under consideration by the STAB evaluated
the success of the taxpayer in carrying on similar or dissimilar
activities. Again, although Darlene claimed she had been a
successful horse trainer in six states before moving to Montana,
there was no documentary evidence admitted to demonstrate that
Darlene was licensed as a horse trainer in six states or that she
had a successful career as a horse trainer prior to her move.
Therefore, there was no concrete support for her contention that
she had successfully made a profit in the horse training business
in the past.
The sixth element considered by the STAB was a review of the
history of income or losses with respect to the horse training
activity. The Leahys' operation lost substantial amounts of money
for each of the years 1983 through 1987. In 1983, the Leahys
claimed a loss of $36,746 from the horse training operation. The
following were the losses for the years 1984, 1985, 1986, and 1987,
respectively: $38,448; $40,552; $49,993; and $48,212.
The STAB noted that Darlene sustained a serious head injury in
1986 which curtailed her horse training activities in 1986 and 1987
and led her to refer clients to other trainers. However, the STAB
found that her losses in 1986 and 1987 remained high, $49,993 and
$48,212 respectively. Despite curtailing her horse training
activities for the two years in question, there was no
corresponding or discernible decrease in expenses of operation.
The STAB found that the horse training operation had a I8nursecow"
income from other sources which enabled it to survive, and that the
operation was measurably supported by Dennis' salary as a pilot.
The STAB, therefore, properly concluded that the petitioners did
not satisfy this element of the test either.
As to the seventh element of the test, the STAB considered the
amount of occasional profits, if any, which were earned from the
horse training operation. It found that "no profit ha[d] been
shown in 1983 through 1987.. .." This statement is supported by the
evidence and again, the STAB correctly concluded that the Leahys
did not satisfy this element. See Joseph T. Tripi and Miriam V.
Tripi v. Commissioner (1983), 46 T.C. Memo 1094, 1101.
The eighth element evaluated by the STAB was the financial
status of the taxpayers. The comments to Treas. Reg. 1.183.2 (8)
state that:
The fact that the taxpayer does not have substantial
income or capital from sources other than the activity
may indicate that an activity is engaged in for profit.
Substantial income from sources other than the activity
(particularly if the losses from the activity generate
substantial tax benefits) may indicate that the activity
is not engaged in for profit especially if there are
personal or recreational elements involved.
26 C.F.R. 5 1.183-2(8) The STAB noted, for example, that Dennis1
salary for 1987 was over $84,000 and yet the Leahys paid no income
tax. It further concluded that the horse training operation's
losses shielded Dennis' salary from taxation. A review of the tax
returns for the Leahys in the tax years at issue demonstrate that
the Leahys paid no or minimal tax for the years in question even
though Dennis8 wages were substantial.
The STAB found that Dennis' salary ranged from $67,000 to
$87,000 during the years in question. The STAB concluded that
"[hlis salary must have been used to subsidize the horse training
activities since this entity couldn't sustain itself through its
own gross income.*' The evidence supports the STAB's conclusion and
indicates an intent that the horse training activity was not
engaged in for a profit. See Boddv, 47 T.C. Memo at 1388.
The final element involves the presence of personal or
recreational motives in carrying out the activity--"[t]he presence
of personal motives in carrying on of an activity may indicate that
the activity is not engaged in for profit, especially where there
are recreational or personal elements in~olved.~~
Horse training,
breeding and racing are activities traditionally associated with
recreation and personal pleasure.
The STAB noted in its opinion, however, that Darlene stated
that she derived no pleasure from the horse training operation but
would continue to work at it until the operation could be sold.
Even if the Leahys could demonstrate there is not a personal motive
or recreational aspect for their operation of the horse training
activity, this fact alone does not counterbalance the failure of
proof on the other elements of the test. See Golantv, 72 T.C. at
430.
The STAB's conclusion that the horse training operation
conducted by the Leahys was not an activity engaged in for profit
is not clearly erroneous, and the STAB's interpretation of the law
as it applies to the instant case is correct. Moreover, the
District Court correctly affirmed the STAB in its findings and
conclusions.
We a f f i r m the District Court.
We concur:
August 4, 1994
CERTIFICATE OF SERVICE
I hereby certify that the following certified order was sent by United States mail, prepaid, to the
following named:
Thomas C. Morrison
Attorney at Law
111 N. Last Chance Gulch, Ste. 3J
Helena, MT 59601-4144
Paul Van Tricht, Tax Counsel
Dept. of Revenue
P.O. Box 202701
Helena, MT 59620-2701
ED SMITH
CLERK OF THE SUPREME COURT
STATE OF MONTANA