                              T.C. Memo. 2015-243



                        UNITED STATES TAX COURT



         MICHAEL G. JUDAH AND SALLY A. JUDAH, Petitioners v.
         COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 18572-13.                          Filed December 16, 2015.



      Paul J. Krazeise, Jr. and Alisha M. Harper, for petitioners.

      Diana N. Wells, Denise A. Diloreto, and John S. Hitt, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      GOEKE, Judge: Petitioners engaged in a saddlebred horse activity. They

have continued to engage in the activity despite reporting losses for every year of

its existence. Respondent audited petitioners’ Forms 1040, U.S. Individual

Income Tax Return, for taxable years 2008 to 2010 and determined petitioners

were not operating the saddlebred horse activity for profit within the meaning of
                                         -2-

[*2] section 183.1 Consequently, respondent determined deficiencies of $55,239,

$49,512, and $32,049 in petitioners’ Federal income tax for the taxable years

2008, 2009, and 2010, respectively. Respondent also determined accuracy-related

penalties of $11,066, $9,902, and $6,410 under section 6662(a) for taxable years

2008, 2009, and 2010, respectively. The issues for decision are:

      (1) whether petitioners’ real estate and saddlebred horse activities should be

treated as a single undertaking for purposes of section 183(d). We hold that they

were two separate and distinct activities;

      (2) whether petitioners engaged in the saddlebred horse activity from 2008

to 2010 for profit within the meaning of section 183(a). We hold that they did not;

and

      (3) whether petitioners are liable for accuracy-related penalties under

section 6662(a) for 2008 to 2010. We hold that they are not.




      1
       Unless otherwise indicated, all section references are to the Internal
Revenue Code in effect for the years at issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure. All monetary amounts are rounded to
the nearest dollar.
                                          -3-

[*3]                           FINDINGS OF FACT

1. Petitioners

       Some of the facts have been stipulated, and they are incorporated in our

findings by this reference. Petitioners, Sally and Michael Judah, resided in

Louisville, Kentucky, at the time of filing the petition.

       Petitioners are married and filed joint income tax returns for the years at

issue. Michael Judah has a bachelor of business degree from Bellarmine

University. Sally Judah has a bachelor of arts degree with a minor in marketing

from the University of Kentucky.

       Both petitioners are financially successful real estate professionals with

many years of experience in the real estate industry. Before commencing the

saddlebred horse activity Mr. Judah held executive positions in large real estate

companies, and he currently owns and manages several real estate businesses.

Mrs. Judah has also held high-level positions in various real estate development

companies. She is currently the chief operating officer of a large real estate

development firm in Louisville, Kentucky. Petitioners both earned considerable

income from the real estate activities during the years at issue.
                                         -4-

[*4] 2. Commencement of the Saddlebred Horse Activity

      Petitioners attended horse camps as children but otherwise had no

substantial connection to the horse industry until the mid-1990s. In or around

1996 petitioners’ daughter, Ali Judah, began riding American saddlebred horses.2

Ali had a natural talent for riding and exhibiting horses, and she became known in

the saddlebred horse industry as an excellent show woman. As a result, petitioners

began searching for a saddlebred horse to purchase for their daughter.

      In 1998 petitioners meet Jo Cornell, a horse trainer with over 20 years of

experience. Petitioners were impressed with Ms. Cornell’s background in the

horse industry and started taking Ali to Ms. Cornell’s stables for riding lessons.

Petitioners also sought advice from Ms. Cornell in purchasing a saddlebred horse.

After seeking input from Ms. Cornell, petitioners purchased their first horse.

      Petitioners began to claim deductions for business expenses related to their

saddlebred horse activity after purchasing said horse, and since this point, they

have continued to deduct expenses for the saddlebred horse activity through the

2014 taxable year. The expenses stemmed from promoting Ali as a saddlebred

horse rider. For example, petitioners deducted the costs of attending horse shows

      2
       An American saddlebred horse is “a breed of 3-gaited or 5-gaited saddle
horses developed chiefly in Kentucky from Thoroughbreds and smooth-gaited
stock.” Merriam-Webster’s Collegiate Dictionary 37 (10th ed. 1993).
                                         -5-

[*5] throughout the United States and the costs of Ali’s equipment, clothing,

training fees, and other miscellaneous items associated with showing saddlebred

horses.

3. Formation of Judah Saddlebreds

      Petitioners conducted their saddlebred horse activity as a sole proprietorship

the first two years of business. Sometime in 1998 petitioners met William

Malone, a certified public accountant (C.P.A.) with the accounting firm Deeming,

Malone, Livesay, and Ostroff. Petitioners hired Mr. Malone to prepare their

income tax returns, and Mr. Malone also advised them to form separate limited

liability companies for their horse and real estate businesses. On December 6,

1999, petitioners filed articles of organization with the Kentucky secretary of state

and formed Judah Saddlebreds, LLC (Judah Saddlebreds). Judah Saddlebreds was

formed as a member-managed LLC with Mr. Judah as the sole member and

manager. Mr. Malone further instructed petitioners to keep their real estate and

saddlebred horse activities completely separate. Adhering to Mr. Malone’s

advice, petitioners maintained separate books, records, and bank accounts for their

real estate and horse activities. On December 8, 1999, petitioners opened a

checking account under the name “Judah Saddlebreds, LLC”. All income and
                                        -6-

[*6] expenses generated by petitioners’ saddlebred horse activity were reflected in

statements from that bank account.

4. Business Plan and Expert Advice

      Petitioners argue that their plan was to purchase young horses and then

increase the horses’ value through training and competing at shows. Petitioners

believed they could thus acquire horses at a relatively low cost and exponentially

increase the horses’ market value. However, Ali’s personal use was always the

primary consideration in purchasing a horse; petitioners never bought a horse that

was unfit for their daughter to ride.

      Petitioners did not prepare a written business plan before commencing their

saddlebred horse activity. Judah Saddlebreds’ formal business organization

documents are the only evidence of a written business plan. The business purpose

of Judah Saddlebreds, as stated in the LLC operating agreement, is “to operate in

the horse industry by purchasing, breeding, training, showing and selling horses”.

Judah Saddlebreds’ mission statement similarly states: “The Mission of Judah

Saddlebreds LLC is to locate and acquire quality horses, which, through proper

training, successful performance, and potential breeding will both enhance the

value of the breed and return a substantial profit to the business”. The mission

statement was prepared in or around 2004, years after petitioners first engaged in
                                          -7-

[*7] the saddlebred horse activity. Petitioners did not prepare financial

projections, budgets, or expected cashflow statements before commencing the

saddlebred horse activity.

      Petitioners always sought input from their trainers before purchasing a

horse. The main criteria in selecting a horse were its age, ability to be trained, and

suitability for Ali’s skill level. Petitioners also independently ensured that the

asking price of a horse was reasonable, and petitioners hired veterinarians to

inspect each horse before they acquired it. Petitioners would also board the horse

for a trial period while deciding whether to purchase it. During the trial period

petitioners paid all boarding and training expenses for the horse. Petitioners

consulted with the trainers before selling horses as well. This was because the

trainers knew the horses’ backgrounds and show records, both being key factors in

establishing the saddlebred horses’ market values.

      Petitioners’ trainers also provided advice as to what shows to enter and what

horse to exhibit at a show. The trainers knew which event and horse bolstered

Ali’s chances of success. The trainers did recommend riders other than Ali to

show petitioners’ horses, but this was not a common practice. Rather, Ali was the

main rider in most horse shows.
                                          -8-

[*8] 5. Books and Records

      The books and records of Judah Saddlebreds have at all times been

maintained by Mr. Judah. Mr. Judah’s accounting method consisted of compiling

bank statements and receipts that were generated over the course of the taxable

year. At yearend Mr. Judah prepared a handwritten summary of income and

expenses and delivered it to Mr. Malone. Mr. Malone or another C.P.A. would

then prepare petitioners’ income tax returns using the handwritten summary of

income and expenses.

      Judah Saddlebreds’ books and records did not separately account for

operating expenses attributable to each individual horse. The books and records

merely reflected the aggregate of income and expenses generated for the operation

as a whole. Petitioners’ records did not track the costs of training, feeding,

showing, or grooming for each individual horse. Consequently, petitioners could

not determine the needed sale price to recoup operating expenses of a specific

animal.

6. Time and Effort in Saddlebred Horse Activity

      Petitioners were unable to devote substantial time to their saddlebred horse

activity. Petitioners had full-time jobs and other responsibilities outside of the

horse activity. Mr. Judah allocated most of his professional time to his real estate
                                         -9-

[*9] businesses, and Mrs. Judah worked approximately 60 hours a week as a chief

operations officer in a real estate company. The time petitioners did allocate their

saddlebred horse activity generally consisted of visiting their horses once a week,

speaking with their trainers on the phone or in person, attending horse shows,

preparing advertisements, and recording receipts and expenses. Petitioners did not

feed, groom, ride, or train their horses. Furthermore, petitioners did not tend to the

stables.

      During the years at issue petitioners were members of multiple horse

associations. Mrs. Judah was a member of the United States Professional

Horseman’s Association, the United States Equestrian Association, the American

Saddlebred Horse Association, and the Kentucky American Saddlebred Horse

Association. Mr. Judah was a member of the American Saddlebred Horse

Association, the United Professional Horse Association, the Kentucky American

Saddlebred Horse Association, and Rock Creek Riding Club. Mr. Judah was also

the vice president and a board member of Rock Creek Riding Club.

7. Advertising

       Petitioners advertised their horses through print sources, online

publications, and horse shows. Horse shows also provided a forum for marketing

horses. Petitioners paid for travel, meals, and hotel costs for themselves, Ali, and
                                        -10-

[*10] the trainers while at horse shows. Petitioners also paid for the costs of

boarding, feeding, and transporting horses to the shows. During the years at issue,

petitioners attended 15 horse shows, each ranging between two and seven days.

8. Profitability of Saddlebred Horse Activity

      Petitioners have never made a profit in their saddlebred horse activity.

Their sources of income from their saddlebred horse activity were through the

sales of horses and horse show winnings. However, petitioners concede that horse

show winnings were marginal. Petitioners never generated income in the breeding

operations either. The following table lists each of petitioners’ horses, the

purchase price, and the corresponding sale price from 1998 to 2012:

  Horse name      Purchase date    Purchase price     Sale date      Sale price
Lady’s Bay
 Day               10/10/1998          $44,000        6/15/2000       $100,000

 Riva Diva         12/28/1998           40,000         3/7/2006        150,000

 Selby Lane           1/5/2001          80,000        6/30/2002        110,000
 Champagne
  in Winter         7/20/2001          125,000        9/15/2004          83,500
 Eddyrile           5/30/2002             2,000      Never sold           ---
 Radiant
  Success           9/30/2002          165,000        7/15/2005          25,000
 I’m a New           Born --                         Donated --
   York Diva         4/17/2005            ---        5/19/2008            ---
                                           -11-

 [*11] Divine
 Renaissance        2/17/2006             137,500          8/27/2010       90,000
 New York’s         Born --                                Transferred
  Perfect Diva      2/1/2006                ---            -- 2/1/2012       ---
 Hollywood
  Agent             2/20/2008             150,000           8/5/2010      190,000
 Iza Diva          11/28/2010              20,000           Currently    Currently
                                                              owned        owned
 Leatherwood                                                Currently    Currently
  Lift-Off          7/11/2012              65,000             owned        owned

      Although petitioners have sold a number of horses for more than their

purchase prices, they have still generated nearly $1.5 million in losses since 1998.

The following table lists the reported loss from each year with respect to

petitioners’ saddlebred horse activity:

                      Taxable year          Net profit (loss)
                          1998                    ($11,370)
                          1999                     (50,312)
                          2000                       ---
                          2001                       ---
                          2002                    (166,385)
                          2003                    (171,319)
                          2004                    (177,642)
                          2005                    (122,652)
                          2006                    (172,766)
                                          -12-

 [*12]                     2007                  (186,145)
                           2008                  (163,286)
                           2009                  (131,655)
                           2010                  (132,182)
                           2011                   (30,162)
                           2012                   (50,776)

9. Operating Expenses

      Petitioners’ substantial losses were due to high operating expenses.

Boarding, training, and showing the horses were by far the largest expenses. At

all times, petitioners kept horses at the trainers’ facilities. In turn, this generated

constant feeding, boarding, veterinarian, and other costs generally associated with

owning horses. In addition, petitioners incurred a monthly fee for training their

horses. The trainers specifically trained horses according to Ali’s riding style and

abilities. In the years prior to those at issue, petitioners claimed business expense

deductions for the costs of Ali’s riding lessons when she trained at Ms. Cornell’s

stables. When Ali stopped taking riding lessons in 2005, petitioners no longer

incurred that expense.

      Show expenses required petitioners to pay extra wages to their trainers

because of the extra time to attend the shows as well as the time it took for the
                                          -13-

[*13] trainers to travel to the shows. Petitioners also incurred horse show costs of

VIP box seats, entry fees, horse stall fees, and horse bedding fees.

      Petitioners financed their acquisition of horses with loans of approximately

$600,000. The loans were taken in Judah Saddlebreds’ name and secured by

Judah Saddlebreds’ horses and personal guaranties from Mr. Judah. Interest

expenses on the loans were paid by Judah Saddlebreds. JREG or Judah

Construction would pay the interest expenses when Judah Saddlebreds had

insufficient funds. Other significant expenses were section 179 depreciation

expenses for the horses and mortality insurance for the horses.

10. Petitioners’ Real Estate Activities

      Petitioners argue that their real estate and saddlebred horse activities

constituted a single undertaking for purposes of section 183.

      Mr. Judah is the owner of various real estate businesses. Mr. Judah formed

Judah Real Estate Group, LLC (JREG), on December 6, 1999, by filing articles of

organization with the Kentucky secretary of state. Mr. Judah has at all times been

the single member and manager of JREG. JREG’s articles of organization provide

that “[t]he business of the company shall be to act as a real estate broker.”

Notably, the articles of organization do not refer to petitioners’ saddlebred horse

activity. JREG’s operating agreement provides that JREG’s purpose is to
                                        -14-

[*14] “perform and operate as a real estate brokerage firm, with duties of sale and

leasing of commercial and residential property in Louisville, Kentucky. In

addition, the Company is to perform duties associated with managing the

development of both residential and commercial property.” JREG’s operating

agreement does not mention its interrelationship with petitioners’ saddlebred horse

activity. Between December 6, 1999, and April 23, 2002, JREG and Judah

Saddlebreds maintained the same principal office. From April 24, 2002, onward,

JREG and Judah Saddlebreds never maintained the same address again. The

following table lists JREG’s net profits from 2002 to 2012:

                                Year     Net profit
                                2002     $166,571
                                2003      137,545
                                2004      156,904
                                2005      237,321
                                2006      327,367
                                2007        93,475
                                2008        36,127
                                2009      102,411
                                2010        46,152
                                2011      113,163
                                2012      282,234
                                        -15-

[*15] Mr. Judah formed Judah Construction, LLC (Judah Construction), on

January 4, 2002. Judah Construction was formed as a member-managed LLC with

Mr. Judah as the sole member and manager. At trial petitioners did not provide

Judah Construction’s operating agreement or other documents to establish the

company’s business purpose or relationship with petitioners’ saddlebred horse

activities. Moreover, Judah Construction has never operated from the same

location as petitioners’ saddlebred horse activity. The following table lists Judah

Construction’s net profits from 2002 to 2012.

                              Year    Net profit (loss)
                              2002         $1,593
                              2003         (1,276)
                              2004          5,429
                              2005         12,770
                              2006          1,909
                              2007             ---
                              2008             (695)
                              2009       147,294
                              2010         39,643
                              2011          2,340
                              2012        (24,427)
                                        -16-

[*16] Mr. Judah owned other businesses that operated in the real estate industry,

but petitioners do not contend that they were part of a single activity for purposes

of section 183.3

      The accounting records of JREG and Judah Construction were maintained

by Mr. Judah. At all times, petitioners’ real estate businesses have tracked

expenses and revenues for each property, development, or project individually.

Moreover, the books and records for the real estate businesses were maintained

contemporaneously with business operations. Mr. Judah also prepared financial

projections when proposing real estate developments to potential investors.

Furthermore, both JREG and Judah Construction prepared financial statements

such as balance sheets and income statements.

      Petitioners commonly transferred funds from JREG to Judah Saddlebreds

given Judah Saddlebreds’ inability to generate a profit. These transfers were

documented within JREG’s financial statements, journals, and ledgers with a

specific account number. JREG treated the transfers to Judah Saddlebreds as

nondeductible expenses for Federal tax purposes. On the other hand, transactions

between petitioners’ various real estate businesses were expensed for Federal


      3
      The other real estate entities owned by Mr. Judah were Judah Development
Group, LLC; Triple Crown Contractors, LLC; and Judah Nachand, LLC.
                                        -17-

[*17] income tax purposes and a Form 1099-MISC, Miscellaneous Income, was

issued to document each expense.

      According to petitioners, Judah Saddlebreds was used to generate clients for

JREG and Judah Construction. Petitioners claim that their saddlebred horse

activity was instrumental in obtaining real estate clients. We note that only one

client specifically used Mr. Judah's real estate services because of his knowledge

of the horse business and horse property. However, neither JREG nor Judah

Construction performed work for the client; instead, it was Triple Crown

Contractors. All the other clients used Mr. Judah's real estate services because of

a close personal relationship with petitioners or because they knew and respected

his professional workmanship.

11. IRS 2004 Examination

      In 2007 the Internal Revenue Service (IRS) initiated an examination of

petitioners’ 2004 income tax return. The scope of the audit included whether

petitioners conducted their saddlebred horse activity with an intent to earn a profit.

Crystal Fitzgerald, the revenue agent who audited petitioners’ 2004 return,

testified that petitioners never contended that they operated Judah Saddlebreds as

a single undertaking with JREG and Judah Construction. The IRS issued a “no

change” letter after the conclusion of the 2004 audit.
                                         -18-

[*18] 12. IRS 2013 Examination and Notice of Deficiency

      More of petitioners returns were audited in 2013. This time the Service

issued a notice of deficiency disallowing petitioners’ 2008, 2009, and 2010

business expense deductions for Judah Saddlebreds and determining penalties

pursuant to section 6662(a) for 2008, 2009, and 2010. Petitioners timely

petitioned this Court redetermination.

                                    OPINION

I. Burden of Proof

      The taxpayer generally bears the burden of proving the Commissioner’s

determinations are erroneous. Rule 142(a). The burden of proof may shift to the

Commissioner if the taxpayer satisfies certain conditions. Sec. 7491(a).

Petitioners argue that under section 7491(a), the burden has shifted to respondent.

Conversely, respondent contends the burden has not shifted because petitioners

failed to introduce credible evidence necessary for the burden to shift. However,

we decide the section 183 issue on the preponderance of the evidence after trial

and, therefore, we need not address the burden of proof. Estate of Bongard v.

Commissioner, 124 T.C. 95, 111 (2005) (citing Blodgett v. Commissioner, 394

F.3d 1030, 1035 (8th Cir. 2005), aff’g T.C. Memo. 2003-212, and Estate of Stone
                                         -19-

[*19] v. Commissioner, T.C. Memo. 2003-309); Mathis v. Commissioner, T.C.

Memo. 2013-294.

II. Separate Undertakings v. Single Undertaking

      Before we address whether petitioners had the requisite profit motive, we

must address the threshold issue of whether petitioners’ saddlebred horse and real

estate activities constituted a single undertaking for purposes of section 183. We

believe the resolution of this issue affects the resolution of all remaining issues in

favor of the party who prevails in the light of section 183(d), which provides:

      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 “3” and “7”for “5”.

      Petitioners have never earned a profit from their saddlebred horse activity.

On the other hand, petitioners’ real estate activities have been profitable. The

following table lists the reported net profits from JREG, Judah Construction, and

Judah Saddlebreds and the income from the three activities combined:
                                         -20-

 [*20]
                                                        Judah
                                     Judah           Saddlebreds
            JREG net profit     Construction net      net profit     Combined net
  Year          (loss)            profit (loss)         (loss)        profit (loss)
  2002          $166,571              $1,593           ($166,385)          $1,779
  2003            137,545             (1,276)           (171,319)         (35,050)
  2004            156,904              5,429            (177,642)         (15,309)
  2005            237,321             12,770            (122,652)        127,439
  2006            327,367              1,909            (172,766)        156,510
  2007             93,475                ---            (186,145)         (92,670)
  2008             36,127               (695)           (163,286)       (127,854)
  2009            102,411           147,294             (131,655)        118,050
  2010             46,152             39,643            (132,182)         (46,387)
  2011            113,163              2,340             (30,162)          85,341
  2012            282,234            (24,427)            (50,776)        207,031

Thus, treating petitioners’ real estate and saddlebred horse activities as a single

undertaking yields a net profit in at least two of the last seven years, thereby

creating the presumption that petitioners conducted their saddlebred horse activity
                                         -21-

[*21] with an intent to earn a profit.4 Accordingly, petitioners have a strong tax

incentive in taking said position under section 183(d).

      Petitioners contend that Judah Saddlebreds was a marketing and customer

development platform for JREG and Judah Construction. Petitioners argue that

Judah Saddlebreds’ existence allowed them to network with wealthy horse owners

who would be willing and able to purchase real estate. Respondent maintains that

petitioners’ real estate activities were separate and distinct from their saddlebred

horse activity and the two did not constitute a single undertaking for purposes of

section 183(d).

      Multiple undertakings of a taxpayer may be treated as one activity if the

undertakings are sufficiently interconnected. Sec. 1.183-1(d)(1), Income Tax

Regs. The most important factors in making that determination are the degrees of

organizational and economic interrelationships of the undertakings, the business

purpose served by carrying on the undertakings separately or together, and the

similarity of the undertakings. Under the regulations, the Commissioner generally




      4
       Petitioners would have generated a net profit in 2005, 2006, and 2009 if we
were to treat JREG, Judah Construction, and Judah Saddlebreds as a single
undertaking. Thus, petitioners would met the requisites for the presumption under
sec. 183(d) for 2008, 2009, and 2010.
                                         -22-

[*22] accepts the taxpayer’s characterization of two or more undertakings as one

activity unless the characterization is artificial or unreasonable.

      We have considered these and other factors in determining whether the

taxpayer’s characterization is unreasonable. The other factors so considered

include: (a) whether the undertakings are conducted at the same place; (b)

whether the undertakings were part of the taxpayer’s efforts to find sources of

revenue from his or her land; (c) whether the undertakings were formed as

separate activities; (d) whether one undertaking benefited from the other; (e)

whether the taxpayer used one undertaking to advertise the other; (f) the degree to

which the undertakings shared management; (g) the degree to which one caretaker

oversaw the assets of both undertakings; (h) the degree to which the undertakings

shared an accountant; and (i) the degree to which the undertakings shared books

and records. Topping v. Commissioner, T.C. Memo. 2007-92; Mitchell v.

Commissioner, T.C. Memo. 2006-145 (citing Keanini v. Commissioner, 94 T.C.

41, 46, (1990), Tobin v. Commissioner, T.C. Memo. 1999-328, Estate of

Brockenbrough v. Commissioner, T.C. Memo. 1998-454, Hoyle v. Commissioner,

T.C. Memo. 1994-592, De Mendoza v. Commissioner, T.C. Memo. 1994-314, and

Scheidt v. Commissioner, T.C. Memo. 1992-9).
                                        -23-

[*23] A. Location of the Activities

      Petitioners did not conduct their saddlebred horse and real estate activities

in the same location. During the years at issue Judah Saddlebreds was operated

from petitioners’ personal residence while JREG and Judah Construction were

operated from an office location. This factor favors respondent.

      B. The Activities as Efforts To Derive Revenue From Land

      Petitioners’ saddlebred horse activity did not use land to generate a profit,

and Judah Saddlebreds did not own real property. This factor favors respondent.

      C. Formation of Activities

      Petitioners commenced their saddlebred horse activity in 1998 but did not

initially form a business entity, i.e., Judah Saddlebreds. On December 6, 1999,

petitioners formed Judah Saddlebreds and JREG. On January 4, 2002, petitioners

formed Judah Construction. Petitioners argue that this factor should weigh in their

favor because Judah Saddlebreds and JREG were formed on the same day. We

disagree.

      Petitioners conducted the saddlebred horse activity for nearly two years

before forming JREG. Mr. Judah also conducted his real estate activities for

sometime before forming JREG. The mere fact that petitioners formally created a

business entity to conduct their preexisting saddlebred horse activity does not
                                         -24-

[*24] mean that they commenced their real estate and horse activities at the same

time. Moreover, petitioners did not deduct business expenses for JREG until 2002

but claimed deductible business expenses for Judah Saddlebreds in 1998. Judah

Construction was formed nearly three years after petitioners began their

saddlebred horse activity. Judah Construction did not claim deductible business

expenses until 2002 either.

      In addition, the formation documents of Judah Saddlebreds, JREG, and

Judah Construction do not establish that petitioners intended for these activities to

be operated as a single undertaking. Judah Saddlebreds’ operating agreement does

not mention anything about real estate. Rather, its stated purpose is “to operate in

the horse business industry by purchasing, breeding, training, showing and selling

horses.” Likewise, Judah Saddlebreds’ mission statement does not refer to

petitioners’ real estate activities. Petitioners failed to introduce the organizational

documents for Judah Construction. Consequently, we hold that petitioners did not

form JREG, Judah Construction, and Judah Saddlebreds as a single undertaking.

This factor favors respondent.

      D. Each Activity’s Benefit to the Other

      Petitioners argue that the saddlebred horse activity provided substantial

benefit to the real estate businesses by generating customers from within the
                                         -25-

[*25] saddlebred horse industry. We do not address whether the real estate

businesses benefited the saddlebred horse activity because petitioners have not

made that argument and therefore concede that point.

      In Topping v. Commissioner, T.C. Memo. 2007-92, we addressed whether a

taxpayer’s equestrian activities benefited her barn/interior design activities. We

held that this factor favored the taxpayer, but the facts were drastically different

from those of the present case. The taxpayer in Topping generated more than 90%

of her interior design clientele through equestrian activity contacts. Id., slip op. at

7. This was because the taxpayer’s barn/interior design clients wanted structures

specifically designed for horses and therefore solicited her services because of her

involvement and expertise in the horse industry. Id. at 6.

      Unlike the barn/interior design activities of the taxpayer in Topping,

petitioners’ real estate activities are not dependent on, or materially benefited by,

their saddlebred horse activity. Petitioners’ saddlebred horse activity contributed

very little to the income of JREG and Judah Construction. In fact, the saddlebred

horse activity drained the financial resources of the real estate businesses;

petitioners commonly transferred funds to cover Judah Saddlebreds’ operating

expenses, but Judah Saddlebreds never returned those funds because of constant
                                         -26-

[*26] operating deficits. Testimony from the clients of Mr. Judah’s real estate

businesses also fails to support petitioners’ position under this factor.

      Petitioners’ clients did not use Mr. Judah’s real estate businesses because

they wanted to sell, buy, or construct property that accommodated horses. These

clients also contributed very little income to petitioners’ real estate businesses

during the years at issue. Indeed, there was only one person who testified she

specifically used Mr. Judah’s real estate services because of his background in the

saddlebred horse industry. However, Triple Crown Contractors was the entity that

performed the work, not JREG or Judah Construction, and petitioners do not

contend that Triple Crown Contractors was part of a single undertaking with Judah

Saddlebreds.

      After considering the testimony offered to support petitioners’ position, we

are convinced that the benefits each activity derived from the other were merely

incidental and fortuitous. Petitioners’ real estate customers were unconcerned

with Mr. Judah’s involvement in the saddlebred horse industry. Instead, testimony

established that Mr. Judah’s real estate services were used because of established

and trusted relationships or because of his reputable workmanship. Moreover, the

revenue collected from witnesses offered to support petitioners’ position is

marginal in comparison to the overall income of JREG and Judah Construction.
                                        -27-

[*27] See Price v. Commissioner, T.C. Memo. 2014-253, at *37 (noting that a

taxpayer’s automobile sales to horse customers amounted to less than 1% of all

sales). It falls far short of the level in Topping, and we fail to see how JREG and

Judah Construction were benefited by Judah Saddlebreds.

      Petitioners’ arguments more closely resemble those advanced by the

taxpayer in Henry v. Commissioner, 36 T.C. 879 (1961). In Henry, the taxpayer

was a tax attorney who purchased a yacht on which he flew a red, white, and blue

pennant with the numerals “1040” on it. Id. at 880. The taxpayer argued that the

yacht and pennant sparked inquiries from other yacht owners and thereby

generated clients for his law practice. Id. However, like petitioners, the taxpayer

in Henry was unable to substantiate how much of an economic benefit this practice

provided to his law business. In disallowing the deduction of the yacht expenses

we held:

      [W]ere we to recognize that expenditures for normally personal
      pursuits become deductible business expenses simply because they
      afford contacts with possible future clients without showing a more
      direct relationship to the production of business income, it is evident
      that most all club dues and similar expenditures, for example, as well
      as the expense of appearing at the right place at the right time with
      the right people, could be claimed as ordinary and necessary business
      expense. * * * [Id. at 886.]
                                        -28-

[*28] We find no tangible business relationship between petitioners’ saddlebred

horse and real estate activities. Like the yacht and pennant in Henry, petitioners’

saddlebred horse activity generated little, if any, income for JREG and Judah

Construction. Petitioners’ saddlebred horse activity did allow them to mingle with

prospective clients; but we are not persuaded that such conduct created a tangible

benefit for Mr. Judah’s real estate businesses. Accordingly, this factor favors

respondent.

      E. Cross-Advertising

      Cross-advertising between the activities was minimal. Petitioners displayed

a banner for JREG or Judah Construction at horse shows they co-sponsored, but

these banners failed to advertise Judah Saddlebreds. Petitioners also advertised

JREG and Judah Construction in the programs of the horse shows they

participated in, but these advertisements also failed to make any reference to Judah

Saddlebreds. Thus, aside from petitioners’ last name, there was no cross-

advertising from these solicitations at horse shows.

      Petitioners argue that the cross-advertising consisted mainly of attending

horse shows, which allowed them to socialize with potential real estate customers.

In Price v. Commissioner, T.C. Memo. 2014-253, the taxpayers operated a car

dealership alongside their horse business. The taxpayers argued that they cross-
                                         -29-

[*29] advertised by giving away T-shirts and free cars at horse shows. Id. at *38.

We said “this argument ignores the fact that marketing the dealerships at horse

shows could also have been done solely to capture a target demographic and

would not require the existence of * * * [a horse business] as part of the

automobile dealership activity.” Id. at *38-*39. Like the taxpayer in Price,

petitioners could have attended horse shows to mingle with the attendees without

Judah Saddlebreds’ existence. Such a business practice did not require $1.5

million of expenses; in contrast, it required only the cost of an admission ticket.

This factor favors respondent.

      F. Shared Management

      Mr. Judah was the single member and manager of Judah Construction,

JREG, and Judah Saddlebreds. There is insufficient managerial overlap because

these entities share management only in the form of Mr. Judah. See id. at *39;

Estate of Stangeland v. Commissioner, T.C. Memo. 2010-185.

      G. Shared Caretaker

      In Price v. Commissioner, at *39 (quoting Webster’s Ninth Collegiate

Dictionary 208 (1985)), we held that the general dictionary definition of a

caretaker is “one that takes care of the house or land of an owner who may be

absent”. Petitioners’ trainers were the caretakers of the horses, but their trainers
                                         -30-

[*30] did not function as the caretakers of their real estate properties as well.

Thus, there is no overlap of caretakers between petitioners’ real estate and horse

activities. This factor favors respondent.

      H. Shared Accountant

      Petitioners did not employ a shared accountant for their real estate and

saddlebred horse activities. Petitioners argue that Mr. Malone was a shared

accountant by virtue of preparing Schedules C, Profit or Loss From Business, for

petitioners’ various entities. However, Mr. Malone’s services were limited to

preparing petitioners’ income tax returns. Other than this, Mr. Malone did not

provide any type of financial advice or services in regard to petitioners’

saddlebred horse activity. In Price, the taxpayer’s C.P.A. prepared the Schedules

F, Profit or Loss From Farming, for the taxpayer’s business entities that were

claimed to be part of a unitary business operation. Id. at *40. We held that this

factor favored the Commissioner because the C.P.A. was required to prepare the

taxpayer’s personal income tax return, and in the process, prepared the Schedules

F. In the present case, Mr. Malone prepared petitioners’ personal tax returns and

therefore had to prepare the various Schedules C for petitioners’ real estate and

saddlebred horse activities. We find that Mr. Malone, like the C.P.A. in Price,

does not qualify as a shared accountant.
                                         -31-

[*31] The only other shared accountant was Mr. Judah, who manually prepared

the books and records for JREG, Judah Construction, and Judah Saddlebreds.

This overlap is not significant because Mr. Judah is also the owner of these

entities. See id. at *39; Estate of Stangeland v. Commissioner, slip op. at 22.

Thus, this factor favors respondent.

      I. Shared Books and Records

      Petitioners maintained separate books and records for each of their entities.

Petitioners did not consolidate financials at yearend to present the financial

statements of JREG, Judah Construction, and Judah Saddlebreds on a unitary

basis. This factor favors respondent.

      After weighing all the factors, we hold that Judah Saddlebreds was an

activity distinct from JREG and Judah Construction. Petitioners claim they

operated the saddlebred horse and real estate activities as a single undertaking. We

think this was an afterthought and an attempt to qualify for the presumption under

section 183(d). The two activities were completely unrelated aside from a

common owner. The fact that Judah Saddlebreds also allowed petitioners to

converse with potential real estate clients is not grounds for finding that the real

estate and saddlebred horse activities constituted a single undertaking.
                                          -32-

[*32] III. Section 183 Analysis

      Having decided that petitioners’ saddlebred horse and real estate activities

were separate undertakings, we next address section 183(a). Section 183(a) limits

section 162 trade or business expense deductions a taxpayer may claim for

expenses attributable to an activity not engaged in for profit. If section 183

applies, taxpayers may not deduct such expenses to the extent they exceed income

generated by the activity. Sec. 183(b).

      Taxpayers engage in an activity for profit when they entertain an actual and

honest objective of making a profit. Dreicer v. Commissioner, 78 T.C. 642, 645

(1982), aff’d without published opinion, 702 F.2d 1205 (D.C. Cir. 1983); sec.

1.183-2(a), Income Tax Regs. Whether the requisite profit objective exists is

determined by looking at all the surrounding facts and circumstances. Keanini v.

Commissioner, 94 T.C. at 46; sec. 1.183-2(b), Income Tax Regs. We give greater

weight to objective facts than to a taxpayer’s mere statement of intent. Thomas v.

Commissioner, 84 T.C. 1244, 1269 (1985), aff’d, 792 F.2d 1256 (4th Cir. 1986);

sec. 1.183-2(a), Income Tax Regs. Evidence from years after the years in issue is

relevant to the extent it creates inferences regarding the taxpayer’s requisite profit

objective in earlier years. E.g., Foster v. Commissioner, T.C. Memo. 2012-207;
                                         -33-

[*33] Bronson v. Commissioner, T.C. Memo. 2012-17, aff’d, 591 F. App’x 625

(9th Cir. 2015).

      Section 1.183-2(b), Income Tax Regs., provides a list of factors to consider

in evaluating a taxpayer’s profit objective, such as: (1) the manner in which the

taxpayer carried on the activity; (2) the expertise of the taxpayer or his or her

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 loss with respect to the activity;

(7) the amount of occasional profits earned, if any; (8) the financial status of the

taxpayer; and (9) whether elements of personal pleasure or recreation were

involved. No single factor controls. Golanty v. Commissioner, 72 T.C. 411, 426

(1979), aff’d without published opinion, 647 F.2d 170 (9th Cir. 1981). After

careful consideration of these factors, we find that petitioners did not engage in

their saddlebred horse activity with an objective of making a profit. Our analysis

follows.

      A. Manner in Which the Taxpayer Carries On the Activity

      The fact that the taxpayer carries on an activity in a businesslike manner

may indicate a profit motive. Sec. 1.183-2(b)(1), Income Tax Regs. This
                                        -34-

[*34] determination requires consideration of: (a) whether the taxpayer

maintained complete and accurate books and records for the activity; (b) whether

the taxpayer conducted the activity in a manner substantially similar to comparable

activities that were profitable; (c) whether the taxpayer changed operating

procedures, adopted new techniques, or abandoned unprofitable methods in a

manner consistent with an intent to improve profitability; (d) the preparation of a

business plan; and (e) in the case of horse breeding and sales, a consistent and

concentrated advertising program. Mathis v. Commissioner, T.C. Memo. 2013-

294; Bronson v. Commissioner, T.C. Memo. 2012-17; Bettis v. Commissioner,

T.C. Memo. 2010-164, 2010 WL 2990300.

             1. Books and Records

      We first address whether petitioners maintained complete and accurate

books and records. Under this factor we consider whether the books and records

were maintained with the objective of making a profit, not merely whether the

taxpayer maintained books and records for tax purposes. Betts v. Commissioner,

T.C. Memo. 2010-164. A taxpayer must maintain books and records for the

purpose of cutting expenses, increasing profits, and evaluating the overall

performance of the operation to satisfy this factor. Id.
                                        -35-

[*35] In Betts, we addressed whether a taxpayer maintained accurate books and

records in her horse business. In that case, the taxpayer maintained “a separate

checking account, used business cards, kept an Excel spreadsheet of her income

and expenses, and kept a file for each horse.” Id., 2010 WL 2990300, at *6.

However, the taxpayer did not track direct and indirect expenses for each

individual horse. Consequently, the taxpayer was unable to determine net profit

after each sale because the costs of feeding, training, and other incidental expenses

in running a horse business were not factored into the bottom line. Id. In holding

that this factor weighed against the taxpayer we said: “Without such knowledge,

* * * [the taxpayer] could not have known how profitable the entire operation

was.” Id.

      Petitioners’ accounting records are even less detailed than those of the

taxpayer in Betts. Petitioners’ records were merely crude, handwritten

compilations of receipts, invoices, and bank account information. Still, petitioners

contend that they would “review the yearly information to identify cost-reducing

strategies.” We do not see how that was possible after viewing petitioners’

accounting records. It appears that no review of the books and records took place

outside of compiling them for tax purposes. Furthermore, petitioners did not keep
                                        -36-

[*36] contemporaneous books and records for each horse, making it impossible to

improve the financial condition of the activity.

      Moreover, petitioners’ accounting records in their real estate activities are

significantly different from those in their saddlebred horse activity. We think the

difference exists because the former was operated to earn a profit. Both

petitioners are seasoned business professionals who understand the importance of

financial records in relation to running a profitable business. Indeed, Mr. Judah

maintains itemized records for each of his real estate developments and tracks

their ongoing profitability. During the years at issue petitioners tracked expenses

and revenues for each property. JREG also maintained detailed general ledgers

that were used to prepare balance sheets, income statements, and other financial

information that a business person would commonly need to assess profitability.

In comparison, petitioners maintained sparse accounting records for Judah

Saddlebreds and never produced financial statements for the activity.

      Consequently, we hold that petitioners did not maintain books and records

to cut expenses and earn a profit. We think that petitioners kept receipts for tax

purposes and compiled their records only for their tax accountant’s use. This

factor favors respondent.
                                         -37-

[*37]         2. Comparable Activities

        The next factor is whether petitioners conducted their saddlebred horse

activity in a manner similar to comparable activities that were profitable.

Petitioners have never actively engaged in any horse-related business other than

the saddlebred horse activity at issue. This factor is neutral.

              3. Changing Operating Tactics To Improve Profitability

        We next consider whether petitioners changed operating procedures, cut

expenses, or abandoned unprofitable lines of business. Petitioners argue that they

began to cut expenses after 2010 and this factor should weigh in their favor.

Specifically, petitioners contend that they changed their advertisement

methodology in an attempt to cut expenses. We disagree.

        Petitioners’ operating expenses increased exponentially from 1998 through

2010. Petitioners failed to realize greater revenue and profit from their saddlebred

horse activity despite a surge in operating expenses from 1998 to 2010. Moreover,

without adequate books and records, petitioners could not abandon unprofitable

lines of business. Simply decreasing their advertising expenses, without more, is

not sufficient to satisfy this factor.

        Showing and training horses was petitioners’ largest expense. Petitioners

made no efforts to reduce these expenses by putting their horses out to pasture in
                                        -38-

[*38] the winter. When a horse is put out to pasture, expenses drastically diminish

because the horse is not being trained. Petitioners did not offer any evidence as to

why they did not put their horses out to pasture; but it was likely that Ali showed

horses throughout the year and petitioners did not want to interfere with their

daughter’s training.

      Notably, petitioners’ show expenses decreased drastically after 2010. This

decrease coincided with Ali’s attendance at veterinary school. Thus, it seems that

petitioners cut their largest expense because Ali was no longer showing horses,

and petitioners no longer needed to incur the costs of promoting their daughter’s

saddlebred horse career. Therefore, on the basis of all the above facts and

circumstances this factor favors respondent.

             4. Business Plan

      Petitioners contend that Judah Saddlebreds’ mission statement constituted a

valid business plan. We disagree. According to the Mission Statement, “[t]he

mission of Judah Saddlebreds is to locate and acquire quality horses, which

through proper training, successful performance, and potential breeding will both

enhance the value of the breed and return a substantial profit to the business.”

Petitioners’ business plan is completely “devoid of any meaningful financial

analysis”. See Betts v. Commissioner, 2010 WL 2990300, at *6. In Betts, the
                                         -39-

[*39] taxpayer testified that her business plan was to “purchase prospective sport

horses that needed developing, some training, and resell them at a much higher

price to the amateur and young rider market.” Id. at *4. Petitioners’ business plan

mirrors that of the taxpayer in Betts, and we held that this factor weighed against

the taxpayer in that case because of the taxpayer’s failure to “prepare any business

or profit plans, profit or loss statements, balance sheets, or financial break-even

analyses” for her horse business. Id. at *6 (quoting Dodge v. Commissioner, T.C.

Memo. 1998-89, aff’d without published opinion, 188 F.3d 507 (6th Cir. 1999)).

Nonetheless, the taxpayer in Betts did maintain contemporaneous books and

records that reflected her ongoing business operations.

      Here, petitioners did not even maintain an ongoing compilation of income

or expenses; instead, they kept a compilation of receipts which they used to

prepare an income and expense statement at yearend. Consequently, petitioners

could not take financial information into account until after the taxable year was

over, much less before they began a new year of operations. Given petitioners’

conduct in other for-profit activities (the business proposal with the Fisher Family

Trust, for example), we would expect Judah Saddlebreds to have some kind of

market analysis, budget, or cashflow projections prepared before commencing the

saddlebred horse activity. Yet petitioners entered into the activity with nothing
                                         -40-

[*40] more than a plan to sell horses for more than they paid for them. This is not

a business plan and is devoid of any meaningful financial analysis. Therefore, this

factor weighs against petitioners.

             5. Advertising

      Petitioners argue they advertised their horses in a manner consistent with

operating a for-profit business in the saddlebred horse industry. We agree and

have held that “advertising at horse shows, by word of mouth, in print media, and

by participation in horse shows may indicate an intent to make a profit”. Id. at *7

(citing Engdahl v. Commissioner, 72 T.C. 659, 667 (1979)). Petitioners advertised

their horses mainly by participating in horse shows. Petitioners also advertised

through online and print media. Although these advertisements helped promote

their daughter as an amateur rider, they also helped promote petitioners’

saddlebred horse activity. This factor favors petitioners.

      In conclusion, we find that petitioners did not carry on Judah Saddlebreds in

a manner consistent with an activity engaged in for profit. Instead, petitioners’

lack of financial planning, failure to maintain adequate books and records, and

continued losses without modifying their business operations indicate that they

lacked an objective of earning profit.
                                        -41-

[*41] B. Expertise of the Taxpayer

      “The taxpayer’s expertise, research, and extensive study of an activity, as

well as his or her consultation with experts, may indicate a profit motive.” Mathis

v. Commissioner, at *10; sec. 1.183-2(b)(2), Income Tax Regs. This factor

focuses on “whether petitioner[s] received advice from the experts as to the

accepted principles and economics of profitably running a business and not merely

the general advice that a horse enthusiast would seek in training and showing

horses as a hobby.” Betts v. Commissioner, 2010 WL 2990300, at *8 (citing

Golanty v. Commissioner, 72 T.C. 411).

      Petitioners argue that they sought business advice from their C.P.A.

However, Mr. Malone simply advised petitioners to acquire horses and sell them

for a profit. Petitioners also assert that Mr. Malone instructed them to form an

LLC. These simple instructions form the basis of petitioners’ argument that Mr.

Malone was an expert consultant. We disagree.

      Mr. Malone’s advice to sell horses for more than petitioners paid for them is

not expert advice by any means. Petitioners did not gain any insight from that

advice, especially considering their business background, education, and success

in other business endeavors. Petitioners did not seek the type of expert financial

advice or services that a C.P.A. commonly provides. Mr. Malone maintained
                                        -42-

[*42] accounting records and prepared monthly financial statements for other

clients. In contrast, Mr. Malone did not provide petitioners the same services

because petitioners never asked for them. Mr. Malone never advised petitioners

on what the sale prices of the saddle horses should be to recoup operating

expenses or what lines of business could improve profitability and reduce

expenses. Most importantly, petitioners never sought any type of advice on

turning Judah Saddlebreds into a profitable business. Mr. Malone only assisted

with the formation of Judah Saddlebreds, and from that point forward he prepared

petitioners’ income tax returns. This does not constitute expert advice in

“profitably running a business.” See id.

      Petitioners further contend that they sought expert advice from their

trainers. Petitioners consulted with their trainers when deciding what shows to

enter and what events provided the best chance of success. Petitioners also

consulted with their trainers to determine the selling price of a horse. Respondent

contends that petitioners’ trainers never had access to petitioners’ books and

records and therefore could not provide reliable advice on the price at which

petitioners needed to sell a given horse for a profit. We disagree with respondent

on this point. Petitioners’ trainers knew what a reasonable sale price would be

given the market and the background of the horse. Petitioners’ seeking advice on
                                         -43-

[*43] what shows to enter and what events to compete in does not amount to

seeking expert advice on profitability because they sought “merely the general

advice that a horse enthusiast would seek in training and showing horses as a

hobby.” See Betts v. Commissioner, 2010 WL 2990300, at *8. However, seeking

advice as to how much to sell a horse for is something different. The trainers were

the most knowledgeable individuals to gauge the market price for a given horse,

especially when considering the unique characteristics that added value to

petitioners’ horses. On balance we find that this factor favors petitioners, but only

because they consulted with trainers before selling their horses.

      C. Time and Effort Allocated to Activity

      The taxpayer’s devotion of much of his or her personal time and effort to

carrying on an activity may indicate a profit motive, particularly if the activity

does not involve substantial personal or recreational aspects. Sec. 1.183-2(b)(3),

Income Tax Regs. The time and effort spent on an activity that has substantial

personal and recreational aspects may be due to a taxpayer’s enjoyment of the

activity rather than the taxpayer’s objective of making a profit. Rinehart v.

Commissioner, T.C. Memo. 1998-205.

      We find that petitioners did not allocate the necessary time or effort to

establish that they had the requisite objective of making a profit. Petitioners’ time
                                         -44-

[*44] and effort consisted of visiting their horses twice a week, speaking with their

trainers, preparing for shows, paying invoices, and maintaining books and records.

Yet petitioners mainly spent their time attending horse shows or horse-related

events while engaging in their saddlebred horse activity. Approximately 10 to 15

hours per week was allocated to these types of activities according to petitioners.

Understandably, petitioners worked full-time jobs, thereby limiting the time they

could allocate to the saddlebred horse activity. We have previously found that

maintaining a full-time job in addition to conducting a purported business can be a

“positive factor reflecting * * * [the taxpayer’s] motivation” to earn a profit.

Dickson v. Commissioner, T.C. Memo. 1986-182, 1986 Tax Ct. Memo LEXIS

423, at *11.

      Petitioners allocated time mainly to the enjoyable aspects of their

saddlebred horse activity. Testimony established that petitioners did not clean the

horse stables, feed or groom the horses, or perform any strenuous labor commonly

associated with running a horse business. Instead, petitioners gained considerable

pleasure by watching their daughter compete in horse shows. In addition,

petitioners enjoyed socializing at horse shows, and participating in the saddlebred

horse business carries a certain amount of prestige. Therefore, we find that the

limited amount of time allocated to their saddlebred horse activity and the
                                        -45-

[*45] substantial elements of personal pleasure weigh against petitioners. See

Mathis v. Commissioner, T.C. Memo. 2013-294 (noting that even though the

taxpayer spent over 40 hours a week in relation to her horse business, the fact that

she gained substantial personal pleasure from the activity limited the overall

impact of this factor in supporting the taxpayer’s claim to be conducting the horse

business for profit).

      D. 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 motive even if the taxpayer derives no profit from current

operations. Sec. 1.183-2(b)(4), Income Tax Regs. However, we may infer a profit

objective from such expected appreciation only when the appreciation exceeds

operating expenses and would be sufficient to recoup the accumulated losses of

prior years. Foster v. Commissioner, T.C. Memo. 2012-207; see Golanty v.

Commissioner, 72 T.C. at 427-428.

      Petitioners argue that some of their horses were sold for more than their

initial costs. Although this may be true, the proper inquiry is whether the

appreciation of petitioners’ assets is sufficient to recoup the accumulated losses of

prior years. See Foster v. Commissioner, T.C. Memo. 2012-207. Overcoming this
                                         -46-

[*46] hurdle seems improbable for petitioners given reported losses for every year

of operation. Indeed, Judah Saddlebreds has accumulated over $1.5 million in

losses, including depreciation expenses on petitioners’ horses.

      According to petitioners, they have realized a net profit of $142,000 since

1998. Petitioners would have us disregard basic accounting principles and ignore

Judah Saddlebreds’ considerable operating expenses if we were to accept that

claim as true, and we fail to see how petitioners realized any profit in regard to the

saddlebred horse activity. Moreover, even if this were true, $142,000 of profit

falls drastically short of recouping $1.5 million in accumulated losses. Most

importantly, petitioners concede that they will never generate enough profit to

recoup the $1.5 million in losses. Nonetheless, they argue that we should ignore

their inability to recoup past losses and look only to the prospective potential of

Judah Saddlebreds’ profitability. However, on the basis of previously decided

cases, we must consider petitioners’ ability to recoup accumulated losses. See

Price v. Commissioner, T.C. Memo. 2014-253; Foster v. Commissioner, T.C.

Memo. 2012-207. Thus, this factor favors respondent.

      E. Success of Taxpayer in Carrying on Other Related Businesses

      Section 1.183-2(b)(5), Income Tax Regs., provides: “The fact that the

taxpayer has engaged in similar activities in the past and converted them from
                                         -47-

[*47] unprofitable to profitable enterprises may indicate that he is engaged in the

present activity for profit, even though the activity is presently unprofitable.”

None of petitioners’ past activities provides evidence of a profit motive here

because petitioners have never actively engaged in other horse-related activities.

Therefore, this factor is neutral.

      F. The Taxpayer's History of Income or Loss With Respect to the Activity

      A history of continued losses with respect to an activity may indicate that

the taxpayer lacked a profit motive. See id. subpara. (6). Although a series of

losses during the initial or startup stage of an activity may not necessarily indicate

a lack of profit motive, a record of large losses over many years is persuasive

evidence that the taxpayer did not have such a motive. Golanty v. Commissioner,

72 T.C. at 426; Foster v. Commissioner, T.C. Memo. 2012-207.

      Petitioners recognized losses only in the saddlebred horse activity. We have

previously held that the start-up phase for a horse breeding activity is 5 to 10

years. Price v. Commissioner, T.C. Memo. 2014-253, at *69 (citing Engdahl v.

Commissioner, 72 T.C. at 669). Petitioners have been in the saddlebred horse

activity for over 10 years and have not generated a profit. Moreover, respondent is

not challenging the first 9 years of petitioner’s saddlebred horse activity, only the

11th, 12th and 13th years. We fail to understand why petitioners have continued
                                        -48-

[*48] to generate losses, given that the startup phase is approximately 5 to 10

years. Petitioners contend that they could generate a profit if they successfully

bred one of their horses. However, petitioners did breed saddlebred horses and

they still did not generate a profit. Furthermore, we cannot find for petitioners on

what may happen, and mere speculation will not carry the day.

      Petitioners further argue that Judah Saddlebreds’ losses have decreased in

recent years. In Mathis v. Commissioner, at *15, the taxpayers “cite[d] the

diminishing losses as a sign that the [horse] farm is nearing profitability.” We

rejected that argument because “the smaller net losses did not result from

increased sales, only from lower reported expenses”. Id. at *15-*16. Like the

losses of the taxpayers in Mathis, petitioners’ losses were the result of decreased

expenditures after 2010. Increasing profits had nothing to do with it.

Furthermore, petitioners’ opening brief states that “[a]lthough * * * [we] may not

be able to fully recoup * * * [our] start-up losses, * * * [we] could generate

sufficient profit going forward to recoup several years of post-start-up losses”.

We have squarely rejected that argument and held “[t]he current and expected

losses of an activity should not be of such a magnitude that an overall profit going

forward would not be possible.” Id. at *16 (citing Bessenyey v. Commissioner, 45

T.C. 261, 274 (1965), aff’d, 379 F.2d 252 (2d Cir. 1967)). Petitioners did not
                                        -49-

[*49] present convincing evidence that future profits could possibly offset the

accumulated losses of $1.5 million. Thus, this factor favors respondent.

      G. The Amount of Occasional Profits Earned

      The amounts of profits in relation to the amount of losses incurred may

provide evidence of the taxpayer’s intent. Sec. 1.183-2(b)(7), Income Tax Regs.

Petitioners have never generated a profit from their saddlebred horse activity and

continue to operate Judah Saddlebreds. In turn, this indicates that petitioners are

engaged in the saddlebred horse activity to promote their daughter as a show

woman. There would be no other reason to continue to run an unprofitable

venture since 1998 unless there was some ulterior motive. This factor favors

respondent.

      H. The Financial Status of the Taxpayer

      Substantial income from sources other than the activity may indicate that the

activity is not engaged in for profit. Id. subpara. (8). A taxpayer with substantial

income unrelated to the activity can more readily afford a hobby. Foster v.

Commissioner, T.C. Memo. 2012-207. This is particularly true if the losses from

the activity might generate substantial tax benefits. Golanty v. Commissioner, 72

T.C. at 429.
                                         -50-

[*50] Petitioners have substantial sources of income apart from the saddlebred

horse activity. Mr. Judah generates substantial self-employment income from his

real estate activities, and Mrs. Judah earns a considerable salary as the chief

operating officer of a large real estate development company. Hence, petitioners

were able to offset that income with recurring losses from Judah Saddlebreds.

Thus, petitioners had substantial income from other sources and gained substantial

tax benefits from the losses generated by Judah Saddlebreds. See id.

      Petitioners argue that there is no benefit from engaging in an activity that

loses money. Petitioners would have likely incurred these expenses anyway, albeit

probably not to the same degree, because they wanted to promote their daughter’s

saddlebred horse hobby. The test is whether petitioners intended to earn a profit,

and in the present case petitioners’ intention to earn a profit was secondary to

Ali’s saddlebred horse hobby. This factor favors respondent.

      I. Whether Elements of Personal Pleasure or Recreation Are Involved

      The presence of personal motives and recreational elements in carrying on

an activity may indicate that the activity is not engaged in for profit. Sec. 1.183-

2(b)(9), Income Tax Regs. The saddlebred horse activity provides substantial

personal pleasure to petitioners. As stated previously, petitioners do not engage in

any of the rigorous aspects of the saddlebred horse activity such as mucking out
                                        -51-

[*51] stalls, grooming, or feeding horses. Rather, petitioners’ activity provides a

social outlet with friends. Most importantly, it allows them to watch their

daughter engage in her passion, and petitioners gain substantial enjoyment seeing

their daughter ride horses.

      In Mathis v. Commissioner, T.C. Memo. 2013-294, we addressed this factor

for a taxpayer who enjoyed watching horses, brought horses to her ranch for

personal pleasure, and exhibited horses with her daughter. The taxpayer worked

between 40 and 60 hours a week in relation to her horse business. Id. at *4. We

held that “running a large-scale breeding operation takes many hours of hard

work, and * * * [the taxpayer] has sacrificed family and personal time to promote

her horses.” Id. at *18-*19. Unlike the taxpayer in Mathis, petitioners did not

sacrifice personal or family time in order to engage in the saddlebred horse

activity. Alternatively, petitioners’ saddlebred horse activity promoted and

supplemented the time that they spent with each other, their daughter, and their

friends. Therefore, this factors favors respondent.
                                        -52-

[*52] In conclusion, we hold that petitioners did not engage in the saddlebred

horse activity to earn a profit. Petitioners’ primary concern was promoting their

daughter’s natural talents, and any intent to earn a profit was secondary.5

IV. Accuracy-Related Penalties

      Respondent determined that petitioners were liable for an accuracy-related

penalty pursuant to section 6662(a) for each of the tax years at issue. Section

6662(a) and (b)(1) and (2) imposes a penalty of 20% on any underpayment

attributable to, among other things, (1) negligence or disregard of rules or

regulations or (2) any substantial understatement of income tax. An

understatement is substantial if it exceeds the greater of $5,000 or 10% of the

income tax required to be shown on the return for the taxable year. Sec.

6662(d)(1)(A).

      Respondent bears the burden of production with respect to this penalty. See

sec. 7491(c). Respondent satisfies the burden by presenting sufficient evidence

supporting the penalty. See Higbee v. Commissioner, 116 T.C. 438, 446 (2001).

Respondent determined understatements of petitioners’ income tax of $55,328,

      5
        Because we hold that petitioners did not engage in their saddlebred horse
activity for profit, we do not address additional issues raised by the parties under
secs. 469 and 1231. Both sections require income to be from a “trade or business”.
Petitioners did not operate a trade or business in regard to the saddlebred horse
activity and therefore the issues raised under secs. 469 and 1231 are moot.
                                         -53-

[*53] $49,512.15, and $32,049 for the years 2008, 2009, and 2010, respectively.

These amounts exceed 10% of the tax required to be shown on the respective

returns, which for each year exceeds $5,000. Petitioners also satisfy the 10%

income tax test as well.6 Thus, respondent has carried his burden of demonstrating

that petitioners substantially understated their income tax for each year at issue.

      Pursuant to section 6664(c)(1), the accuracy-related penalty under section

6662 does not apply to any portion of an underpayment for which a taxpayer

establishes that he or she: (1) had reasonable cause and (2) acted in good faith. A

taxpayer’s failure to comply with section 183 does not preclude a reasonable cause

and good faith defense. See, e.g., Rodriguez v. Commissioner, T.C. Memo.

2013-221, at *57. For a taxpayer to rely reasonably upon advice so as possibly to

negate a section 6662(a) accuracy-related penalty determined by the

Commissioner, the taxpayer must prove by a preponderance of the evidence that

the taxpayer meets each requirement of the following three-prong test: (1) the

adviser was a competent professional who had sufficient expertise to justify

reliance, (2) the taxpayer provided necessary and accurate information to the


      6
       Petitioners’ correct income tax is $67,786, $141,015, and $74,081 for the
taxable years 2008, 2009, and 2010, respectively. Ten percent of the income tax
owed is $6,779, $14,102, and $7,408 for the taxable years 2008, 2009, and 2010,
respectively.
                                         -54-

[*54] adviser, and (3) the taxpayer actually relied in good faith on the adviser's

judgment. Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 99 (2000),

aff’d, 299 F.3d 221 (3d Cir. 2002). Whether a taxpayer has acted with reasonable

cause and in good faith depends on the facts and circumstances of the case.

      Petitioners hired a C.P.A. to prepare their income tax return for each of the

years at issue. Mr. Malone was petitioners’ C.P.A. from 1998 to 2007, but he did

not sign petitioners’ returns for the years at issue on account of his retirement in

2008. However, Mr. Malone believed petitioners conducted their saddlebred

horse activity in a businesslike manner and therefore instructed petitioners to

deduct the saddlebred horse activity expenses on their income tax returns.

      During the years at issue, a C.P.A. from Mr. Malone’s old firm prepared

petitioners’ income tax returns. Accordingly, we think said C.P.A. would have

been of the same opinion as Mr. Malone in that petitioners’ saddlebred horse

activity was not subject to the hobby loss rules of section 183. At all times,

petitioners submitted complete and accurate records to their C.P.A. to substantiate

the business expenses and relied on their C.P.A. to properly prepare the returns.

Thus, the three-prong test of Neonatology Assocs. is satisfied.
                                  -55-

[*55] To reflect the foregoing,


                                               Decision will be entered for

                                         respondent as to the deficiencies and

                                         for petitioners as to the accuracy-

                                         related penalties under section

                                         6662(a).
