                         T.C. Memo. 1999-83



                       UNITED STATES TAX COURT



     COURTNEY LUNDQUIST AND BRENDA LUNDQUIST, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent




     Docket No. 20779-94.                     Filed March 19, 1999.



     Edward DeFranceschi, for petitioners.

     Paul Colleran and David N. Brodsky, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     COLVIN, Judge:   Respondent determined deficiencies in

petitioners' 1988, 1989, and 1990 Federal income tax as follows:


                      Year      Deficiency
                      1988       $26,658
                      1989        23,869
                      1990        14,305
                                - 2 -

     The sole issue for decision is whether petitioner operated

her horse breeding activity for profit in 1988, 1989, and 1990.

We hold that she did not.

     References to petitioner are to Brenda Lundquist.      Section

references are to the Internal Revenue Code.

                       I.    FINDINGS OF FACT

A.   Petitioners

     Petitioners are married and lived in Lake Worth, Florida,

when they filed their petition.    They have no children.

     Petitioner Courtney Lundquist (Mr. Lundquist) owned

Winnipesocki Airlines, a commuter airline, until he sold it in

1979.   He later became a pilot for Delta Airlines.   He retired

from Delta in 1989.

     Petitioner graduated from high school in 1959.    She

graduated from Bay State Junior College with an associate's

degree in business in 1961.    She worked as a flight attendant for

Northeast Airlines for 2 years.    She then worked for Avis Rent-a-

Car, first as a rental agent and later as Avis' director of

training at Logan Airport.

     In 1966, petitioner began working for Kelly Services, Inc.

(Kelly), as a branch manager.    She became an area sales manager

and helped Kelly obtain contracts including Ray-Chem and a

regional Nielsen television survey.     In 1976, petitioner began to

work for Winnipesocki Airlines.    She was president when her

husband sold it in 1979.
                                 - 3 -

     Petitioner loves animals.    From 1966 to 1984, petitioner

bred English sheepdogs, Yorkshire terriers, and Maltese terriers.

She sold 10 to 15 puppies.    Petitioner did not report any income

from this activity on her tax returns for tax years 1978 to 1984.

     Petitioner is not a horse trainer and does not have any

formal training in horse breeding.       However, she has been

interested in horses since she was 9 or 10 years old.       She rode

horses when she was a child.

B.   Dressage Competition

     Dressage is an Olympic sport which involves training a horse

to do basic movements that are executed in a small arena in front

of a panel of judges.    A dressage program is analogous to

compulsory movements in figure skating.       Three-day eventing is

also an Olympic sport.    It consists of a day each of dressage,

cross country, and stadium jumping.

     A dressage horse can start training when it is 3 years old.

A horse can compete in medium level competitions when it is 6 or

7 and in upper level competitions when it is 8 or 9.       Dressage

levels are training, first, second, third, fourth, fifth, Prix

St. Georges, Intermediare I, Intermediare II, and Grand Prix.

     Dressage competitions award ribbons and prizes such as coats

and coolers but do not offer monetary prizes.       Traditional

dressage horses are called "warmbloods", which are a mixture of

European horse breeds and thoroughbreds.       The main warmblood

breeding centers were in Europe in 1982.
                                 - 4 -



C.   Early Years of Petitioner's Horse Activity

     In 1976, petitioner began her horse activity when she bought

two young Anglo-Arab horses and began to learn about horse

breeds.   She investigated dressage competitions, European horses,

and breeding and concluded that warmblood horses from Europe are

better for dressage than American thoroughbred horses.

Petitioners first reported on their tax return that petitioner's

activity was a business in 1979.

     Sometime during the early years of petitioner's horse

activity (on a date not stated in the record), a horse threw her,

causing her to have a concussion and temporary loss of sight.

She has not ridden since then.

     Horst Planzor (Planzor) owned Westfalian Pride Farm in

Poolesville, Maryland.    In 1980 or 1981, petitioner visited

Planzor three times at his farm, where she saw his horses.

Planzor was a past president of the American Hanoverian Society.

Planzor owned a Hanoverian breeding stallion.

D.   Petitioner's Purchase of European Horses and First
     Competition

     1.     Petitioner's First Trip to Europe To Buy Horses

     Petitioner went to Germany in February 1982 with Michael

Poulin (Poulin) and Ruth Sarkunas (Sarkunas).    Petitioner

intended to buy two brood mares and a horse to perform in shows

and compete.    Poulin was a dressage trainer from Maine and a

member of the U.S. Olympic team.    Sarkunas was one of Poulin's

students.    Sarkunas had trained with Nuno Olivera, who was well
                                 - 5 -

known in the horse world.    Petitioner reimbursed some of their

expenses but did not otherwise pay them.

     In Europe, petitioner saw Temptation, a breeding stallion

approved by the Swedish Government which competed at the Prix St.

Georges level of dressage in Germany from 1977 to 1981.

     Petitioner bought Temptation and two brood mares, Abfahrt

and Donka.   Abfahrt was pregnant.   Temptation cost about $30,000,

and the two mares cost $1,500 to $3,500 each.    Petitioner

mortgaged some property to pay for the three horses.

     Petitioner believed that if she bought a stallion she could

use him to impregnate her own mares and mares owned by others.

     Temptation and the two mares were required to be quarantined

because they were more than 2 years old.    Any horse more than 2

years old that can reproduce must be tested for equine ritritis.

This test requires that a stallion be bred to two mares in

Germany and wait 30 days to determine if he is infected with

equine ritritis.    After being quarantined in Europe, the horse

must be quarantined in the United States.    Abfahrt was unable to

travel because she was pregnant and close to delivery, so

petitioner placed her at a breeding facility in Europe where she

delivered a foal.    Abfahrt and her foal were then flown to the

United States and quarantined.    Petitioner did not know she would

be required to quarantine the horses for more than 3 days.

     Petitioner boarded Abfahrt, Donka, and the foal at Planzor's

farm.   Abfahrt's foal was bred to Planzor's stallion.   The
                                 - 6 -

resulting foal was named Markant.     Markant subsequently became

seriously ill and had colic surgery.

     2.      Temptation's Competition and Injury

     Temptation came to the United States in June 1982 and was

released from quarantine in July or August 1982.     Petitioner

thought Temptation was from Switzerland when she bought him, but

later learned that he was from Sweden.

     Petitioner intended to campaign (i.e., show on the circuit)

Temptation with Sarkunas as his rider.     Mary Phelps (Phelps), a

prominent horse photographer, photographed Temptation with

Sarkunas in the saddle shortly after Temptation was released from

quarantine.     Poulin then began Temptation's dressage training at

Poulin's farm in Maine.

     Petitioner advertised that Temptation was available for stud

in Dressage & Eventing magazine in September and October 1982 and

in EquiSport magazine in January/February 1983.

     Petitioner showed Temptation in the United States at Groton

House Spring Show at Groton Farms in Hamilton, Massachusetts, in

1983.     When petitioner saw Temptation being unloaded from the van

at that competition, she realized that he was lame.     Petitioner

believed that Temptation was lame due to lack of care of his

hooves.

     Poulin entered Temptation at the third level of dressage.

Two or three other horses were entered.     Temptation finished

second and third in the tests.
                                - 7 -

     Petitioner did not enter Temptation in any dressage

competitions after the 1983 Groton House Spring Show because he

was lame.    Petitioner removed Temptation from Poulin's farm and

boarded him at the Groton House Farm in Hamilton, Massachusetts,

about 10 miles from her home.    Petitioner agreed to give the

owner of the farm breedings to Temptation in exchange for

boarding.

     3.     Petitioner's Second Trip to Europe To Buy Horses

     In 1983, petitioner returned to Sweden to buy mares to breed

to Temptation.    Petitioner bought Labrette, a 1-1/2-year-old

filly.    Petitioner was not required to quarantine Labrette

because she was less than 2 years old, thereby avoiding the need

to pay quarantine fees.

     Petitioner also bought a 6-month old colt, Zenit, that she

boarded for 4 years at the Swedish national stud facility.      Zenit

stayed at the Swedish national stud facility for 4 years so he

could be raised like Temptation.    After Zenit trained for 4

years, petitioner was asked if he could be trained to compete for

the Swedish Olympic team.    Petitioner declined and instead sold

Zenit to Gunnar Ostergard, a Danish trainer and his wife, a

Danish Olympic rider team member.      Petitioner kept all breeding

rights to Zenit.

E.   Petitioners' Move to Florida

     1.     The Lake Worth Residence

     In January 1984, petitioners moved from New Hampshire to

Florida.    In 1984, petitioner owned Temptation, Labrette, and
                                 - 8 -

Abfahrt, two colts, a Morgan horse, and a thoroughbred horse used

by visitors to ride for pleasure.

     Petitioner advertised that Temptation was available for stud

in the Gold Coast Dressage Association program for May 5 and 6,

1984, and the programs for the 1984 and 1986 Palm Beach Dressage

Derby.   She joined the Miami Dade County Dressage Association and

Gold Coast Dressage Association.

     In April 1985, petitioners bought a facility for $240,000

for petitioner's horses in Lake Worth, Florida, next to the Palm

Beach Polo and Country Club.   This property had a four-bedroom

house with 3,062 square feet, 5 acres of land with improved

pastures with water, a five-stall barn with a tack room, three

outdoor stalls with a roof, a lighted arena with a judging stand,

a covered paddock and a run in a shed, and indoor and outdoor dog

kennels.

     Petitioner's parents moved with her to Florida in 1984.   She

used her money from the sale of a house that she owned in

Massachusetts to buy them a two-bedroom home about 6 miles from

petitioners' home.

     Petitioner promoted Temptation in 1984 and 1985 by arranging

for him to participate in parades and demonstrations.   Serenity

Reins and Temptation participated in the 1984 Palm Beach Dressage

Derby and Stallion Parade.   Petitioner arranged for Temptation to

participate in demonstrations at the Gold Coast Dressage

Association show at Trafalgar Park Equestrian Center, Miami,

Florida, on May 5 and 6, 1984.
                               - 9 -

     In 1985, petitioner investigated the use of artificial

insemination to breed horses and had Temptation evaluated as a

breeding stallion.   Temptation's earning potential as a stud

diminished considerably after he was injured.     Temptation's stud

fee was generally $500 if the owner did not want registration

papers and $1,000 if the owner wanted registration papers.

Petitioner bred Temptation two or three times for cash and once

in exchange for boarding at the Groton House.     On March 1, 1985,

petitioner agreed to breed Temptation to a mare for $500.

     In April 1985, petitioner wrote a letter to Ellen Dixon

(Dixon), the daughter of F. Eugene Dixon, who was prominent in

the horse world, in which she sought to lease her mares to Dixon.

Petitioner believed that it would be prestigious to do so because

petitioner's name and Serenity Farms would be listed above the

stall of her mare.   She believed this would be like having $1

million in publicity.   In the letter she said:

          I am just looking to lease these mares out for one
     year so I can take a break. These last four years have
     been murder and my husband's patience is almost worn
     out with my not ever going away with him, not to
     mention spending all his money and never cooking, etc.
     I could never get back what I have into them monitarily
     [sic] and I really do love them two. I know your mare
     care would be super and I would not have to worry about
     them. I had originally hoped to lease them to someone
     to have Temptation babies but I know they would do
     Fruhwind proud.

Fruhwind died before petitioner and Dixon reached an agreement.

     At a time not specified in the record, petitioner wrote

notes to herself on the back of the letter to Ellen Dixon,

including:
                              - 10 -

     Open line of communication

     (1) 5/10 breedings yearly - my own or outside mares ok
     (Good judgement re: when & where) not during training/s

     (2) Referrals to breed Temptation

     (3) Referrals to sell Mandarin & present & future
     babies

     (4) Help Marija to properly show & sell filly & baby

     (5) Promise of plenty of PR that Zenit was a product of
     Serenity Reins Farm type quality of purchase &
     breeding: Bought from us because we wished the best aux
     for the horse: Dual PR for future. * * * (illegible).
     Future working relationship

     2.   Labrette

     Around 1985, petitioner bred Labrette, then 3, to

Temptation.   Labrette had a filly when she was 4.   The filly was

put down after she broke her neck in an accident when she was 6

months old.

     3.   The White Fences Residence

     In 1986 and 1987, petitioners rented a residence at the

White Fences Golf and Equestrian Club of the Palm Beaches (White

Fences), Laxahatchee, Florida.    White Fences is a planned

community with a golf course and riding trails.    The White Fences

Dressage Derby was held at White Fences, and a dressage facility

was being built there.   The literature distributed by the owners

of the White Fences development describes Serenity Reins as a top

breeder of superb Swedish warmbloods.    While petitioners lived at

White Fences, they rented to others their residence in Lake

Worth, Florida.
                              - 11 -

     Jessica Raneshausen (Raneshausen) and her groom, Julia

Hackensen (Hackensen), stayed for free at petitioners' house at

White Fences while Hackensen was riding for another horse owner

at a dressage derby.   Raneshausen had been in the 1964 Olympics

and is a member of the executive committee of the United States

Dressage Federation.   Hackensen is a Swedish Olympic rider.

     4.   Petitioners' Return to Lake Worth

     In October 1987, petitioners moved back to Lake Worth.     At

that time, petitioner's herd consisted of Temptation, mares

Labrette, Abfahrt, and Donka, four young horses, and one foal by

Temptation.   The quality of the two foals by Temptation was far

below petitioner's expectations.   She donated three of her horses

(not specified in the record) to a Gainesville, Florida, breeding

program and claimed a charitable contribution deduction of $1,050

for a mare.

F.   Petitioner's Horse Activities During the Years in Issue
     (1988 to 1990)

     Petitioners lived in Lake Worth in 1988 and 1989.

Petitioner did not breed Labrette after 1987 because Labrette was

very athletic, and petitioner thought Labrette would perform well

on the show circuit.   Petitioner entered Labrette in shows in the

1989-90 season.

     1.   Petitioner's Income From Serenity Reins

     On April 10, 1989, petitioner agreed to breed Temptation to

a mare for $750.   In 1989, petitioner sold Donka for $1,500,

Treasure for $7,900, and Pataplan for $4,300.   She also received

$200 for boarding a horse.
                                - 12 -

     Petitioner sold Temptress for $4,000 on November 14, 1990,

Mandarin for $6,500 on December 1, 1990, and another horse for

$4,000 in 1990.

     2.   Raneshausen

     Raneshausen used petitioner's facility and stayed for free

at petitioners' home at Lake Worth during the 1989-90 show

season.   Petitioner did not have enough room to board

Raneshausen's horses and found a rental stable for them.

Raneshausen trained Labrette at no cost.    Petitioner believed

that it was very prestigious to have Raneshausen at petitioners'

residence and that petitioner would be more likely to succeed in

competitions and breeding of dressage horses if she associated

with people who are prominent in the dressage horse field.

     3.   Darren Chiacchia

     Darren Chiacchia (Chiacchia), a 3-day event rider, also

stayed at petitioners' home at Lake Worth during the 1989-90 show

season.   In 1989, Chiacchia was 26 years old and had won many

competitions.     Chiacchia came to petitioners' home a month before

the 1989-90 competitions began and discussed riding and

competitions with petitioner.    Chiacchia asked petitioner if he

could ride Labrette.

     Chiacchia and petitioner visited two Olympic trainers who

had won gold medals, Joe Farges (Farges) and Conrad Holmfeld

(Holmfeld).   Farges and Holmfeld evaluated Labrette.    Based on

that evaluation, petitioner decided that Chiacchia would campaign

Labrette with Raneshausen.    They did so the entire season.
                                    - 13 -

      4.     1990

      Petitioner did not keep any horses at her residence at Lake

Worth in 1990 and 1991 so she could care for her parents and take

Labrette on the show circuit.        In 1990, petitioner allowed a

couple to live at her residence in exchange for their maintaining

it.

              a.    Temptation

      Petitioner boarded Temptation in Lexington, Kentucky, in

1990.      Temptation unexpectedly died while there.

              b.    Labrette

      During the 1990-91 season, Chiacchia successfully rode

Labrette in combined training events (dressage, endurance, and

jumping) in an effort to qualify Labrette for 3-day eventing in

the Olympics to be held in Barcelona in 1992.        Petitioner

traveled on the competition with Chiacchia.        Labrette began horse

trials as a novice and rose to the level of preliminary in 1990.

In 1990, Labrette finished second in the training level at the

Mid-Florida competition.         Labrette won the training level with a

very high score at the Groton House in Massachusetts.        Labrette

also excelled in competitions at the Third Open Preliminary, the

Open Preliminary at Ledyard Farm, the First Open Preliminary, and

the Genessee Valley Hunt Horse Trial.

      5.      Typical Daily Routine

      Petitioner usually worked 14 to 18 hours a day on her horse

activity in 1988 and 1989.        She fed and showered the horses,

checked them for injuries, checked their shoes, drove the tractor
                                - 14 -

to drag manure, checked the fences, checked horse manure for

sand, and cleaned the stalls.

     Petitioner used a Corvette as the vehicle for her horse

activity to haul hay, halters, and feed ropes.    She drove it to

all the competitions.

     Petitioner never competed in any equestrian events.

However, she attended those in which her horses competed.

     6.   Finances and Records

     Petitioner did not have a separate checking account for her

horse breeding activity in 1988, 1989, or 1990.    Petitioner

segregated from her personal records those which related to the

horse activity and rent receipts and checks.    She also had a

credit card which she used only for her horse activity.

     Petitioner summarized the checks for her horse activity in

spreadsheets listing the check number, amount, date, payee, and

general category of expense such as feed and hay, veterinarian,

tack and supplies, dues and fees, labor, horse transportation,

horse board, and office supplies.    Petitioner gave her

spreadsheets, check stubs, and credit card and cash receipts to

her accountant during the years in issue.

     7.   Petitioner's Lack of Sales

     Petitioner was surprised that buyers were not interested in

the warmblood horses that she had for sale in the years in issue.

She concluded that her potential customers were interested in

color and marking but not pedigree.
                                        - 15 -

G.     Petitioners' Income Tax Returns and Respondent's
       Determination

       Petitioners reported the following on their joint tax

returns for tax years 1979 to 1990:

                   Interest,                                                Net loss
                   dividend,                                                   from
                      IRA,      Horse                              Total      horse
Year       Wages    pension    income   Expenses   Depreciation   expense   activity
1979     $78,260        $658     0        $1,952       $284        $2,236     $2,236
1980      87,642         845    2,620     13,133      1,290        14,423     11,803
1981      95,049       7,553    4,871     24,878      3,468        28,346     23,475
1982     111,513       4,855    4,000     78,522      5,300        83,822     79,822
1983     136,807       2,275    7,107     61,660      6,628        68,288     61,181
1984     144,881       1,269    1,450     76,647      9,110        85,757     84,307
1985     162,519       1,072    7,133     64,589     18,883        83,472     76,339
1986     159,971       1,300    4,320     76,131     15,357        91,488     87,168
1987     178,850       1,802    1,937     46,432     11,419        57,851     55,914
1988     179,162       1,960      500     63,255      9,426        72,681     72,181
1989      74,775     150,002   12,400     75,458      7,161        82,619     70,219
1990         937     133,838   14,500     74,410      3,945        78,355     63,855
       1,410,366     307,429   60,838    657,067     92,271       749,338    688,500

       In the notice of deficiency, respondent disallowed losses

for 1988, 1989, and 1990 for petitioner's horse activity on the

grounds that petitioner did not conduct the activity for profit.1




       1
       Each party offered evidence of events involving petitioner
which occurred after the years in issue. Each party objected to
the other's evidence from years after 1990, the last year in
issue. We did not consider evidence of events which occurred
after 1990 because it did not show whether petitioner had a
profit objective during the years in issue. See Estate of
Brockenbrough v. Commissioner, T.C. Memo. 1998-454; Gustafson's
Dairy, Inc. v. Commissioner, T.C. Memo. 1997-519; Choate Constr.
Co. v. Commissioner, T.C. Memo. 1997-495; cf. Estate of
Hutchinson v. Commissioner, T.C. Memo. 1984-55 (events after the
date in issue are relevant only if they shed light on the
taxpayer's state of mind on the date in issue), affd. 765 F.2d
665 (7th Cir. 1985).
                                 - 16 -

                           II.    OPINION

A.   Background

     The issue for decision is whether petitioner operated her

horse breeding activity for profit in 1988, 1989, and 1990.

     An activity is conducted for profit if it is conducted with

an actual and honest profit objective.      Osteen v. Commissioner,

62 F.3d 356, 358 (11th Cir. 1995), affg. in part and revg. on

other issues T.C. Memo. 1993-519; Surloff v. Commissioner, 81

T.C. 210, 233 (1983); Dreicer v. Commissioner, 78 T.C. 642, 645

(1982), affd. without opinion 702 F.2d 1205 (D.C. Cir. 1983).       In

deciding whether petitioner operated her horse racing and

breeding activity for profit, we apply the nine factors listed in

section 1.183-2(b), Income Tax Regs.      The factors are:   (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, if any, which are earned; (8) the

financial status of the taxpayer; and (9) whether elements of

personal pleasure or recreation are involved.      No single factor

controls.   Osteen v. Commissioner, supra; Brannen v.

Commissioner, 722 F.2d 695, 704 (11th Cir. 1984), affg. 78 T.C.

471 (1982); sec. 1.183-2(b), Income Tax Regs.      Petitioners have
                               - 17 -

the burden of proof on all issues in dispute in this case.

Golanty v. Commissioner, 72 T.C. 411, 426 (1979), affd. without

published opinion 647 F.2d 170 (9th Cir. 1981).

B.   Application of the Factors

     1.      Manner in Which the Taxpayer Conducted the Activity

     Conducting an activity in a manner substantially like

comparable businesses which are profitable may indicate that a

taxpayer conducted the activity for profit.      Engdahl v.

Commissioner, 72 T.C. 659, 666-667 (1979).

            a.    Basic Investigation

     Careful investigation of a potential business to ensure the

best chance for profitability strongly indicates an objective to

engage in the activity for profit.      Sec. 1.183-2(b)(2), Income

Tax Regs.    Petitioner studied horse competitions and breeding

before she began her activity.    However, she did not seriously

investigate the activity's potential for profit.

            b.    Business Plan

     Petitioners contend that petitioner's notes on the back of

her letter to Dixon show that petitioner had a business plan and

showed her projected income and expenses.      We disagree.   The

notes do not show petitioner's projected income and expenses or

even that she was contemplating making a profit.      Those notes

show primarily that she had an interest in horses, not

necessarily an interest in business.

     Petitioners' expert, Edward E. Emerson, Jr. (Emerson), had

been in the horse training and breeding business for more than 25
                               - 18 -

years at the time of trial.    In 1997, he bred about 75 to 80

mares.   He had three stallions.   About 25 percent of his business

was breeding, including about 10 percent of which was selling

foals.   His gross receipts in 1997 were about $200,000, of which

about 25 percent was from breeding.     The 5 to 10 breedings per

year which petitioner wrote on the back of her letter to Dixon

are considerably fewer than Emerson's 75 to 80.

     Petitioner's letter to Dixon does not show that petitioner

in 1985 had a bona fide objective that her horse activity would

become profitable.

     Petitioners contend that petitioner's business plan was to

import dressage horses from Europe and breed and sell them in the

United States.   Petitioner thought Temptation, Labrette, and the

stallion Zenit could earn a profit because Planzor had told her

that she could earn $15,000 per foal.     This was a dubious

assumption for her to make because she bought brood mares in

Europe for $1,500 to $3,500.

            c.    Financial Records

     Petitioner kept invoices, receipts, canceled checks (and a

spreadsheet summarizing them), and bank statements, which she

gave to the accountant to prepare petitioners' annual returns.

However, petitioner did not have budgets, balance sheets, income

projections, or other financial statements for her horse

activity.    There is no evidence that she used her records to help

her evaluate or improve the financial performance of her horse

activity.
                               - 19 -

       Petitioners contend that petitioner's books were like those

kept by the taxpayer in Phillips v. Commissioner, T.C. Memo.

1997-128, whom we held conducted a horse activity for profit.        We

disagree.    In Phillips, the taxpayers had a business plan.    They

calculated the costs per horse per month.      They estimated when

their horse activity would become profitable.      They performed a

detailed analysis of their horse activity and planned each of

their horses' breedings.    Petitioner did not do so.    Phillips

also differs from this case because the taxpayers in Phillips

made significant changes in their operating methods by adding

horse boarding, training, teaching classes, and operating a tack

shop to sell equipment.

            d.    Commingling of Funds

       Commingling of funds suggests that the activity is a hobby

rather than a business for profit.      See Rinehart v. Commissioner,

T.C. Memo. 1998-205; Ballich v. Commissioner, T.C. Memo. 1978-

497.    Petitioner paid the expenses of the horse breeding activity

from petitioners' personal account.      She had no separate bank

accounts for the horse breeding activity.

       Petitioners used a credit card for her horse activity.

However, she did not say that she paid all of the horse activity

expenses with the credit card, and she paid the credit card bills

from petitioners' personal checking account.      She did not

segregate income from her horse activity.
                                 - 20 -

          e.       Change of Operating Methods

     A willingness to adopt new techniques or abandon

unprofitable methods may indicate that a taxpayer has a profit

motive.   Sec. 1.183-2(b)(1), Income Tax Regs.

     Petitioner changed her plans for Temptation and Labrette.

She stopped entering Temptation in competitions because he was

lame.   However, she did not adopt a new technique for becoming

profitable because she was already breeding Temptation.     In fact,

petitioner continued to breed Temptation even though the two

foals produced by Temptation before the years in issue were far

below her expectations.

     Petitioner changed her plan from breeding Labrette to

competing her.    Petitioner contends that Labrette's success could

help her horse breeding activity become profitable, but we are

not convinced that she compared the expenses with the profit

potential.     This suggests she cared about sports success, not

business success.

     Petitioner testified that petitioners moved to Florida, and

then relocated in Florida, to be near dressage activities.

Petitioners also point out that petitioner culled her herd in

1987 when she donated three thoroughbred mares to a Gainesville

breeding program.     However, petitioner did not show how these

changes would make her horse breeding activity profitable.

           f.      Advertising

     The record includes copies of six advertisements for

Serenity Farms and Temptation that petitioner placed before the
                               - 21 -

years in issue.2   Petitioner's limited advertisements do little

to show that she conducted her activity in a businesslike manner.

          g.       Emerson

     Emerson testified that petitioner operated her activity in a

businesslike manner.    We disagree.    Emerson first met petitioner

in 1993 or 1994.    He did not know how much she earned from stud

and boarding fees or the sale of foals.     He never saw business

records or a business plan for petitioner.

     Emerson was a member of the U.S. Equestrian Team that

competed in the 1974 world championships and the 1976 Olympics.

He was national 3-day champion in 1976 and 1979.     Emerson

attributes his financial success to his personal fame.

Petitioner lacked this advantage.

     Emerson received gross receipts of about $50,000 from

breeding 3 stallions and 75 to 80 mares.     The rest of his income

was from clinics and training.    Petitioner had one lame stallion

and a few mares.    She had no income from training or clinics.

     Emerson's conclusion that breeding Temptation could have

been profitable is not enough to show that petitioner had an

actual and honest profit objective.

     This factor favors respondent.




     2
       Petitioners deducted advertising expenses of $878 for
1988, $628 for 1989, and $632 for 1990. The record includes no
information about these expenses. In 1991, petitioner advertised
that Labrette was for sale.
                               - 22 -

     2.   The Expertise of the Taxpayers or Their Advisers

     Efforts to gain experience and a willingness to follow

expert advice are considered in deciding if a taxpayer has a

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

     Petitioner studied breeding and competition and learned much

about horses and breeding techniques.    She learned to deliver

foals on her own and learned about artificial breeding

techniques.    However, she erroneously thought Temptation was from

Switzerland when she bought him, and her costs to quarantine her

horses for more than 3 days would not have been unexpected if she

had known the quarantine rules.

     Petitioner did not seriously study the business of breeding

and selling horses or show how her skills would lead to the

financial success of her horse activity.    Petitioner's horse

trainers and riders apparently advised her on horse buying,

training, and showing, not on how to make a profit.     These facts

suggest that petitioner lacked a profit motive.      See Rinehart v.

Commissioner, supra (horse activity owner employed horse

professionals but not for business advice).

     This factor favors respondent.

     3.   Taxpayer's Time and Effort

     The fact that a taxpayer devotes much time and effort to

conducting an activity may indicate that he or she has a profit

objective.    Sec. 1.183-2(b)(3), Income Tax Regs.

     Petitioner usually spent long hours working with her horses.

     On balance, this factor favors petitioners.
                                 - 23 -

      4.     Expectation That Property Used in the Activity Would
             Appreciate in Value

      A taxpayer may expect, despite the lack of profit from

current operations, that an overall profit will result when

appreciation in the value of assets used in the activity is

realized.      Bessenyey v. Commissioner, 45 T.C. 261, 274 (1965),

affd. 379 F.2d 252 (2d Cir. 1967); sec. 1.183-2(b)(4), Income Tax

Regs.      There is an overall profit if future net earnings and

appreciation are sufficient to recoup losses sustained in prior

years.     Bessenyey v. Commissioner, supra.

      Petitioners contend that this factor favors them because

petitioner expected that their horses would appreciate in value.

We disagree.      Petitioners offered no evidence showing which of

their horses would appreciate or the amount of appreciation they

expected.      Temptation's potential value decreased substantially

after he was injured in 1983, which was at least 5 years before

the years in issue.      The two foals by Temptation were of far less

quality than petitioner expected.      By the years in issue,

petitioner did not reasonably expect Temptation's value to

increase.      Petitioner sold Donka for $1,500 in 1989.

      Until 1988, Labrette had not produced any valuable

offspring.      It is true that Labrette could appreciate in value,

but there is no evidence showing how much that appreciation could

be.   We are not convinced that petitioner expected the

appreciation of her horses to exceed her total losses.

      On balance, this factor favors respondent.
                               - 24 -

     5.    Taxpayer's Success in Other Activities

     The fact that a taxpayer has previously engaged in similar

activities and made them profitable may show that the taxpayer

has a profit objective, even though the activity is presently

unprofitable.   Sec. 183-2(b)(5), Income Tax Regs.

     Petitioner testified that she profitably bred dogs from 1966

to 1984.   However, her testimony on this point was at best vague.

She said she sold a total of about 10 to 15 puppies.   Petitioners

did not report any income from this activity on their tax returns

that are in the record (1978 to 1984), and petitioners provided

no information about any income from dog breeding before 1978.

Petitioners did not show that petitioner's work at Kelly or

Winnipesocki Airlines had any bearing on her ability to conduct a

profitable horse activity.

     This factor favors respondent.

     6.    Taxpayer's History of Income or Losses

     A history of substantial losses may indicate that an

activity was not conducted for profit.    Golanty v. Commissioner,

supra at 427; sec. 1.183-2(b)(6), Income Tax Regs.

     Petitioner had losses from the horse activity each of the 12

years from 1979 to 1990.    She had losses in those years totaling

$749,338 and income of $60,838.   Losses during the initial stage

of an activity do not necessarily indicate that the activity was

not conducted for profit.    Engdahl v. Commissioner, 72 T.C. at

669; sec. 1.183-2(b)(6), Income Tax Regs.   Petitioners contend

that the losses occurred during the startup phase.   We disagree.
                               - 25 -

We have said that the startup phase of a horse breeding activity

may be 5 to 10 years.    Engdahl v. Commissioner, supra.

Petitioner had losses for 12 years.

     Petitioner contends that this case is similar to Perry v.

Commissioner, T.C. Memo. 1997-417; Shane v. Commissioner, T.C.

Memo. 1995-504; Arwood v. Commissioner, T.C. Memo. 1993-352; and

Pirnia v. Commissioner, T.C. Memo. 1989-627, where we found that

taxpayers had a profit motive despite having a history of losses.

We disagree.   Those cases differ from this case for several

reasons.   In Perry v. Commissioner, supra, the taxpayer had

losses from 1986 to 1993 during the startup period and a profit

in 1994.   The taxpayers in Perry expected their land appreciation

to more than offset their losses.

     The other cases cited by petitioner are also

distinguishable.   In Shane v. Commissioner, supra, the taxpayer

had losses from 1986 to 1991 from racing the taxpayer's horses

but had profits in prior years.   He bought an inexpensive horse

in 1988 and made a profit, winning about $65,000 in 18 months.

He kept his costs low.   He stopped racing horses when it became

unprofitable and focused on breeding.   We found that he

reasonably expected that his horses would increase in value.    His

1990 and 1991 losses occurred within 5 to 10 years of when he

started to breed horses.   Petitioners had considerably more

income than the taxpayer in Shane who earned $42,000 in 1990 and

$38,000 in 1991 from sources not related to horses and had
                                - 26 -

expenses for his horse activity of $39,324 for 1990 and $36,039

for 1991.

     The taxpayer in Arwood v. Commissioner, supra, had losses

from 1981 to 1987.    He emphasized the business of horse breeding.

He had a written business plan and relied on experts for business

advice.     He believed that his horses would be profitable because

his horse's half-brother received $10,000 per breeding, and the

sire of his horse received $40,000 per breeding.     Petitioner

focused little on making money.

     In Pirnia v. Commissioner, supra, the Commissioner

determined a deficiency in income tax for 1982, the year after

the taxpayer bought her first horse.     The taxpayer relied on

experts for financial advice.    She expected profits to exceed her

losses.     She could not rely on income from her physician husband

to pay for her horse activity because they were experiencing

marital difficulties.    She discontinued show activities which

were unprofitable to concentrate on breeding.

     This factor favors respondent.

     7.     Amount of Occasional Profits, If Any

     Small occasional profits with large continuous losses do not

indicate that the taxpayer had a profit objective.     Sec. 1.183-

2(b)(7), Income Tax Regs.    Petitioner's losses were large and

continuous from 1979 when she started to 1990, the last year in

issue.

     Losses caused by unforeseen circumstances do not necessarily

indicate that a taxpayer lacked a profit objective.     See Engdahl
                               - 27 -

v. Commissioner, supra at 669; Phillips v. Commissioner, T.C.

Memo. 1997-128; Briggs v. Commissioner, T.C. Memo. 1994-125;

Leonard v. Commissioner, T.C. Memo. 1993-472; sec. 1.183-2(b)(6),

Income Tax Regs.    Petitioners contend that their losses in the

years in issue were caused by unforeseen circumstances, such as

Temptation's injury, the death of a foal, Labrette's bowed

tendon, and lack of customers.    Petitioners point out that

Emerson said that Temptation would have been profitable if he had

not been injured.

     Temptation never performed at better than the intermediate

dressage level.    We do not know if Temptation would have reached

the highest levels of dressage, or if petitioner's activity would

have been profitable if Temptation had not been injured.     It is

also unknown if petitioner's activity would have been profitable

if Labrette's foal by Temptation had not been injured in 1983.

See Burger v. Commissioner, 809 F.2d 355 (7th Cir. 1987), affg.

T.C. Memo. 1985-523 (taxpayer did not show that activity would

have been profitable if the unforeseen circumstance had not

occurred).   These injuries occurred at least 5 years before the

first year in issue.

     Petitioner did not campaign Labrette until 1990, the last

year in issue.    Labrette bowed a tendon after the years in issue.

Thus, that injury did not affect the years in issue.

     A small chance to make a large profit may indicate that a

taxpayer has a profit objective even if he or she has large

continuous losses.    Sec. 1.183-2(b)(7), Income Tax Regs.
                               - 28 -

     Petitioners contend that this factor favors them because

they were like the taxpayer in Shane v. Commissioner, supra,

where we found that the taxpayer had a profit objective.    We

disagree.    Petitioners have not shown that they had any chance to

make a profit or even to recoup their losses.

     This factor favors respondent.

     8.     Financial Status of the Taxpayer

     Substantial income from sources other than the activity,

especially if the losses generate substantial tax benefits, may

indicate that the taxpayer is not conducting the activity for

profit.   Sec. 1.183-2(b)(8), Income Tax Regs.

     Petitioners contend that they did not have a large amount of

income.   We disagree.   Mr. Lundquist received total wage income

of $254,874 from Delta Airlines during the years in issue.

Petitioners' income from interest and IRA and pension

distributions totaled $285,800 for the years in issue.    See

Rinehart v. Commissioner, T.C. Memo. 1998-205 (taxpayers lacked

profit objective where taxpayer earned between $166,000 and

$170,000 per year during the years in issue).

     Petitioners contend that they had limited financial means

and point out that petitioner bought the three horses with money

petitioners raised by mortgaging property.     Petitioners had ample

income, and they did not show that they had to mortgage property

to finance the horse activity.

     This factor favors respondent.
                                - 29 -

     9.     Elements of Personal Pleasure

     The presence of recreational or personal motives in

conducting an activity may indicate that the taxpayer is not

conducting the activity for profit.      Sec. 1.183-2(b)(9), Income

Tax Regs.    A taxpayer's enjoyment of an activity does not show

that the taxpayer lacks a profit objective if the activity is, in

fact, conducted for profit as shown by other factors.      Jackson v.

Commissioner, 59 T.C. 312, 317 (1972); sec. 1.183-2(b)(9), Income

Tax Regs.    However, if the possibility for profit is small

compared to the possibility for gratification, the latter

possibility may be the primary motivation for the activity.

White v. Commissioner, 23 T.C. 90, 94 (1954), affd. per curiam

227 F.2d 779 (6th Cir. 1955).

     Petitioners point out that petitioner did not ride horses in

the years in issue and that she worked hard.     Despite this,

petitioner loves animals and has enjoyed being around horses

since childhood.    Considering petitioner's unlikelihood of

profit, we conclude that this factor favors respondent.

C.   Conclusion

     We conclude that petitioner did not operate her horse

breeding activity for profit in 1988, 1989, and 1990 for purposes

of section 183.

     To reflect the foregoing,


                                            Decision will be entered

                                      for respondent.
