                        T.C. Memo. 2000-109



                      UNITED STATES TAX COURT



         FRED B. AND GEORGIA ELANE BERRY, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 1119-98.                  Filed March 29, 2000.



     Rufus E. Wolff, for petitioners.

     Donald E. Edwards, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     COLVIN, Judge:   Respondent determined that petitioners have

a $15,570 deficiency in income tax for 1995.

     The issue for decision is whether petitioners operated their

farm and horse-breeding activity for profit in 1995.   We hold

that they did not.
                                 - 2 -

     Section references are to the Internal Revenue Code in

effect during the year in issue.    Rule references are to the Tax

Court Rules of Practice and Procedure.

                           FINDINGS OF FACT

A.   Petitioners

     Petitioners lived in Roland, Arkansas, when they filed their

petition.    They have five grown children, three through previous

marriages.

     Petitioner Elane Berry (Mrs. Berry) spent time on her

grandparents’ farm when she was a child.       She bought a horse when

she was 9.    When she was 15, she raised a filly born to a mare

that she had bought.    She worked full time as an x-ray technician

after she graduated from high school.

     Petitioner Fred Berry (Dr. Berry) graduated from Tulane

University Medical School in 1949.       He has practiced medicine

since then.    Dr. and Mrs. Berry were married in 1972.     Dr. Berry

could not work for 2 months in 1985 because he was ill.       In 1991,

Dr. Berry cashed in one of his retirement plans and received

about $17,000.

     Dr. Berry and his sister inherited some apartment houses,

which his sister managed, and mutual funds, which Dr. Berry

managed.    Dr. Berry’s sister began liquidating the apartment

houses around 1991.    The amount Dr. Berry received is not stated

in the record.     In 1994, Dr. Berry liquidated some of the mutual
                                 - 3 -

funds in 1994, but he kept as much as possible because they were

appreciating in value rapidly.

     Mrs. Berry worked part time as the office manager for Dr.

Berry’s surgical clinic until he closed the clinic in 1995.    Dr.

Berry has practiced medicine at the White River Rural Health

Service since then.

B.   Petitioners' Farm

     1.   Starting the Horse-Breeding Activity

     Dr. and Mrs. Berry bought a 127-acre farm in Roland,

Arkansas, in 1974 and moved to the farm in 1979.    Petitioners

grew soybeans in 1979 and started a horse-breeding activity in

1980 which they called Berry Lane Farm.

     2.   Racking Horses

     Petitioners decided to breed racking horses.    Racking horses

and Tennessee walking horses have the same bloodlines.    Tennessee

walking horses walk with at least three feet on the ground, over-

striding rear legs, a reaching motion in their front legs, and a

nodding head.   Racking horses walk with at least one foot on the

ground, a folding motion in their front legs, and heads that are

steadier than those of Tennessee walking horses.

     Petitioners decided to breed racking horses because they

thought racking horses were increasing in popularity faster than

any other kind of horse and were more affordable than Tennessee

walking horses.   In addition, Mrs. Berry believed that the
                                 - 4 -

training techniques used to develop a Tennessee walking horse’s

gait were cruel.

     3.     Advice From Others

     Heidi Haskins, a friend of petitioners who raised horses,

recommended that they buy a broodmare in foal.    Petitioners

bought two broodmares in foal in 1980.    However, petitioners did

not have a plan for selling the colts born to those broodmares

and had difficulty selling them.

     At a time not specified in the record, Mrs. Berry sought

advice from Ann Yeiser (Yeiser), who published a racking horse

magazine.    Yeiser told Mrs. Berry that petitioners had received

bad advice on what broodmares to buy and that they needed a

better trainer.    Yeiser suggested several trainers for

petitioners to use, including Joe Dan Carter (Carter).

     Petitioners hired Carter to be their trainer in 1985.

Carter has been a professional horse trainer since 1976.    He

bought a horse from petitioners, apparently in 1995 or later.    On

a date not stated in the record, Carter told petitioners that

their horses would sell better if they bred famous Tennessee

walking horses.    Carter sold one of petitioners’ horses for

$24,000 in 1996.

     James Roberts (Roberts) is an analyst for the Tennessee Farm

Bureau Federation.    Mrs. Berry met him in 1988 or 1989.   Roberts

has shown racking horses since 1988.     He was vice chairman of the
                                 - 5 -

Racking Horse Association’s promotions committee in 1999.      He has

shown and has tried to sell petitioners’ horses at events.

     On a date not specified in the record, Mrs. Berry asked

Roberts for advice about raising horses and farming.     Roberts

advised Mrs. Berry to breed her horses with higher quality

horses.   He also advised her to train more of her horses as

Tennessee walking horses.    He advised her to reduce her farm

expenses and to find better ways to market her animals.

     4.    Operating the Farm and Horse-Breeding Activity

     Mrs. Berry has managed petitioners’ farm and horse-breeding

activity since 1979.   She supervises the farm’s employees and

does manual labor on the farm.    Before 1995, Mrs. Berry worked

part time for Dr. Berry.    She could schedule her work at the

office to accommodate her work at the farm.    She worked on

petitioners’ farm and horse-breeding activity 60 to 70 hours per

week in 1995.   Dr. Berry worked on the farm only occasionally.

     Petitioners had one to five employees during each year from

1985 through the year in issue.    The record does not state how

many employees petitioners had at any one time.

     Mrs. Berry read magazines and journals about horses and took

courses and seminars on breeding at the University of Tennessee

at Murfreesboro.   She learned how to artificially inseminate

broodmares.   She offered this service for a flat fee.
                                 - 6 -

     In 1995, Mrs. Berry was a member of the Futurity Breeders

Association, the Amateur Association, the Pleasure Association,

and the Arkansas Racking Horse Association.     Mrs. Berry rode a

horse only once or twice in 1995.

     Mrs. Berry takes horses to a 9-day racking horse celebration

held at Decatur, Alabama, every September, at which the Racking

Horse Breeders Association selects the world champions for the

year.     Mrs. Berry usually enters horses in a 3-to-4-day show at

Shelbyville, Tennessee, a 4-day spring celebration, and some 1-

day horse shows.     Mrs. Berry washes, grooms, and clips her horses

and braids their manes for the shows, but she usually does not

show the horses herself.     Potential customers see petitioners’

horses at shows.

     5.      Books and Records for the Farm and Horse-Breeding
             Activity

     Mrs. Berry kept a disbursement journal and general ledger

for the farm from 1981 through the year in issue.     She also kept

records of horses that she bought and sold and the births and

deaths of horses on petitioners’ farm.     Petitioners had a

separate bank account for their farm.

     6.      The Number of Horses on Petitioners’ Farm

     Petitioners had the following numbers of horses on their

farm:1


     1
          Petitioners’ summary states that they had six broodmares
                                                     (continued...)
                                         - 7 -

                    Brood
Year       Show     mares   Weanlings   Yearlings   2 Year   3 Year Stallions
1980        1          2         0           0         0        0        0
1981        4          8         6           1         0        0        0
1982        4          8         8           6         1        0        1
1983        3         12         9           8         3        0        2
1984        4         16         9           7         7        3        2
1985        6         14         6           7         1        1        1
1986        2         10         4           5         1        0        1
1987        2          8         6           3         1        1        1
1988        4          7         5           5         2        0        1
1989        2          5         2           3         1        0        1
1990        2          5         5           2         1        1        1
1991        1          5         4           5         0        1        1
1992        1          5         4           4         4        0        1
1993        1          5         3           3         4        1        1
1994        1          6         4           3         3        3        1
1995        1          6         4           3         3        2        1
1996        0          6         5           3         3        1        1
1997        0          7         3           4         1        0        1
1998        0         13         9           4         3        0        1

       7.         The Number of Horses That Petitioners Sold

       Petitioners sold the following numbers of horses from 1982

through 1998:




       1
      (...continued)
in 1994. Petitioners do not explain why their records are
inconsistent.
                                 - 8 -

                         Total    Number     Highest
             Year        sales     sold    sales price
             1982       $6,900      3        $5,000
             1983          352      1            352
             1984       16,170     13          3,700
             1985       17,471     15          2,500 (twice)
             1986        7,400      6          2,000
             1987        4,260      4          1,260
             1988        9,950      9          2,700
             1989        2,000      2          1,500
             1990        8,900      4          3,400
             1991        5,000      2          3,800
             1992        7,150      4          4,000
             1993          750      1            750
             1994        4,588      4          2,400
             1995        4,905      4          2,400
                                             1
             1996       36,600      6          24,000
             1997        6,300      2          3,600
             1998        2,000      1          2,000
     1
          Petitioners’ next highest price in 1996 was $3,750.

     8.      Petitioners' Income From Farm Products, Horse Show
             Prizes, Stud Fees, and Boarding Fees

     Mrs. Berry usually entered horses in six to eight shows each

year.     Petitioners boarded horses for other people and provided

stud services from 1982 through 1997.      Petitioners received the

following amounts of horse show prize money, stud fees, and fees

for boarding horses:
                                   - 9 -

                           Horse
                           show
                           prize            Stud     Boarding
       Year      Total     money            fees       fees
       1982     $2,137     $471              -0-      $1,666
       1983        402      117             $250          35
       1984      1,423       50            1,050         323
       1985      1,524       25            1,300         199
       1986      2,250      -0-            1,850         400
       1987      1,552      103            1,200         249
       1988        400      -0-              400         -0-
       1989      1,005      211              500         294
       1990      3,227    1,343              930         954
       1991      3,957    2,331            1,054         572
       1992      5,274    2,263            1,050       1,961
       1993      8,935    1,634            2,250       5,051
       1994      7,036    1,085            1,200       4,751
       1995      6,607    1,765              400       4,442
       1996     14,308    2,469            3,100       8,739
       1997     17,253    3,350            5,100       8,803

       Petitioners received the following amounts of income from

growing and selling grain (includes wheat and soybeans), pecans,

and hay and from hauling horses:

                                                                 Horse
Year        Total    Grains                Pecans     Hay       hauling
1981       $1,396       –                    --     $1,396        --
1982        6,494    $5,428                  --      1,066        --
1983        2,809     2,533                  --        276        --
1984        4,472     3,938                  --        534        --
1985        8,067     7,670                  –-        397        --
1986           20       –                    --         20        --
1987        2,197     2,030                  --        167        --
1988       13,894    13,432                $120        342        --
1989        8,703     6,851                  --      1,852        --
1990        2,150     1,329                  --        821        --
1991        9,514     8,295                  –-        527        $692
1992       10,476     4,347                 335        752       5,042
1993       10,703     3,385                  95      1,883       5,340
1994       13,974     5,261                 166        956       7,591
1995        6,377     3,630                 385      1,065       1,297
1996        5,392     3,331                  98      1,695         268
1997        6,650     2,979                  75      3,184         412
                                 - 10 -

C.     The Racking Horse Association Registry

       The Racking Horse Association maintains a registry of racking

horses.     It planned to close its registry around 1995 to limit the

racking horses in the registry to those with a specific gait.

D.     Petitioners' Farm and Nonfarm Income and Farm Losses

       Petitioners had the following amounts of gross receipts and

losses from their horse and farm activity from 1982 through 1997:2

                            Farm
                           loss not    Farm loss      Reported
              Gross       including    including     Schedule F
   Year      receipts1   depreciation depreciation      loss
   1982      $15,531       $75,980    $113,480       $115,186
   1983        3,564        93,830     132,070        132,385
   1984       22,015        91,922     131,341          N/A
   1985       27,037        59,215      94,675        104,923
   1986        9,670        52,846      58,096         81,077
   1987        8,009        53,787      63,787         66,751
   1988       24,244        32,145      35,595         39,340
   1989       11,708        35,596      39,628         49,130
   1990       14,277        36,458      40,348         50,360
   1991       18,470        36,299      41,285         45,310
   1992       22,900        32,516      38,209         42,535
   1993       20,388        41,246      41,246         45,290
   1994       25,598        39,309      43,178         45,845
   1995       17,890        38,128      41,247         43,596
1982-95
  Total      241,301       719,277        914,185     861,728

     1996     56,300        29,900         45,158      37,689
     1997     30,203        39,116         39,116      42,539

1982-97
  Total      327,804       788,293        998,459     941,956
1
  This column is the total income from paragraphs B-7 and B-8
above.



        2
            The amounts in the first three columns are from
    petitioners’ financial records. The amounts in the last column
    are from petitioners’ income tax returns.
                              - 11 -

     Petitioners reported on their income tax returns the

following amounts of nonfarm income from 1982 through 1997:

                                  Pension       Nonfarm
          Year       Wages        income        income
          1982     $239,580                    $260,552
          1983      188,900                     240,135
          1984       N/A                         N/A
          1985      124,905                     148,064
          1986       93,500                     107,521
          1987      101,000                     121,102
          1988       70,000                      78,497
          1989       51,200       $38,492       101,178
          1990       28,500       104,000       142,238
          1991       54,000        47,000       116,373
          1992      126,883        28,000       169,090
          1993      119,700        24,500       157,815
          1994      144,340                     236,966
          1995      139,390                     154,309

          1982-95
           Total 1,481,898        241,992     2,033,840

          1996      144,854                     152,416
          1997      144,354                     170,963

          1982-97
           Total 1,771,106        241,992     2,357,219

Nonfarm income includes wages and proceeds from the sale of

investments and inherited property.

                              OPINION

A.   Whether Petitioners Operated Their Farm and Horse-Breeding
     Activity for Profit in 1995

     The issue for decision is whether petitioners operated their

farm and horse-breeding activity for profit in 1995.      A taxpayer

conducts an activity for profit if he or she does so with an

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

62 F.3d 356, 358 (11th Cir. 1995), affg. in part and revg. on
                               - 12 -

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 petitioners operated their horse-breeding

activity for profit, we apply the following nine nonexclusive

factors:    (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.    See sec. 1.183-2(b), Income Tax Regs.   No single

factor controls.    See 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

the burden of proof.    See Golanty v. Commissioner, 72 T.C. 411,

426 (1979), affd. without published opinion 647 F.2d 170 (9th

Cir. 1981).
                                - 13 -

B.   Whether We Should Treat 1995 as the Startup Year of
     Petitioners’ Farm and Horse Activity

     Petitioners contend that we should treat 1995 as the startup

year of their farm and horse activity because, in 1995, Mrs.

Berry began to work full time on the farm, to supervise employees

more closely, to organize activities better, and to repair and

expand the barn to accommodate more broodmares.    Petitioners

contend that, even if they did not have a profit motive before

1995, they did in 1995.

     It is true that Mrs. Berry worked full time on the farm in

1995.   However, we do not view Mrs. Berry’s change to full time

as the commencement of petitioners’ farm and horse activity.     The

record does not show how much more time Mrs. Berry devoted to the

farm in 1995 than in prior years.    Mrs. Berry worked part time as

Dr. Berry’s office manager before 1995.    She had a flexible

schedule that allowed her to work on the farm when needed.

Repairing and expanding the barn was not the commencement of

petitioners’ farm and horse activity because the barn had

accommodated 16 broodmares before 1995.    Petitioners’ use of

improved breeding stock after 1995 is not directly relevant to

whether petitioners had a profit motive during 1995.

     Petitioners contend that their hay, stud, and horse boarding

activities increased in 1995 and thereafter when Mrs. Berry

worked on the farm full time.    We are not convinced that their

activities increased significantly or even at all in 1995 because
                              - 14 -

petitioners’ gross receipts in 1995 from (a) hay were less than

in 1981, 1982, 1987, and 1993; (b) stud fees were less than from

1984 to 1987, the same as in 1988, and less than from 1989 to

1994; and (c) boarding fees were less than in 1993 and 1994.

     Petitioners contend that this case is like Feistman v.

Commissioner, T.C. Memo. 1982-306, affd. 718 F.2d 1110 (9th Cir.

1983), in which we held that a taxpayer changed a stamp and coin

collecting hobby to a business.   We disagree.   During the years

in issue, the taxpayer in Feistman undertook activities

consistent with those of a retailer and inconsistent with those

of a hobbyist.   He (a) bought 100 first day covers for each new

stamp issued, far more than he needed as a collector; (b)

regularly displayed merchandise for sale at shows and swap meets;

(c) received a business tax registration certificate with a

“retail sales” classification; (d) bought and sold inventory; and

(e) received authority from credit card companies to accept

charges.   The taxpayer in Feistman changed his activity in

several respects that showed that he operated it for profit.

Petitioners did not.

     We do not treat 1995 as the first year of petitioners’ horse

and farm activity.
                                - 15 -

C.   Applying the Factors

     1.    Manner in Which the Taxpayer Conducts the Activity

     Maintaining complete and accurate books and records,

conducting the activity in a manner substantially similar to

comparable businesses which are profitable, and making changes in

operations to adopt new techniques or abandon unprofitable

methods suggest that a taxpayer conducted an activity for profit.

See Engdahl v. Commissioner, 72 T.C. 659, 666-667 (1979); sec.

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

     Petitioners maintained a separate general journal and bank

account for the farm.   However, they did not have a written

business plan, income projections, or profit plans.      This

suggests that they did not operate their farm and horse activity

for profit.   See Westbrook v. Commissioner, 68 F.3d 868, 873, 878

(5th Cir. 1995) (no written business plan, financial projections,

or estimates for return of capital), affg. T.C. Memo. 1993-634;

Osteen v. Commissioner, T.C. Memo. 1993-519; cf. Phillips v.

Commissioner, T.C. Memo. 1997-128 (written financial plan not

required for 32-horse farm where business plan evidenced by

action).

     Petitioners contend that they had a business plan, which was

for Mrs. Berry to work full time on the farm and for them to have

at least 11 broodmares.     We disagree.   Petitioners did not

credibly show how they intended to make the farm profitable.
                               - 16 -

Petitioners had at least 11 broodmares in 1983, 1984, and 1985,

and had some of their largest losses in those years.

     Petitioners contend that they spent cautiously in 1995,

which shows that they had a profit objective.      We are not

convinced that petitioners spent cautiously in 1995.      They spent

less in 1989, 1990, 1991, and 1993 than they did in 1995.       Also,

petitioners’ level of spending is inconsistent with their claimed

business plan of having 11 good-quality broodmares.      To comply

with their business plan, it appears that petitioners needed to

spend more to buy more broodmares.      This factor favors

respondent.

     2.   The Expertise of the Taxpayers or Their Advisers

     Efforts to gain experience, a willingness to follow expert

advice, and preparation for an activity by extensive study of its

practices may indicate that a taxpayer has a profit motive.      See

sec. 1.183-2(b)(2), Income Tax Regs.

     By 1995, Mrs. Berry had learned a lot about breeding and

raising racking and Tennessee walking horses.      People sought her

advice about horse breeding.   However, there is no evidence that

Mrs. Berry sought or acquired expertise in the financial aspects

of horse breeding.

     Petitioners contend that they consulted Carter, Roberts, and

Yeiser as experts.   There is no evidence that Carter or Yeiser

advised petitioners how to make their farm and horse activity
                                - 17 -

profitable.    At a time not specified in the record, Roberts

advised Mrs. Berry to cut her farm expenses, improve her

marketing, concentrate on Tennessee walking horses, and increase

and improve her broodmare bloodlines.     There is no evidence that

Mrs. Berry followed his advice, except to buy four broodmares

with better bloodlines in 1998.     Petitioners did not adequately

seek and follow advice relating to the economic aspects of their

horse activity.    See Burger v. Commissioner, 809 F.2d 355, 359

(7th Cir. 1987), affg. T.C. Memo. 1985-523; Glenn v.

Commissioner, T.C. Memo. 1995-399, affd. without published

opinion 103 F.3d 129 (6th Cir. 1996); see also Golanty v.

Commissioner, 72 T.C. at 432.     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.     See sec. 1.183-2(b)(3), Income Tax Regs.   Mrs. Berry

spent long hours on the activity beginning in February 1995.

This factor favors petitioners.

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

     A taxpayer may intend to make an overall profit when

appreciation in the value of assets used in the activity is

realized.     See 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 net earnings and appreciation
                                - 18 -

are enough to recoup losses sustained in prior years.   See Bessenyey

v. Commissioner, supra.   Petitioners concede that they did not

expect their land or any asset other than their horses to increase

in value but contend that the offspring of the higher quality

broodmares that they bought after 1995 are worth more than those

born in prior years.   We disagree.   Petitioners offered no evidence

of the value of offspring of higher quality broodmares they bought

after 1995.   This factor favors respondent.

     5.   Taxpayer's Success in Other Activities

     The fact that a taxpayer previously engaged in similar

activities and made them profitable may show that the taxpayer has a

profit objective.   See sec. 183-2(b)(5), Income Tax Regs.   Mrs.

Berry’s work as office manager at her husband’s clinic is not

sufficiently similar to operating a farm and horse activity to

indicate that she could do so successfully.    This factor favors

respondent.

     6.   Taxpayer's History of Income or Losses

     A history of substantial losses may indicate that the taxpayer

did not conduct the activity for profit.   See Golanty v.

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

taxpayer may have a profit objective even if the activity has a

history of losses, see Bessenyey v. Commissioner, supra at 274,

because losses during the initial stage of an activity do not

necessarily indicate that the activity was not conducted for profit,
                                   - 19 -

see Engdahl v. Commissioner, 72 T.C. at 669; sec. 1.183-2(b)(6),

Income Tax Regs.     We have said that the startup phase of a horse-

breeding activity may be 5 to 10 years for standard bred horses.

See Engdahl v. Commissioner, supra.

     Petitioners have a long history of substantial losses in their

farm and horse activity.     Petitioners contend that they incurred

losses due to unforeseen circumstances such as Dr. Berry’s 2-month

illness in 1985 and the reopening of the racking horse registry in

1997.     We disagree.   We are not convinced that Dr. Berry’s illness

in 1985 prevented petitioners from buying broodmares in 1992, 1993,

1994, and 1995, because in those years income from his medical

practice had increased to more than $119,000, and he had additional

income from other sources.     Petitioners contend that the reopening

of the racking horse registry in 1997 caused their losses in 1995.

We disagree.     Petitioners have offered no evidence about the

reopening of the registry or how the reopening caused their losses

in earlier years.     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.      See sec. 1.183-

2(b)(7), Income Tax Regs.     Petitioners had gross receipts from

selling pecans and grains, from providing stud services, and

boarding and hauling horses.     The record does not indicate the

amount of expenses that were related to these activities.     Even if
                                  - 20 -

those activities were profitable, those small amounts of receipts do

not offset the large losses that petitioners had each year from 1980

to 1995.     This factor favors respondent.

     8.      Financial Status of the Taxpayer

     The receipt of a substantial amount of income from sources

other than the activity, especially if the losses from the activity

generate large tax benefits, may indicate that the taxpayer does not

intend to conduct the activity for profit.      See sec. 1.183-2(b)(8),

Income Tax Regs.     Petitioners had nonfarm income of $154,309 in

1995.     Their nonfarm income exceeded their farm losses from 1980 to

1997.     See Rinehart v. Commissioner, T.C. Memo. 1998-205 (taxpayers

lacked a profit objective where taxpayer earned between $166,000 and

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

sheltered a large amount of their income in 1995.     This factor

favors respondent somewhat.

     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.     See 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.     See 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
                                  - 21 -

for gratification, the latter possibility may be the primary

motivation for the activity.     See White v. Commissioner, 23 T.C. 90,

94 (1954), affd. per curiam 227 F.2d 779 (6th Cir. 1955).

Petitioners point out that no person in their family rode horses for

pleasure in the year in issue.     However, Mrs. Berry testified that

she has always enjoyed horses.     This factor is neutral.

D.      Conclusion

        We conclude that petitioners did not operate their farm and

horse-breeding activity for profit in 1995 for purposes of section

183.3

        The record contains information about events that occurred

after 1995, on which both parties rely.     The post-1995 information

shows that the pre-1995 pattern of activity and losses generally




        3
        Some of petitioners’ activities may have been for profit,
such as those involving their crops and the hauling and boarding
of horses. However, petitioners do not contend that they had
more than one activity, and they have not provided any basis for
us to decide the amount of their expenses that were related to
activities that may have been for profit.
                                 - 22 -

continued through 1998.4   Our conclusion would be the same whether

or not we considered post-1995 events.

     To reflect the foregoing,


                                          Decision will be entered

                                    under Rule 155.




     4
        Petitioners sold one horse for $24,000 in 1996. This
appears to be an anomaly because the sales prices of all of the
other horses that they sold after 1995 were similar to sales
prices before 1995. Petitioners received the notice of
deficiency in this case in 1997, and they expanded the number of
higher quality broodmares in 1998. Petitioners’ actions after
1997 may have been influenced by the pendency of this case and
show little or nothing about their intent in 1995. See Taube v.
Commissioner, 88 T.C. 464, 482 (1987); Lundquist v. Commissioner,
T.C. Memo. 1999-83; Brockenbrough v. Commissioner, T.C. Memo.
1998-454.
