                          T.C. Memo. 1999-93



                     UNITED STATES TAX COURT



               MELISSA S. SPRANGER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 8485-97.               Filed March 25, 1999.



     Melissa S. Spranger, pro se.

     Eric R. Skinner, for respondent.


             MEMORANDUM FINDINGS OF FACT AND OPINION

     CARLUZZO, Special Trial Judge:     This case was heard pursuant

to the provisions of section 7443A(b)(3) of the Internal Revenue

Code of 1986, as amended and in effect at the time the petition

was filed, and Rules 180, 181, and 182 of the Tax Court Rules of

Practice and Procedure.    Unless otherwise indicated, subsequent

section references are to the Internal Revenue Code in effect for

1993.
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     Respondent determined a deficiency in petitioner's 1993

Federal income tax in the amount of $6,426.    The issue for

decision is whether petitioner is entitled to various deductions

claimed on a Schedule C included with her 1993 Federal income tax

return.   The resolution of this issue depends upon whether,

during 1993, petitioner's dog breeding activity constituted a

trade or business within the meaning of section 162.

                         FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

Petitioner filed a timely 1993 Federal income tax return.      On

that return, petitioner computed her taxable income and Federal

income tax liability in accordance with the cash receipts and

disbursements method of accounting.    At the time that the

petition was filed, she resided in Omaha, Nebraska.

     During 1993 petitioner was employed as a building

official/inspector by the City of Gross Pointe Woods, Michigan.

Her work schedule was somewhat irregular; however, she routinely

worked between 40 and 60 hours per week.    She received and

properly reported wage income in the amount of $40,306 from this

employment.

     As of the date of trial, petitioner had been involved in

breeding and showing Pomeranian dogs for over 30 years.    Her

interest in Pomeranian dogs arose when she was only 10 years old.

For Federal income tax purposes, in 1989 she and her former

husband began reporting income earned and expenses paid in

connection with this activity on Schedules C included with their
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Federal income tax returns.   Petitioner and her former husband

separated in 1993 and were divorced in 1994.

     From 1989 through the date of trial, petitioner never

realized or reported on a Federal income tax return a net profit

from the activity.   The income and expenses with respect to the

activity reported on petitioner's Federal income tax returns from

1993 through 1996, inclusive, are summarized in the following

table:

     Year            Income            Expenses         Net Loss

     1993            $ 525             $29,142          $28,617
     1994              375              19,111           18,736
     1995              350              14,670           14,320
     1996              250               7,104            6,854


     On her 1993 Schedule C petitioner reported the following
items:


     Income                                      $525
     Expenses
          Advertising          $  891
          Depreciation          7,903
          Insurance             1,932
          Interest              4,196
          Repairs               2,431
          Supplies              3,616
          Tax                     254
          Travel, etc           5,071
          Other                 2,848       29,142

     Net loss                               28,617
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     During 1993 petitioner owned 28 dogs.   Some of the above

expenses related to the maintenance (including feeding, grooming,

and veterinarian services) of those dogs.    The dogs were kept in

an addition to petitioner's residence that was constructed for

that purpose.

     The $525 of income petitioner reported on the Schedule C

consists of a single stud fee ($150) and the sale of one puppy

($375).   Stud fees and puppy sales are the only ways in which

petitioner expected to generate income from her dog breeding

activity.

     Dog breeders gain recognition for themselves and their dogs

by entering their dogs in shows sanctioned by the American Kennel

Club and sponsored by various organizations.   Dogs that have

successfully competed in shows attract customers interested in

obtaining stud services or purchasing puppies from dogs owned by

the breeders.

     During 1993 petitioner entered only five of her dogs in

various shows.   The shows were held at various locations in

different states.   Some shows were scheduled in clusters over a

three or four-day period.   Typically petitioner was required to

pay a fee to enter her dogs in a show.   The shows did not award

cash prizes to the winners.   As explained above, the financial

reward for winning came in the form of enhancing the winner's

reputation for breeding purposes, which in turn resulted in more

demand and higher fees for the breeding services of the winner.
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     Petitioner traveled to the dog shows with an associate in

petitioner's 1989 Fleetwood motor home.   Petitioner purchased the

motor home in 1989 for $36,897.    On the Schedule C included with

her 1993 return, petitioner indicated that the motor home was

used exclusively in her dog breeding business.

     Petitioner also owned a 1993 Ford Bronco that was purchased

in 1992 for $36,998.   On the Schedule C included with her 1993

return, she indicated that 83 percent of the usage of the Bronco

was attributable to her dog breeding activity.   Petitioner used

the Bronco to commute to her job with Gross Pointe Woods, a

distance of over 30 miles from her residence.

     Petitioner did not keep a separate set of books and records

for her dog breeding activity.    Some of the expenses relating to

the activity were paid from a personal joint checking account

that petitioner maintained with her former husband.   She also

kept copies of receipts for some of the expenses related to her

dog breeding activity.   Because of complications related to her

divorce, petitioner cannot locate the relevant check registers or

any receipts.

     Since 1989, only five of petitioner's dogs generated any

income.   Petitioner did not maintain any records that tracked

income and expenses attributable to a particular dog.   She did

not develop a business plan for the year in issue, or for any

other year.   Petitioner never consulted with any professionals in

order to develop a strategy that would allow her to profit from

her dog breeding activity, nor did she alter her practices from
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one year to the next in order to increase the likelihood for

profit.   Petitioner never had her dogs appraised, and she did not

insure them.

     Relevant for our purposes, in the notice of deficiency,

respondent disallowed the net loss reported on the Schedule C.

Respondent explained the disallowance as follows:    "It is

determined that the Schedule C loss pertaining to your dog

operations was not incurred in transactions entered into for

profit.   Therefore, the loss of $28,617.00 shown on your return

is not allowable."

                              OPINION

     Deductions are a matter of legislative grace.    A taxpayer

who claims a deduction must identify the specific statute that

allows for the type of deduction claimed and demonstrate that all

of the requirements of the statute have been satisfied.

INDOPCO, Inc. v. Commissioner, 503     U.S. 79, 84 (1992); New

Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).

Although not expressly referred to by petitioner, it is clear

that in this case petitioner relies upon section 162(a) in

support of the deductions here in dispute.

     In general, section 162(a) allows a deduction for all

ordinary and necessary expenses paid or incurred during the

taxable year in carrying on a trade or business.    The term "trade

or business" is not precisely defined in the Internal Revenue

Code or the regulations promulgated thereunder; however, it is

well established that in order for an activity to be considered a
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taxpayer's trade or business for purposes of section 162, the

activity must be conducted "with continuity and regularity" and

"the taxpayer's primary purpose for engaging in the activity must

be for income or profit."    Commissioner v. Groetzinger, 480 U.S.

23, 35 (1987).

       Consistent with the manner in which petitioner reported the

income and expenses attributable to petitioner's dog breeding

activity on her 1993 Federal income tax return, she argues that

she engaged in that activity during 1993 with the intent to make

a profit, and therefore the activity constitutes a trade or

business.    She further points out that her return for taxable

year 1989 was examined and respondent allowed her to treat the

dog breeding activity as a trade or business.

       Respondent argues that petitioner's dog breeding activity

did not constitute a trade or business during 1993 because

petitioner did not engage in that activity with the requisite

intent to profit.    Consequently, according to respondent,

petitioner is only entitled to deduct the expenses related to

petitioner's dog breeding activity as allowable under section

183.

       The test of whether a taxpayer conducted an activity for

profit is whether he or she entered into, or continued, the

activity with an actual or honest objective of making a profit.

Keanini v. Commissioner, 94 T.C. 41, 46 (1990); Dreicer v.

Commissioner, 78 T.C. 642, 644-645 (1982), affd. without opinion

702 F.2d 1205 (D.C. Cir. 1983); sec. 1.183-2(a), Income Tax Regs.
                                - 8 -


Although a reasonable expectation of profit on taxpayer's part is

not required, the profit objective must be bona fide, as

determined from a consideration of the surrounding facts and

circumstances.    Keanini v. Commissioner, supra at 46; Dreicer v.

Commissioner, supra at 645; Golanty v. Commissioner, 72 T.C. 411,

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

Cir. 1981); Bessenyey v. Commissioner, 45 T.C. 261, 274 (1965),

affd. 379 F.2d 252 (2d Cir. 1967).

     Whether petitioner engaged in her dog breeding activity with

an actual and honest objective of realizing a profit must be

redetermined year-to-year, taking into account all of the

relevant facts and circumstances.       Golanty v. Commissioner, supra

at 426; sec. 1.183-2(a) and (b), Income Tax Regs.      More weight is

given to objective facts than to petitioner's statement of her

intent.   Engdahl v. Commissioner, 72 T.C. 659, 666 (1979); sec.

1.183-2(a), Income Tax Regs.    Respondent's determinations with

respect to other years, if any, may be taken into account but are

not conclusive.

     The following factors, which are nonexclusive, should be

considered in the determination of whether an activity is engaged

in for profit:    (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 assets used in

the activity may appreciate in value; (5) the success of the

taxpayer in carrying on other similar or dissimilar activities;
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(6) the taxpayer's history of income or losses with respect to

the activity; (7) the amount of occasional profits, if any, which

are earned; (8) the financial status of the taxpayer; and (9)

elements of personal pleasure or recreation.    Sec. 1.183-2(b),

Income Tax Regs.

     No one factor is determinative in and of itself, and our

conclusion with respect to petitioner's profit motive does not

depend upon merely counting up those factors that suggest the

presence of a profit motive and comparing the number to those

factors that indicate the opposite.     Sec. 1.183-2(b), Income Tax

Regs.

     Taking into account the above factors and considering the

facts and circumstances relating to petitioner's dog breeding

activity, as discussed more fully below, we are not persuaded

that during 1993 petitioner engaged in that activity with the

intent to profit that is necessary to consider the activity a

trade or business for purposes of section 162.    The activity did

generate gross income; however, not all income producing

activities constitute trades or businesses within the meaning of

section 162(a).    Cf. Commissioner v. Groetzinger, supra at 35.

     For the year in issue, the great majority of expense

deductions attributable to petitioner's dog breeding activity

were related to the Fleetwood motor home and Bronco that

petitioner owned.   Deductions for the fixed costs of the those

vehicles, including depreciation, interest and insurance, totaled

$14,020.   Deductions for the marginal costs attributable to those
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vehicles, including repairs, maintenance and actual travel

expenses, totaled $7,402.   The marginal costs alone exceeded the

income from the activity by a factor of 12.

     We are particularly influenced by petitioner's failure to

consider the extent of stud fees and puppy sales necessary to

cover not only the costs of operating the motor home and truck,

but the other expenses related to the activity as well.   She did

not develop a business plan, or prepare a break-even analysis.

Nor did she record the particular income earning history of any

of her dogs, so that the profit potential of the activity could

be better evaluated.   The following portion of petitioner's cross

examination demonstrates the complete lack of the type of

planning that is indicative of an activity engaged in for profit:

     Q. Prior to the time when you began deducting losses
     for your dog activity, did you ever prepare a business
     plan?

     A.   No, sir.

     Q. Between 1989 and -- well, until now, have you ever
     prepared any profit or loss statements other than a
     final tallying for your tax returns?

     A.   No, sir.

     Q. Did you ever prepare a break-even analysis or any
     projections of what you might have to earn to make a
     profit?

     A.   No.

     Q.   Did you prepare any budgets for the activity?

     A.   No, sir.

     Q. Okay. Just based upon your history of losses in
     the activity, how much would you have to earn this year
     to make a profit on the activity as a whole?
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     A.    With the prior years and losses?

     Q.    Yeah.

     A.    I would have no idea off the top of my head.

     *    *   *

     Q. During 1989 and subsequent years for the business,
     did you keep any records that would show the
     expenditures made with respect to any individual dog?

     A.    No, sir.

     Q. Okay. Did you make any attempt, since 1989 and
     subsequent years, to apportion the expenses to
     determine how much each animal was costing you?

     A.    No, sir.


     Since 1989 only five of petitioner's dogs generated any

income, although she owned 28 dogs during 1993, and deducted the

costs of maintaining all of those dogs.       Petitioner has an

obvious interest in owning, raising, and showing Pomeranian dogs;

however, we find that during the year in issue, her interest,

which developed when she was a child, was personal in nature and

not based upon the necessary profit motive that would allow for

the activity to be considered a trade or business within the

meaning of section 162(a).       Of course, deriving personal

satisfaction out of an activity does not necessarily indicate the

absence of an intent to profit; however, "where the possibility

for profit is small (given all the other factors) and the

possibility for gratification is substantial, it is clear that

the latter possibility constitutes the primary motivation for the

activity."        Smith v. Commissioner, T.C. Memo. 1997-503 (citing
                               - 12 -


Burger v. Commissioner, T.C. Memo. 1985-523); Sec. 1.183-2(b)(9),

Income Tax Regs.    Weighing the personal pleasures derived from

petitioner's involvement with her dogs against the profit

potential that could result from her breeding activity, we are

satisfied that the breeding activity was conducted more for the

purpose of subsidizing the costs of maintaining and showing her

dogs than for profit.

     Our conclusion on the point is further supported by the

history of losses incurred by petitioner since she began treating

the activity as a trade or business for Federal income tax

purposes.   "[W]here losses continue to be sustained beyond the

period which customarily is necessary to bring the operation to

profitable status such continued losses, if not explainable,

* * * may be indicative that the activity is not being engaged in

for profit."    Sec. 1.183-2(b)(6), Income Tax Regs.   During 1993,

petitioner deducted a $28,617 loss attributable to her dog

breeding activity.    Since 1989, when petitioner began reporting

the income and expenses attributable to her dog breeding

activity, she has never realized a profit.    Over a 4-year period

starting in 1993, expenses exceeded income by almost $60,000.

During that period annual income ranged from a low of $250 to a

high of $575.    The magnitude of annual and cumulative losses

compared to the low levels of income generated strongly indicates

that petitioner did not conduct the activity for profit.     Smith

v. Commissioner, supra; Burger v. Commissioner, supra.
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     Because petitioner's dog breeding activity was not an

activity engaged in for profit, the activity cannot be considered

a trade or business for purposes of section 162(a).    Therefore,

she is only entitled to deduct the expenses incurred in that

activity in accordance with section 183.    It follows, and we

hold, that respondent's determination in this regard is

sustained.

     To reflect the foregoing,

                                           Decision will be

                                   entered for respondent.
