                          T.C. Memo. 1998-330



                        UNITED STATES TAX COURT



            MARTIN AND MARION ABBENE, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 16788-95.                Filed September 21, 1998.



     Martin H. Bodian, for petitioners.

     Linda P. Azmon and Gary W. Bornholdt, for respondent.



                MEMORANDUM FINDINGS OF FACT AND OPINION

     WELLS, Judge:     Respondent determined deficiencies in

petitioners' Federal income tax in the amounts of $18,905,

$16,465, and $15,434 for taxable years 1990, 1991, and 1992,

respectively.    Petitioners Martin Abbene and Marion Abbene will

individually be referred to as Mr. Abbene or Mrs. Abbene,

respectively.
                               - 2 -


     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.   After concessions by petitioners, the issue remaining

to be decided is whether petitioners may deduct losses incurred

by Mr. Abbene's wholly owned S corporation, Blue Ribbon

Thoroughbred Breeding Farms, Inc. (Blue Ribbon), in its horse-

related activities, or whether such losses are nondeductible

because Blue Ribbon did not engage in such activities for profit

within the meaning of section 183(a).

                         FINDINGS OF FACT

     Some of the facts have been stipulated for trial pursuant to

Rule 91.   The parties' stipulations of fact are incorporated

herein by reference and are found as facts in the instant case.

At the time they filed their petition, petitioners resided at 6

Tide Mill Road, Nissequogue, New York (6 Tide Mill Road).

Petitioners are husband and wife and have one child, Elena Abbene

(Elena), born on October 27, 1967.     During the years in issue,

Elena lived with petitioners, who were her sole means of support.

Petitioners filed timely joint Federal income tax returns for all

years in issue.

     Prior to and during the years in issue, Mr. Abbene was

employed as a sales representative with Pride Solvents & Chemical
                                - 3 -


Company, Inc. (Pride Solvents).1   Mrs. Abbene was employed as a

registered nurse.

Mr. Abbene's Horse-Related Activities Before the Incorporation of
Blue Ribbon

     Mr. Abbene's involvement with horses began when, at the age

of 17,2 he first owned and rode horses for pleasure.    Mr. Abbene

has maintained horses for showing, riding, and breeding since

1971.    Although Mr. Abbene was never formally trained to show or

breed horses, he was active in several horseman's associations

both before and during the years in issue. Specifically, Mr.

Abbene belonged to the New York Thoroughbred Breeder's

Association, the Professional Horseman's Association of Long

Island, and the Nassau-Suffolk Horseman's Association.3

        Petitioners' daughter, Elena, began riding horses during

1970, at the age of 3, following a 50-cent pony ride.     Elena has

trained with the United States Equestrian Team since age 15 and

is a 1989 Olympic Bronze Medalist.4     Petitioners spent $30,000 to


1
     Mr. Abbene was employed with Pride Solvents for 21 years
from 1974 until 1995.
2
     Mr. Abbene was born on Jan. 17, 1941.
3
     Mr. Abbene served as the director of the Nassau-Suffolk
Horseman's Association for approximately 10 years from 1984 to
1994.
4
     The parties stipulated that Elena "is a 1989 Olympic bronze
medalist." The record, however, also contains a business card on
which it is advertised that Elena is "a 1989 U.S. Olympic
Festival Bronze Medal Winner". Whether Elena participated in
                                                   (continued...)
                                       - 4 -


$50,000 of their own funds each year to cover Elena's training

and competition costs.

      During 1975, petitioners purchased the 1½ acre property

located at 6 Tide Mill Road (the property), and they have

maintained the property as their primary residence every year

since then.      At the time it was purchased, there was a 13-room

house on the property, but there was no barn.               Sometime during

either 1976 or 1977, petitioners built a barn on the property, at

a cost of $2,600.       Two years later petitioners built a second

barn on the property, to match the first, also at a cost of

$2,600.      During 1988, petitioners built a third barn on the

property, at a cost of $49,870, after one of the original barns

was destroyed by fire.5

      During the years subsequent to the purchase of the property,

Mr. Abbene purchased the following horses and equipment,

ownership and title to which are in his name individually, for

use in connection with his horse-related activities:

                                       Horses
                                          Purchase     Year         Year      Year
      Name           Type of Horse         Price     Purchased1     Born      Died

Country Girl       Female Welsh pony         $750    1976/1977       1959     1995
                                                                                2
Nakita             Female Shire             2,200    1976/1977    1970/1971



4
 (...continued)
official Olympic competition during 1989 or in an "Olympic
Festival", however, is immaterial to our analysis.
5
     The record does not disclose which of the two original barns
was destroyed by fire.
                                          - 5 -

Toast of the Town    Gelded   Thoroughbred       1,500   1976/1977      1973   1994
                                                                          3      2
Meadow Silk Spirit   Female   Welsh pony           800   1976/1977
                                                                                 2
Spectacular Rhythm   Female   Thoroughbred       5,000      1984        1979
Magic Moment         Gelded   Thoroughbred       4,000      1986        1974   1991
                                                                                 2
King Lion            Gelded   Irish Warmblood   63,000      1987        1981
      1
        Before the incorporation of Blue Ribbon, no horses were sold.
      2
        Date of death not disclosed in the record.
      3
        Date of birth not disclosed in the record.




                                       Equipment

     Type                            Purchase Price                  Year Purchased

Pickup truck                             $10,321                          1978
Trailer                                   17,500                          1987
Riding equipment                          10,000                         1986-88
Coral and fencing                          5,000                          1988

      During the years preceding the incorporation of Blue Ribbon,

Elena competitively rode several of her father's horses including

Country Girl,6 Meadow Silk Spirit, and Magic Moment.7                   Elena, an

accomplished rider, also won many ribbons for showing Magic

Moment, Toast of the Town, Nakita, and Spectacular Rhythm.

      Before the incorporation of Blue Ribbon, Mr. Abbene

maintained a separate checkbook for all of the expenditures that

he incurred for his showing, riding, and breeding activities.

Mr. Abbene also maintained a log showing all the competitions in

which he entered horses.             Mr. Abbene never realized a profit from

his horse-related activities during the period from 1971 to 1989.



6
      Elena rode Country Girl in the national championships.
7
     Elena rode Magic Moment, a jumper, in the national
championships and in Olympic competition.
                                - 6 -


Operation of Blue Ribbon

     Sometime before January 24, 1989, Capital Cities/ABC, Inc.

(ABC), approached Mr. Abbene about the possibility of using King

Lion in the filming of an episode of one of its daytime dramas,

"All My Children" (AMC).    On January 27, 1989, Mr. Abbene

incorporated Blue Ribbon in order to take advantage of the

opportunity to rent his horse to ABC, which dealt only with

corporations.

     Mr. Abbene is Blue Ribbon's sole shareholder.    Blue Ribbon

conducts its operations on the property using Mr. Abbene's horses

and equipment.8    Mr. Abbene never transferred ownership of the

horses and equipment or the property to Blue Ribbon.    Blue Ribbon

never paid petitioners any rent or income for the use of the

property or the horses and equipment in its operations.

     On January 24, 1989, 3 days before Blue Ribbon's

incorporation, Mr. Abbene entered into an agreement with ABC, on

Blue Ribbon's behalf, to rent certain horse-riding equipment to

ABC for $10,400.    On February 8, 1989, Blue Ribbon entered into a

second agreement with ABC to rent King Lion to ABC for $3,432.

ABC rented the horse and the riding equipment for use in the

filming of an episode of AMC during February 1989.    During


8
     In addition to the horses listed supra p. 4, Mr. Abbene
acquired Queenie, a female Shire, during either 1990 or 1991.
Queenie was not used by Blue Ribbon for any income-producing
activity.
                                - 7 -


November 1990, the major Hollywood film and television producers

began a boycott against Local 52 of the International Alliance of

Theater Stage Employees and Moving Picture Machine Operators

(Local 52), which significantly lessened film and television

production in the New York City metropolitan area.    The boycott

against Local 52 was settled during May 1991.    Neither Blue

Ribbon nor Mr. Abbene had any further dealings with ABC after the

February 8, 1989, agreement.

     During the years in issue, Blue Ribbon engaged solely in the

activities of horse breeding, horse showing, and providing riding

lessons.    Neither Mr. Abbene nor Blue Ribbon sold any horses

during the years in issue.

     Nakita and Spectacular Rhythm were maintained for breeding

purposes.    Mr. Abbene hired a veterinary doctor to do all of the

breeding because neither he nor Elena had any veterinary

training.    Nakita produced no foals, and Spectacular Rhythm

produced only one foal, Precious Moment.    Precious Moment was

born stunted, during 1991.    Mr. Abbene made no attempt to breed

Spectacular Rhythm after the birth of Precious Moment.

     Blue Ribbon entered approximately 25 to 30 horse shows each

year during the years in issue.    King Lion, however, was the only

horse shown by Blue Ribbon for prize moneys.9   Aside from $6,500

9
     We make this finding notwithstanding Mr. Abbene's testimony
that Nakita was also shown for prize moneys. The parties
                                                   (continued...)
                                 - 8 -


that King Lion won during 1990, placing second at the Hamptons

Classic, King Lion won no prize moneys during the years in issue.

Mr. Abbene kept no formal ledger of King Lion's winnings.     The

remaining horses were generally shown for ribbons only.     Country

Girl, Toast of the Town, Meadow Silk Spirit, and Spectacular

Rhythm, however, were not shown during the years in issue.     Magic

Moment was injured and had to be destroyed during 1991.10

     Blue Ribbon used Country Girl, Toast of the Town, and Meadow

Silk Spirt for riding lessons.    During the years in issue, Elena

provided, on behalf of Blue Ribbon, riding lessons to four

individuals, some of whom went on to successfully compete.    Blue

Ribbon charged $30 for a half-hour lesson and $50 for an hour

lesson.   Mr. Abbene maintained neither a log of the riding

lessons given by Elena nor a formal ledger of the income derived

from the provision of riding lessons during the years in issue.




9
 (...continued)
stipulated that King Lion was the only horse shown for prize
moneys. Consistent with the stipulation of facts, respondent
requested the Court to find that King Lion was the only horse
shown for prize moneys during the years in issue. As petitioners
made no objection to the requested finding of fact, we shall
treat the stipulation of facts as a conclusive admission by the
parties. Rule 91(e).
10
     The record does not disclose the year in which Magic Moment
suffered injury.
                                - 9 -


     Mr. Abbene and Elena managed Blue Ribbon's day-to-day

operations.11   Blue Ribbon, however, had no paid employees during

the years in issue, and Mr. Abbene kept no record of the number

of hours that either he or Elena worked.

     Mr. Abbene normally devoted time to Blue Ribbon after work

and on weekends.   Mr. Abbene also spent much of his vacation, 2

months each year, and holidays traveling with the horses for

shows.   While he was at work, Mr. Abbene left Elena in charge of

Blue Ribbon's operations.

     Elena worked approximately 50 hours each week at Blue Ribbon

where she was responsible for (1) the general care and

maintenance of the horses, (2) training, preparing, and riding

the horses shown by Blue Ribbon in competitions, and (3)

providing riding lessons on behalf of Blue Ribbon.   Elena also

had the authority to make purchases on behalf of Blue Ribbon,

although she did not maintain or review any records concerning

Blue Ribbon's expenditures.   Before 1989, Elena had no experience

operating a business.   Elena did not attend college and had no

formal business education.

     Mr. Abbene had business cards made, highlighting Elena's

1989 Olympic Bronze Medal, to advertise the services offered by

Blue Ribbon.    The cards were dispersed through the mail and given

11
     Mrs. Abbene had no active involvement in Blue Ribbon's
operations and did not take part in any of the decision making
concerning its operations.
                               - 10 -


to local tack shops, where they were either displayed near the

cash register or posted on a bulletin board.    Mr. Abbene also

advertised Blue Ribbon's services by circulating a rate schedule

to approximately 100 individuals included on a mailing list that

he purchased from the American Horse Show Association.12    Blue

Ribbon claimed advertising expenses in the amounts of $925 for

1990, $351 for 1991, and $549 for 1992.

     Mr. Abbene paid an accountant, George Seaford (Mr. Seaford),

to maintain Blue Ribbon's records during the years in issue.

Although Mr. Abbene kept a separate bank account for Blue

Ribbon's expenditures, he did not keep a formal ledger of Blue

Ribbon's income.   Rather, Mr. Abbene would place photocopies of

the checks received for riding lessons and prize winnings in an

envelope which was forwarded, every 3 months, along with the bank

statements to Mr. Seaford.    Mr. Seaford performed quarterly

reconciliations of the bank statements and prepared Blue Ribbon's

Federal income tax returns.

     During the years in issue, Mr. Abbene did not maintain any

formal business plan or formal business strategy for the

operation of Blue Ribbon.    Mr. Abbene did not prepare or maintain

any formal budgets, operating statements, or analyses of Blue

12
     Petitioners attached to their posttrial brief photocopies of
two advertisements purportedly placed in the New York Production
Guide during the years in issue. These advertisements are not
part of the record in the instant case, and we give them no
consideration in our analysis.
                                - 11 -


Ribbon's records to determine how costs could be controlled.       Mr.

Abbene did not formally calculate the amount of income that would

be required to produce a profit, and he did not attempt to

project the amount of income necessary to produce a profit for

future years.   Mr. Abbene never formally calculated the income

required to recover the losses sustained by Blue Ribbon during

the years in issue.

     Although Blue Ribbon has operated at a loss every year since

its inception, Mr. Abbene has made no change to the manner in

which Blue Ribbon conducts its operations.     Mr. Abbene cannot

presently say when or whether Blue Ribbon will become profitable.

Blue Ribbon's Forms 1120S reported the following income, expenses

(including depreciation), and net losses during the period from

1989 to 1994:

                                           Expenses &
     Year             Income         Depreciation         Net Loss

     1989             $13,000            $34,518           $21,218
     1990               6,500             65,309            58,809
     1991               1,785             59,584            57,799
     1992               2,950             63,967            61,017
     1993                 313             62,951            62,638
     1994                 450             60,164            59,714


On its returns for taxable years 1989 through 1994, Blue Ribbon

claimed depreciation deductions relating to the assets used in

its operations despite the fact that Mr. Abbene never transferred
                              - 12 -


ownership of those assets to the corporation.13   On its 1991 Form

1120S, Blue Ribbon also reported a section 1231 loss on the

destruction of Mr. Abbene's horse, Magic Moment, in the amount of

$2,880.

     Petitioners reported combined gross income of $134,629 for

1990, $112,136 for 1991, and $110,245 for 1992.   Petitioners

claimed losses in the amounts of $58,809, $57,799, and $61,017

for 1990, 1991, and 1992, respectively, as Mr. Abbene's

distributive share of Blue Ribbon's operating losses.14   For

1991, petitioners also claimed $2,880, as Mr. Abbene's

distributive share of the section 1231 loss Blue Ribbon claimed

on the destruction of Magic Moment.


13
     Mr. Abbene indicated at trial that Blue Ribbon did not own
the assets used in its operations and for which it claimed
depreciation deductions during the years in issue. Accordingly,
at the close of trial, respondent made an oral motion pursuant to
Rule 41(b) to amend the pleadings to conform to the evidence in
order to assert, in the alternative, that petitioners are not
entitled to claim losses in connection with the operation of Blue
Ribbon to the extent that such losses represent depreciation
deductions. We denied respondent's motion on the grounds that
the depreciation issue was not tried by either express or implied
consent of the parties. Rule 41(b). Consequently, the issue of
whether Blue Ribbon was entitled to depreciation deductions in
connection with the assets owned by Mr. Abbene, but used in its
operations, is not properly before the Court, and is not
considered in this opinion.
14
     Petitioners claimed a loss from the operation of Blue Ribbon
in the amount of $62,638 for 1993. Petitioners claimed no losses
from the operation of Blue Ribbon for 1994, 1995, or 1996. While
the record discloses a loss of $59,714 for 1994, there is no
evidence of the amount of income or loss from the operation of
Blue Ribbon for 1995 or 1996.
                               - 13 -


     Respondent determined that Mr. Abbene's distributive share

of Blue Ribbon's losses for each year in issue was zero because

Blue Ribbon's activities were activities not engaged in for

profit within the meaning of section 183.

                              OPINION

     Petitioners claim entitlement to Mr. Abbene's share of Blue

Ribbon's losses for the taxable years in issue.   Petitioners

argue that the losses are fully deductible because Blue Ribbon

engaged in the activities of horse breeding, horse showing, and

providing riding lessons with the requisite profit objective.

Petitioners contend that Mr. Abbene formed Blue Ribbon to take

advantage of the opportunity to do film and television work with

ABC and that he hoped to capitalize on Elena's fame as an Olympic

medalist and skill as an accomplished rider to make Blue Ribbon a

profitable operation.   Respondent contends that the activities

were not engaged in for profit.   Petitioners bear the burden of

proof.15   Rule 142(a); Welch v. Helvering, 290 U.S. 111 (1933).

     Section 1366(a) generally allows shareholders of S

corporations to take into account their pro rata share of the


15
     Internal Revenue Service Restructuring & Reform Act of 1998
(RRA of 1998), Pub. L. 105-206, sec. 3001, 112 Stat. 685, 726-
727, added sec. 7491, which shifts the burden of proof to the
Secretary in certain circumstances. Sec. 7491 is applicable to
"court proceedings arising in connection with examinations
commencing after the date of the enactment of this Act." RRA of
1998, sec. 3001(c). RRA of 1998 was enacted on July 22, 1998.
Accordingly, sec. 7491 is inapplicable to the instant case.
                                  - 14 -


corporation's net operating losses.16      A net operating loss is

defined in section 172(c) as the excess of allowable deductions,

including ordinary and necessary business expenses deductible

under section 162, over gross income.      Section 183, however,

limits the deductions of S corporations with respect to

activities that are not engaged in for profit.

     Section 183(a) provides the general rule which disallows all

deductions attributable to activities "not engaged in for

profit".   Section 183(b)(1), however, qualifies the general rule

by allowing those deductions otherwise allowable regardless of

profit objective, e.g., interest and State and local taxes.

Further, section 183(b)(2) allows those deductions which would be

allowable if the activity were engaged in for profit, but only to




16
     Sec. 1366(a) provides, in relevant part, as follows:

          SEC. 1366(a).      Determination of Shareholder's Tax
     Liability.--

          (1) In general.--In determining the tax under this
     chapter of a shareholder for the shareholder's taxable year
     in which the taxable year of the S corporation ends * * *,
     there shall be taken into account the shareholder's pro rata
     share of the corporation's--

                (A) items of income (including tax-exempt
           income), loss, deduction, or credit the separate
           treatment of which could affect the liability for tax
           of any shareholder, and

                   (B)   nonseparately computed income or
           loss.
                               - 15 -


the extent that gross income attributable to the activity exceeds

the deductions permitted by section 183(b)(1).

     Section 183(c) defines an activity which is "not engaged in

for profit" as "any activity other than one with respect to which

deductions are allowable for the taxable year under section 162

or under paragraph (1) or (2) of section 212."   Deductions under

sections 162 or 212(1) or (2) require the "actual and honest

objective of making a profit."    Dreicer v. Commissioner, 78 T.C.

642, 645 (1982), affd. without opinion 702 F.2d 1205 (D.C. Cir.

1983).    Profit means economic profit independent of tax savings.

Antonides v. Commissioner, 91 T.C. 686, 694 (1988), affd. 893

F.2d 656 (4th Cir. 1990).   Although the expectation of making a

profit need not be reasonable, the facts and circumstances must

indicate that the taxpayer entered into the activity, or

continued it, with the actual and honest objective of making a

profit.   Id.; Dreicer v. Commissioner, supra at 645; sec. 1.183-

2(a), Income Tax Regs.

     Although the section 183 analysis with respect to the

activities of a subchapter S corporation is applied at the

corporate level, sec. 1.183-1(f), Income Tax Regs., a taxpayer's

intent is attributable to his wholly owned S corporation, see

Ballard v. Commissioner, T.C. Memo. 1996-68; Sousa v.

Commissioner, T.C. Memo. 1989-581; Kartrude v. Commissioner, T.C.

Memo. 1988-498, affd. in part, revd. in part on another ground
                              - 16 -


and remanded, 925 F.2d 1379 (11th Cir. 1991).   Accordingly, we

shall examine Mr. Abbene's intent and attribute his intent to

Blue Ribbon.

     Whether a taxpayer has an actual and honest profit objective

is decided on the basis of all surrounding circumstances.

Dreicer v. Commissioner, supra at 645; sec. 1.183-2(b), Income

Tax Regs.   In making our determination, we give greater weight to

objective factors than to a taxpayer's statement of intent.

Dreicer v. Commissioner, supra at 645; sec. 1.183-2(a), Income

Tax Regs.

     Section 1.183-2(b), Income Tax Regs., provides a

nonexclusive list of objective factors to be considered in

deciding whether an activity is engaged in for profit.    Allen v.

Commissioner, 72 T.C. 28, 33 (1979).   The factors are:   (1) The

manner in which the taxpayer carries on the activity; (2) the

expertise of the taxpayer or the taxpayer's 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 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.
                                 - 17 -


     No single factor is determinative, and all facts and

circumstances, including factors not listed, should be

considered.   Abramson v. Commissioner, 86 T.C. 360, 371 (1986);

sec. 1.183-2(b), Income Tax Regs.     Moreover, we do not resolve

the issue of profit objective by simply comparing the number of

factors indicating profit objective with those indicating the

lack of such an objective.    Sec. 1.183-2(b), Income Tax Regs.

     If gross income derived from a horse training or breeding

activity for 2 or more taxable years in a period of 7 consecutive

taxable years exceeds the deductions attributable to such

activity, then the activity is presumed to be an activity engaged

in for profit.    Sec. 183(d).   In the instant case, as gross

income from the activity did not exceed deductions from the

activity during any of the years in issue, petitioners are not

entitled to the presumption that Mr. Abbene's horse-related

activities were engaged in for profit.     Consequently, we address

the aforementioned factors to decide whether Mr. Abbene engaged

in his horse-related activities through the operation of Blue

Ribbon with an actual and honest profit objective during the

years in issue.

     1.   Manner in Which the Taxpayer Carried On the Activity

     The fact that the taxpayer carries on the activity in a

businesslike manner and maintains complete books and records may

indicate that the activity was engaged in for profit.     Sec.
                             - 18 -


1.183-2(b)(1), Income Tax Regs.    Changes in operating methods,

adoption of new techniques, or abandonment of unprofitable

methods in a manner consistent with an intent to improve

profitability may also indicate a profit motive.    Id.

     Petitioners contend that Mr. Abbene operated Blue Ribbon in

a businesslike manner because he:    (1) Hired a certified public

accountant to maintain Blue Ribbon's books and records, (2)

maintained a separate bank account for Blue Ribbon's

expenditures, (3) advertised Blue Ribbon's services, and (4)

devoted a great deal of time to the business.    Respondent argues

that these facts merely reveal the trappings of a for-profit

business and are outweighed by other facts indicating that Mr.

Abbene operated Blue Ribbon in a nonbusinesslike manner.

Respondent contends that Mr. Abbene failed to operate Blue Ribbon

in a businesslike manner because he failed to prepare or maintain

any type of formal business plans, budgets, operating statements,

or analyses of Blue Ribbon's records to determine how to make

Blue Ribbon a profitable enterprise.    Respondent further contends

that Mr. Abbene's failure to implement any changes to the manner

in which he operated Blue Ribbon in order to improve its

profitability is evidence that he lacked the requisite profit

motive.

     We agree with respondent.    While the activity had some of

the "trappings" of a business, those trappings are insufficient
                               - 19 -


under the circumstances to demonstrate that the activity was

carried on for profit.   Although Mr. Abbene hired an accountant

to maintain Blue Ribbon's books and records, those books and

records may represent nothing more than a conscious attention to

detail.    Golanty v. Commissioner, 72 T.C. 411, 430 (1979), affd.

without published opinion 647 F.2d 170 (9th Cir. 1981).   In the

instant case there has been no showing that the books and records

were kept for the purpose of cutting expenses, increasing

profits, or evaluating the overall performance of the operation.

Id.   Mr. Abbene testified that he reviewed Blue Ribbon's records,

but he has failed to show that he used them to improve the

operation of the enterprise.    Id.

      Additionally, petitioners concede that, despite mounting

losses, Blue Ribbon was operated in substantially the same manner

from the time it was formed throughout all the years in issue.

We believe that if profit had been the motive, Mr. Abbene would

have either adopted new techniques or abandoned unprofitable

methods in an effort to improve Blue Ribbon's profitability.

Accordingly, we conclude that petitioners failed to establish

that Mr. Abbene operated Blue Ribbon in a businesslike manner.

      2.    The Expertise of the Taxpayer or the Taxpayer's
            Advisers

      A taxpayer's expertise, research, and study of an activity,

as well as his consultation with experts may be indicative of a

profit motive.    Sec. 1.183-2(b)(2), Income Tax Regs.
                               - 20 -


     Petitioners contend that Mr. Abbene possessed the requisite

expertise to operate Blue Ribbon in a profitable manner, and that

he regularly consulted others who had expertise in the activity.

Respondent argues that Mr. Abbene lacked expertise with respect

to the economics of running a profitable horse farm, and that

petitioners failed to present any evidence that Mr. Abbene

consulted outside experts in an effort to improve Blue Ribbon's

profitability.

     We agree with respondent.   Mr. Abbene, a longstanding member

of several horseman's associations, has owned horses for most of

his adult life.   We do not doubt his expertise and knowledge

about horses.    Mr. Abbene's expertise, however, did not focus on

the economic aspects of the activities in which Blue Ribbon

engaged.   Petitioners made no showing that Mr. Abbene undertook a

study of the accepted business and economic practices with

respect to the activities of his horse farm or that he consulted

with outside experts concerning the profitability of Blue Ribbon.

Petitioners failed to show that Mr. Abbene sought or acquired the

expertise that would enable him to turn his horse farm into a

profitable business.   See Golanty v. Commissioner, supra at 432.

The failure to seek professional advice is another factor that

indicates a lack of profit motive.      Id.
                               - 21 -


     3.   The Time and Effort Expended by the Taxpayer in
          Carrying On the Activity

     The fact that the taxpayer devotes much of his personal time

and effort to carrying on an activity, particularly if the

activity does not have substantial personal or recreational

aspects, may indicate an intention to derive a profit.   Sec.

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

     Petitioners contend that Mr. Abbene devoted a considerable

amount of time and effort to the operation of Blue Ribbon which

is indicative of a profit motive.   Respondent argues that

petitioners failed to establish the amount of time that Mr.

Abbene devoted to the operation of Blue Ribbon or that he

employed competent and qualified persons to oversee the day-to-

day operations of Blue Ribbon in his absence.   See sec. 1.183-

2(b)(3), Income Tax Regs.   Respondent contends that Mr. Abbene's

responsibilities to his employer, Pride Chemicals, would

necessarily limit the amount of time that he was able to devote

to Blue Ribbon's activities.

     Although the record does not support a finding of the exact

amount of time that Mr. Abbene spent working for Blue Ribbon, we

are convinced that it was substantial.   The record indicates that

Mr. Abbene and Elena managed all aspects of Blue Ribbon's

operations.   Mr. Abbene devoted his evenings, weekends, and much
                              - 22 -


of his vacation time to operating Blue Ribbon.   Therefore,

despite Mr. Abbene's outside employment with Pride Chemicals, we

conclude that the time and effort expended by Mr. Abbene is a

factor that favors petitioners.

     4.   Expectation That Assets Used in the Activity May
          Appreciate in Value

     An expectation that assets used in the activity may

appreciate in value may be an indication of a profit objective.

Engdahl v. Commissioner, 72 T.C. 659, 668 (1979); sec. 1.183-

2(b)(4), Income Tax Regs.

     Respondent argues that petitioners had no expectation of

asset appreciation.   Petitioners contend that they sincerely and

reasonably believed that the property and the horses used in Blue

Ribbon's operations would appreciate in value.

     Petitioners contend that the property had nearly doubled in

value since its acquisition in 1975.   Although petitioners point

to the value of the property, we do not consider it to be

relevant to the issue of Mr. Abbene's profit objective with

respect to his horse-related activities.   While the term "profit"

may contemplate appreciation in the value of assets, including

land, used in the activity, sec. 1.183-2(b)(4), Income Tax Regs.,

the holding of land for appreciation will generally be considered

a separate activity for purposes of ascertaining a profit motive
                              - 23 -


where there is no net income from the activity to reduce the cost

of carrying the land for appreciation, see sec. 1.183-1(d)(1),

Income Tax Regs.

     We conclude that the property and Mr. Abbene's horse-related

activities are not to be considered a single activity.    During

the years in issue, the operation of Blue Ribbon did not reduce

the net cost of carrying the property for its appreciation in

value.   Sec. 1.183-1(d)(1), Income Tax Regs.   Accordingly, we

consider the horse-related activities, on the one hand, and the

property, on the other hand, as separate activities in deciding

whether a profit objective existed.

     Petitioners concede that, during and after the years in

issue, the horses used in Blue Ribbon's operations actually

declined in value.   Petitioners argue, however, that initially

they believed King Lion and Magic Moment would appreciate in

value as a result of winning horse shows, and that Spectacular

Rhythm and Nakita would appreciate in value if successfully bred.

Hindsight, petitioners argue, does not change the fact that they

started out with a reasonable expectation of appreciation.

Moreover, petitioners contend that the decrease in value was due

to circumstances beyond their control.   Specifically, petitioners
                             - 24 -


contend that King Lion and Magic Moment both suffered injury and

that Nakita suffered from fertility problems.

     Petitioners presented no evidence in support of Mr. Abbene's

testimony that he initially expected King Lion, Magic Moment,

Spectacular Rhythm, or Nakita to increase in value.   By

petitioners' own admission, the horses actually decreased in

value during and after the years in issue.    Although petitioners

contend that King Lion and Magic Moment both suffered injuries

and illness17 that prevented them from being actively shown

during the years in issue, they offered no evidence regarding the

nature or extent of the purported injuries.   Moreover, the record

is devoid of any evidence of the value of the horses had they

remained healthy, and we cannot ignore the fact that Blue Ribbon

was never profitable even when King Lion and Magic Moment were in

full health.

     Petitioners contend that they expected Spectacular Rhythm

and Nakita to increase in value if they were successfully bred.

Petitioners, however, offered no evidence that they implemented

any type of breeding plan or method for acquiring horses

appropriate for breeding purposes.    Although Spectacular Rhythm



17
     King Lion contracted pleurisy and pneumonia during 1993 when
he went to Texas with the Olympic team.
                               - 25 -


successfully produced one foal, albeit one of limited value,

petitioners concede that Mr. Abbene made no further attempt to

breed Spectacular Rhythm.    Petitioners assert that Mr. Abbene

encountered difficulties breeding Nakita.    Yet, aside from a

vague reference to fertility problems, the record is devoid of

any evidence regarding any specific attempts to breed Nakita

during the years in issue.    We conclude that there is no evidence

in the record that justifies Mr. Abbene's claimed expectation of

appreciation in the value of the horses used in Blue Ribbon's

operations.

     Moreover, it is necessary that the taxpayer's objective be

to realize a profit on the entire operation.     Bessenyey v.

Commissioner, 45 T.C. 261, 274 (1965), affd. 379 F.2d 252 (2d

Cir. 1967).   This would require future net earnings and

appreciation sufficient to recoup the losses which the taxpayer

sustained in prior years.    Id.   Petitioners, however, failed to

produce any credible evidence that Blue Ribbon had any realistic

chance of recovering the excessive losses incurred since its

incorporation.   In fact, petitioners conceded that they do not

know when or whether Blue Ribbon will ever become profitable.

Accordingly, we conclude that the expectation of asset

appreciation is a factor that weighs against petitioners.
                               - 26 -


     5.     The Success of the Taxpayer in Carrying On Similar or
            Dissimilar Activities

     The fact that the taxpayer has engaged in similar activities

in the past and converted them from unprofitable to profitable

enterprises may indicate that he is engaged in the present

activity for profit, even though the activity is presently

unprofitable.    Sec. 1.183-2(b)(5), Income Tax Regs.

     It is uncontroverted that Mr. Abbene has never realized a

profit from his horse-related activities.    Petitioners contend,

however, that Mr. Abbene successfully engaged in a dissimilar

activity as a sales representative in the chemical industry.

     While the record contains no evidence, aside from Mr.

Abbene's testimony that he increased his chemical sales from $1

million to $3.5 million annually during his tenure with Pride

Chemicals, we believe that Mr. Abbene enjoyed some degree of

success as is evidenced by his substantial income.      There is,

however, no evidence to suggest that Mr. Abbene's acquired

business expertise was used in the operation of Blue Ribbon.

Moreover, we see few, if any, similarities between selling

chemicals and operating a horse farm.    Accordingly, we attach

minimal significance to Mr. Abbene's success as a chemical

salesman.
                                - 27 -



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

     A record of substantial losses over several years may be

indicative of the absence of a profit motive.     Golanty v.

Commissioner, 72 T.C. at 426.    A series of losses during the

initial or startup stage of an activity, however, may not

necessarily be an indication that the activity is not engaged in

for profit.   Sec. 1.183-2(b)(6), Income Tax Regs.   Moreover, if

losses are sustained because of unforeseen or fortuitous

circumstances which are beyond the control of the taxpayer, such

losses would not be an indication that the activity was not

engaged in for profit.   Id.    Petitioners assert that Blue

Ribbon's losses were incurred during its startup stage and that

the losses were due, in part, to circumstances beyond their

control.

     Although the presence of losses in the early years of an

activity is not inconsistent with an intention to make a profit,

the goal must be to realize a profit on the entire operation,

Bessenyey v. Commissioner, supra at 274, a proposition that

presupposes not only future net earnings but also sufficient net

earnings to recoup the losses which have meanwhile been sustained

in the intervening years, id.
                               - 28 -


     Petitioners argue that Mr. Abbene expected current profits

from the use of his horses by ABC because ABC promised "many,

many more jobs" and that he hoped that such work would provide a

springboard to additional similar work.    Petitioners, however,

offered no evidence to substantiate that expectation.    Blue

Ribbon contracted with ABC on two occasions during 1989.    It is

uncontroverted, however, that ABC had no further dealings with

either Mr. Abbene or Blue Ribbon after the February 1989

agreement to rent King Lion.   Moreover, James Balzaretti, the ABC

employee responsible for procuring props needed for the

production of AMC, testified that he had no recollection that ABC

made any promises that it would use Blue Ribbon for further film

work.   In fact, he indicated that subsequent to the episode

filmed during February 1989, no horses were needed for the

production of AMC.   Additionally, there is nothing in the record

to indicate that Mr. Abbene actively sought additional film and

television work after February 1989.    In light of those

circumstances and given the magnitude of Blue Ribbon's losses in

relation to the income generated from its activities, we are

unpersuaded that Blue Ribbon was likely to ever make a profit,

much less recoup its past losses.
                              - 29 -


     Petitioners attribute Blue Ribbon's losses to certain

circumstances beyond their control.     Petitioners argue that Mr.

Abbene's profit expectations were undermined because ABC failed

to make good on its promise to provide additional film and

television work.   Aside from Mr. Abbene's testimony, however, the

record contains no evidence to corroborate the contention that

ABC did in fact promise additional jobs.     Petitioners further

contend that the Local 52 strike hampered Mr. Abbene's efforts to

obtain further film and television work.     The Local 52 strike,

however, began in November of 1990, more than a year and a half

after the last agreement between Blue Ribbon and ABC.     As

discussed supra p. 28, there is no indication that Mr. Abbene

sought further film and television work after February 1989.

Thus, we cannot conclude that the strike negatively affected the

performance of Blue Ribbon.

     Petitioners further attribute Blue Ribbon's losses to the

fact that two of their prize horses suffered from injury and

illness during the years in issue.     We recognize that the

injuries purportedly suffered by King Lion and Magic Moment could

have negatively affected Blue Ribbon's operations.     As discussed

supra p. 24, however, petitioners failed to offer any evidence

concerning the nature or extent of the injuries suffered.
                                - 30 -


Moreover, petitioners made no showing that Blue Ribbon would have

been profitable had the horses not suffered injury.      See, e.g.,

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

Memo. 1985-523.

     7.   The Amount of Occasional Profits, If Any, Which Were
          Earned

     The amount and frequency of occasional profits earned from

the activity may also indicate a profit objective.    Sec. 1.183-

2(b)(7), Income Tax Regs.    It is uncontroverted that Blue Ribbon

never reported a profit from its horse-related activities.     The

occasional revenues Blue Ribbon generated from horse shows and

the provision of riding lessons during the years in issue were de

minimis compared to the expenses and depreciation incurred.

Nonetheless, petitioners contend that the opportunity to earn a

substantial ultimate profit in a highly speculative venture is

ordinarily sufficient to indicate that the activity is engaged in

for profit even though losses or only occasional profits are

actually produced.    Id.   Additionally, petitioners contend that a

small chance of making a large profit may indicate the requisite

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

Petitioners, however, offered no evidence to indicate that Blue

Ribbon stood to earn a large or substantial profit during the
                               - 31 -


years in issue.   Accordingly, we conclude that the frequency of

occasional profits is a factor that favors respondent.

     8.   The Financial Status of the Taxpayer

     Substantial income from sources other than the activity,

particularly if the losses from the activity generate substantial

tax benefits, may indicate that the activity is not engaged in

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

     Petitioners concede that, during the years in issue, they

enjoyed a relatively high level of income from Mr. Abbene's

employment with Pride Chemicals.    Petitioners assert, however,

that, without a profit motive, their income could not justify or

sustain the type and size of expenditures that they incurred over

the years.    Respondent contends that petitioners' substantial

income from their regular employment allowed them to continue

operating Blue Ribbon despite the heavy losses incurred each

year.

     We agree with respondent.    Petitioners reported combined

gross income in the amounts of $134,629, $112,136, and $110,245

for 1990, 1991, and 1992, respectively.     Clearly, there is no

benefit to losing money when the resulting tax savings represent

less than 100 percent of the loss.      Engdahl v. Commissioner, 72

T.C. at 670.    Petitioners' substantial income, however, enabled
                               - 32 -


them to continue to operate Blue Ribbon notwithstanding its heavy

losses and to seek to have the Government subsidize a portion of

its costs.   See, e.g., Gircsis v. Commissioner, T.C. Memo. 1992-

244; Purdey v. Commissioner, T.C. Memo. 1989-657, affd. without

published opinion 922 F.2d 833 (3d Cir. 1990).

     9.     Elements of Personal Pleasure or Recreation

     The presence of personal motives in the carrying on of an

activity may indicate that the activity is not engaged in for

profit, especially where there are recreational or personal

elements involved.    Sec. 1.183-2(b)(9), Income Tax Regs.

     Petitioners concede that Mr. Abbene derived pleasure from

his horse-related activities but argue that his love of horses

does not indicate a lack of profit motive.    To the contrary,

petitioners contend that Mr. Abbene’s prior investment of time,

love, and money formed a natural basis from which to enter into a

business.

     To be sure, enjoyment of one's work is not inconsistent with

a profit motive.    See Jackson v. Commissioner, 59 T.C. 312, 317

(1972).   On the record before us, however, we are not convinced

that either Blue Ribbon or Mr. Abbene engaged in the horse-

related activities with an actual and honest profit objective.

Accordingly, Blue Ribbon is not entitled to take deductions for
                             - 33 -


business expenses and depreciation in excess of income.

Consequently, Mr. Abbene's distributive share of Blue Ribbon's

operating losses is zero.

     Finally, we turn our attention to the section 1231 loss

claimed by Blue Ribbon on its 1991 Form 1120S and by petitioners

on their 1991 joint Federal income tax return.     The loss in issue

arose out of the destruction of Magic Moment, Mr. Abbene's horse.

Section 1231 permits deductions for losses sustained from the

sale or exchange of property used in a trade or business.    To be

engaged in a trade or business, the taxpayer must engage in an

activity with continuity and with the primary purpose of

realizing income or a profit from it.    Sec. 162; Commissioner v.

Groetzinger, 480 U.S. 23, 35 (1987).    Because Blue Ribbon did not

engage in the horse-related activities with the requisite profit

motive, the horse was not property used in a trade or business.

See Budin v. Commissioner, T.C. Memo. 1994-185.     Accordingly, we

sustain respondent’s determination on this issue.

     We have considered the parties' remaining arguments and

conclude that the arguments are either without merit or

unnecessary to reach.

     To reflect the foregoing,

                                      Decision will be entered

                                 for respondent.
