                      T.C. Memo. 1997-417



                  UNITED STATES TAX COURT



    KENNETH E. PERRY AND MARY A. HOFER, Petitioners v.
       COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 21336-94.          Filed September 18, 1997.



     Bruce W. Powell and Michael H. Gertner, for

petitioners.

     John J. Boyle, for respondent.



          MEMORANDUM FINDINGS OF FACT AND OPINION

     WHALEN, Judge:   Respondent determined the following

deficiencies in and additions to petitioners' joint Federal

income tax for the years in issue:
                                      - 2 -
                                           Additions to Tax
                                    Sec.           Sec.          Sec.
       Year       Deficiency   6653(a)(1)(A) 6653(a)(1)(B)    6653(a)(1)
                                                    1
       1986       $1,575.26       $78.86                         --
       1988        6,649.00         --             --          $332.45
            1
              Plus 50 percent of the interest payable under sec.
       6601 with respect to the portion of the underpayment which
       is attributable to negligence.


All section references are to the Internal Revenue Code as

in effect during the years in issue.               Respondent also

determined the following deficiencies in, additions to, and

penalty on petitioner Kenneth E. Perry's separate Federal

income tax for the years in issue:


                                      Additions to Tax          Penalty
                                    Sec.           Sec.
       Year       Deficiency   6653(a)(1)(A) 6653(a)(1)(B)     Sec. 6662
                                                    1
       1987       $3,920          $196                           --
       1989        4,020           --              --            $804
       1990          825           --              --             165
       1991        1,367           --              --             273
              1
              Plus 50 percent of the interest payable under sec.
       6601 with respect to the portion of the underpayment which
       is attributable to negligence.


       After concessions, the issues remaining for decision

are:    (1) Whether petitioners' horse breeding and boarding

activity during 1986 and 1988 was an "activity not engaged

in for profit" within the meaning of section 183; (2)

whether petitioner Kenneth E. Perry's horse breeding and

boarding activity during 1987, 1989, 1990, and 1991 was an

"activity not engaged in for profit" within the meaning of

section 183; (3) whether petitioners are liable for the
                              - 3 -

additions to tax for negligence prescribed by sections

6653(a)(1)(A) and (B) and 6653(a)(1) with respect to their

1986 and 1988 returns; (4) whether petitioner Kenneth E.

Perry is liable for the additions to tax for negligence

prescribed by section 6653(a)(1)(A) and (B) with respect to

his 1987 return; and (5) whether petitioner Kenneth E.

Perry is liable for the accuracy-related penalty prescribed

by section 6662 with respect to his 1989, 1990, and 1991

returns.

                        FINDINGS OF FACT

     Some of the facts have been stipulated and are so

found.     The stipulation of facts and attached exhibits are

incorporated herein by this reference.     Petitioners are

husband and wife who filed joint Federal income tax returns

for 1986 and 1988.     Petitioner Kenneth E. Perry filed

separate Federal income tax returns for 1987, 1989, 1990,

and 1991.     At the time they filed their petition in this

case, petitioners resided in Brookville, Ohio.

     Petitioners were both raised on family farms, and

both have been around horses most of their lives.

Mr. Perry learned to break and care for horses when he

was 10 to 12 years old and was involved in purchasing,

breeding, training, and selling horses with his father and

brother for over 20 years prior to 1986.     Ms. Hofer also

learned to break and care for horses at a very young age
                            - 4 -

and was also involved in purchasing, breeding, training,

and selling horses for some time prior to the years in

issue.

     Mr. Perry studied business administration and

industrial management at Franklin University, Dayton

University, Michigan State University, and San Jose

State University.   The record does not disclose whether

he received a degree from any of these institutions.

Mr. Perry began working for the General Motors Corp.

sometime in or around the mid-1970's.

     Ms. Hofer holds a dual bachelor's degree in

production operative management and logistics from Ohio

State University.   In 1984, she began working as a

production supervisor for General Motors.   Mr. Perry and

Ms. Hofer became acquainted in 1984 through their mutual

employment with General Motors and were married sometime

prior to 1986.   Petitioners subsequently had two children

together, Muriel, born December 9, 1987, and Lauren, born

October 9, 1989.

     Petitioners were both full-time employees of General

Motors throughout the years in issue.   Petitioners received

the following wages from their employment with General

Motors during the years in issue:
                               - 5 -

         Year       Mr. Perry     Ms. Hofer     Total

         1986        $56,140       $40,608     $96,748
         1987         52,014        39,910      91,924
         1988         52,485        43,064      95,549
         1989         55,167        43,358      98,525
         1990         61,487        45,562     107,049
         1991         56,905        48,653     105,558


Mr. Perry retired from General Motors in 1995.      At the

time of trial, Ms. Hofer was on dependent care leave and

did not wish to return to work.

     At the time they were married, petitioners planned

to acquire a farm and raise horses.      Before implementing

this plan, petitioners had at least one conversation with

Mr. John Adkins, who had extensive experience breeding

Tennessee Walking Horses.      Based on their discussions with

Mr. Adkins and their prior experience, petitioners decided

to acquire and develop a breeding stock of registered

Tennessee Walking Horses.      Petitioners knew that the

undertaking would require a substantial outlay of cash and

that there was a significant likelihood of losses during

the early stages.   However, petitioners did not have a

formal business plan or income projection at the time they

began the undertaking.   Petitioners believed that they

could create a self-sustaining breeding operation by

acquiring and developing sufficient real estate, planting

appropriate crops, and acquiring attractive horses.        At the

time they began their horse-related operation, petitioners
                             - 6 -

believed that they could eventually generate a profit of

approximately $8,000 to $10,000 per year.

     Petitioners began their horse-related operation on

June 28, 1986, when they acquired a registered Tennessee

Walking Horse stallion from Mr. Adkins.    After purchasing

this stallion, petitioners acquired and developed various

parcels of real property to facilitate their activity.      In

the following discussion, we describe petitioners' real

estate transactions before describing their acquisitions

and transfers of horses.


Real Estate Transactions

     On November 21, 1986, petitioners purchased 1.72 acres

of real estate located in Union County, Ohio, for a total

price of $103,733.95.    Petitioners satisfied $11,855.24 of

the purchase price with cash and executed a promissory note

for the balance.   Petitioner obtained a portion of the cash

downpayment from a savings account and obtained the

remainder by cashing in Mr. Perry's retirement options and

Ms. Hofer's stock options with General Motors.    The 1.72-

acre parcel included a small house which petitioners used

as their personal residence from the time they acquired the

property until 1994.    Petitioners constructed a small barn

and two separate paddocks on the 1.72-acre parcel.    The

barn consisted of two open stalls and a separate area for
                           - 7 -

storing hay and was completed in early 1987 at a total

cost of approximately $13,000.

     On or about June 15, 1987, petitioners purchased

4 additional acres of real estate contiguous to the 1.72-

acre parcel for a total price of $10,000.    The party from

whom petitioners purchased this land retained the right to

harvest a crop already growing on the property.    In 1988,

after this crop was harvested, petitioners tilled the soil

and converted the land to pasture.    Petitioners also

constructed a second, larger barn on the 4-acre parcel.

This barn consisted of six bay stalls, one wash stall, a

tack room, and an "open run-in".   The barn was completed

in 1989 at a total cost of $30,700.

     On or about April 15, 1989, petitioners purchased

an additional 19.491 acres of land contiguous to the

4-acre parcel and adjacent to the 1.72-acre parcel for

a total price of $48,727.50.   Shortly thereafter,

petitioners prepared a portion of the land for pasture

and the remainder for cultivating alfalfa.    Petitioners

did not erect any structures on the 19.491-acre parcel.

     Between 1986 and 1990, petitioners converted a total

of approximately 24 acres of the Union County real estate

from tillage to pasture and hay fields.    Due to severe

drought conditions in 1987 and 1988, the pastures and hay

fields were not productive as sources of feed for
                             - 8 -

petitioners' horses until 1990.      These drought conditions

also caused an increase in the cost of feed and depressed

the market for horses.

     In 1994, General Motors transferred Ms. Hofer to its

plant in Dayton, Ohio.    Because of this transfer, and

because Mr. Perry was planning to retire from General

Motors in 1995, petitioners decided to relocate their

home and horse breeding operation to a location nearer

Ms. Hofer's work.   On or about June 3, 1994, petitioners

purchased 20 acres of real estate located in Montgomery

County, Ohio, for a total price of $141,273.14.      This

included a house which petitioners used as their personal

residence from the time of the purchase up to the time of

trial, and a "home barn".

     After acquiring the Montgomery County property,

petitioners began selling their real estate in Union

County.   On or about July 26, 1994, petitioners sold the

1.72- and 4-acre parcels, together with the house and

barns, for a total price of $212,500.      In December 1995,

petitioners sold 10 of the remaining 19.491 acres for a

total price of $35,000.    At the time of trial, petitioners

were offering the remaining 9.491 acres for sale in three

parcels for a total price of $83,000.      Petitioners were

also continuing to cultivate alfalfa on the remaining Union
                              - 9 -

County property and intended to plant corn on 15 to 18

acres of their Montgomery County property.


Horse Acquisitions, Transactions, and Related Facts

     Petitioners acquired, bred, boarded, and sold numerous

horses during the years in issue.     These included Tennessee

Walking Horses, thoroughbreds, and one Morgan.     To avoid

confusion, we discuss each breed separately.


Tennessee Walking Horses

     On June 28, 1986, petitioners purchased a 12-year-old

registered Tennessee Walking Horse stallion named Copy's

Big Shot S (Big Shot) from Mr. Adkins for $1,500.     At the

time of purchase, petitioners intended to use Big Shot as

a breeding stallion.   Although Big Shot suffered from a

bronchial condition, petitioners believed that $1,500

was a favorable price given the horse's bloodline and

"confirmation".   Big Shot sired a total of eight foals

for petitioners before his death in 1992.

     On October 15, 1987, petitioners purchased a 1-year-

old Tennessee Walking Horse mare named Copy's Sugar Plum

(Sugar Plum) for $300.   At the time of purchase,

petitioners intended to use Sugar Plum as a broodmare.

Sugar Plum produced a total of five foals for petitioners

prior to the time of trial.    One of these foals was killed

in 1991 after suffering a broken leg.     Petitioners sold
                             - 10 -

Sugar Plum's second foal, a gelding named Copy's Black

Prince, for $650 in 1993 after determining that it lacked

adequate confirmation.    Also in 1993, petitioners sold

another of Sugar Plum's foals, a filly named Copy's Sugar

Shot, for $1,000.    At the time of trial, petitioners were

using Sugar Plum and two of its offspring, Copy's Allen

Rose and Copy's Eyote Anoka, as broodmares.

     In 1988, petitioners purchased an unregistered

Tennessee Walking Horse mare named Amy for $1,000.     Amy

was in foal at the time of petitioners' purchase and

subsequently gave birth.    In 1989, after determining that

it was not economically feasible to register Amy or the

foal, petitioners sold both horses for a total price of

$500.

     Also in 1988, petitioners purchased a registered

Tennessee Walking Horse mare named Damon's Red Lady for

$650.    Damon's Red Lady subsequently produced three foals

for petitioners.    Petitioners sold the first of these

foals, Shot Strutter, for $650 in 1991.     The purchaser

thereafter paid petitioners to board Shot Strutter on

their property.


Thoroughbreds

        Sometime in 1987, petitioners acquired two thorough-

bred mares named Spiro Gyro and Queens Dynasty for $500
                             - 11 -

each.    At the time of purchase, petitioners erroneously

believed that both mares were in foal.     Petitioners later

learned that neither mare was in foal.     They sold Queens

Dynasty for $75 after she became ill.    They bred Spiro

Gyro, who produced a foal named Flying Footprint in 1989,

and sold Spiro Gyro in 1990 for $500.    In 1991, after

determining that breeding thoroughbreds would not be

profitable, petitioners sold Flying Footprint for $1,000.

However, petitioners repossessed Flying Footprint after

receiving only $150 of the purchase price and resold the

horse to a second buyer in 1992 for $1,000.


Morgan

        Sometime in 1988, petitioners purchased a registered

Morgan mare named Dancer for $300.     Petitioners sold Dancer

in early 1989 for $375.     The purchaser thereafter paid

petitioners to board Dancer on their property.     The record

does not disclose the fee petitioners received for this

service.

        Petitioners are members of the Tennessee Walking Horse

Breeders and Exhibitors Association.     With the exception of

veterinary and complicated farrier services, petitioners

personally performed all of the tasks attendant to their

horse-related activity during the years in issue, including

feeding and watering, grooming, inoculations, hoof care,
                                          - 12 -

foaling, and breaking.             Petitioners have never shown any of

their horses in competitions and do not ride their horses

for recreation.

      Petitioners advertised their horse-related operation

by placing a sign near a road which runs adjacent to their

property.       This sign reads "Tennessee Walking Horses

boarded and stud [sic] and for sale".                      Petitioners also

periodically placed advertisements in local magazines and

newspapers when they desired to sell a foal or offer a

stallion for stud services.


Income and Losses

      Petitioners reported a net loss from their horse-

related operation during each of the years in issue,

calculated as follows:
                        1986       1987        1988        1989      1990      1991
Income:

  Sale of horses         --         --           $75        $875      $250      $500
  Boarding fees                                 --          --       1,200     1,000
  Sale of alfalfa         --        --          --          --       2,599       --
  Sale of hay             --        --          --          --         --      1,700
  Sale of tractor         --        --          --          --       1,600       --
  Unexplained income      --        --          --          --         --         70

Gross income             --         --               75      875     5,649     3,270

Expenses:

  Breeding fees          --        $(500)       --          (234)     --        --
  Depreciation &
    sec. 179             --       (1,308)     (3,363)     (3,321)   (3,692)   (3,203)
    expenses
  Feed purchased       $(1,886)   (5,019)     (7,596)     (3,153)     (880)   (1,083)
  Fertilizers & lime      --        --          --          --         --       (135)
  Freight & trucking       (50)     --          --          --         --        --
  Gasoline, fuel,
                          (280)     --          --          --        --        --
   oil
  Insurance               --        --          --          (250)     (250)      --
  Labor hired             --        --        (2,300)       --         --       (381)
  Rent of farm,
                          (990)     --          --          (500)     --        --
   pasture
  Repairs,
                          --        --          --          --        (923)     (589)
   maintenance
  Seeds, plants
                          (120)     --          (200)     (1,681)     --        --
   purchased
                                          - 13 -
                       1986        1987        1988        1989       1990      1991
  Storage,
                         --       (1,200)       --          --         --        --
   warehousing
  Supplies purchased     --         --        (3,500)     (1,045)      (162)     --
  Veterinary fees,
                          (85)    (1,658)     (1,347)       (504)      --        (507)
   medicine
  Other expenses        --          (516)     (5,450)     (1,975)     (874)      (550)

  Total expenses       (3,411)   (10,201)    (23,756)    (12,663)    (6,781)   (6,448)

Net income (loss)      (3,411)   (10,201)     (23,681)    (11,788)   (1,132)   (3,178)




Petitioners reported the losses in 1986 and 1988 on

Schedules F attached to their joint income tax returns.

Mr. Perry reported the losses in 1987, 1989, 1990, and

1991 on Schedules F attached to his individual income tax

returns.       We note that Mr. Perry's return reports gross

income of $3,270 for 1991, whereas the stipulation of facts

filed by the parties states that petitioner received only

$3,200 of gross income in that year.                      The record does not

disclose the reason for this discrepancy, and we accept the

figure stated in petitioner's return.                      The additional $70

which is not explained in the stipulation is listed as

"unexplained income" in the above schedule.                          Mr. Perry

reported net losses from his horse breeding and boarding

activity in 1992 and 1993 of $1,720 and $517, respectively,

and a net profit of $1,274 in 1994.

      Respondent began the examination of petitioners' tax

returns sometime in or around 1988.                      On December 19, 1989,

petitioners filed with respondent Form 5213, Election to

Postpone Determination as to Whether the Presumption That

an Activity is Engaged in for Profit Applies, for an
                            - 14 -

activity described as "Breeding and showing horses"

beginning with the 1986 tax year.


Books and Records

       Initially, petitioners' financial record keeping

consisted of retaining receipts of expenses related to the

horse activity in a box in their home.    At the end of the

year, petitioners would sort through these receipts with an

accountant to calculate their tax liability.    In or around

1988, after the start of respondent's audit, petitioners

began recording receipts and expenditures related to their

horse operation on a calendar where they also recorded

important events such as the dates foals were born and the

dates of inoculations.    In or around 1989, petitioners also

began transferring these records to financial ledgers.

Petitioners did not maintain a separate bank account for

their horserelated activity during any of the years in

issue and did not introduce any of their financial records

into evidence.

                            OPINION

Section 183

       The primary factual issue in this case is whether

petitioners' horse breeding and boarding operation was an

"activity not engaged in for profit" as defined by section

183.    Section 183(a) provides generally that in the case of
                           - 15 -

an individual or an S corporation no deduction attributable

to an activity which is not engaged for profit is allowed

except as provided in section 183(b).   Section 183(b)(1)

allows the deductions which would be allowable without

regard to whether the activity is engaged in for profit.

Section 183(b)(2) allows a deduction equal to the amount of

the deductions that would be allowable for the taxable year

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

extent the gross income derived from the activity exceeds

the deductions allowable under section 183(b)(1).

     Section 183(c) defines "activity 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."

The test for determining whether an activity is engaged in

for profit is whether the individual is engaged in the

activity with "the actual and honest objective of making a

profit".   See Dreicer v. Commissioner, 78 T.C. 642, 645

(1982), affd. without published opinion 702 F.2d 1205 (D.C.

Cir. 1983); Brannen v. Commissioner, 78 T.C. 471, 502

(1982), affd. 722 F.2d 695 (11th Cir. 1984); Allen v.

Commissioner, 72 T.C. 28, 33 (1979).    Although a taxpayer

need not have a reasonable expectation of earning a profit,

he must have entered into or continued the activity with a

bona fide objective of doing so.    See Keanini v. Commis-
                           - 16 -

sioner, 94 T.C. 41, 46 (1990); Hulter v. Commissioner, 91

T.C. 371, 393 (1988); Beck v. Commissioner, 85 T.C. 557,

569 (1985); Dreicer v. Commissioner, supra; Golanty v.

Commissioner, 72 T.C. 411, 425-426 (1979), affd. without

published opinion 647 F.2d 170 (9th Cir. 1981); sec. 1.183-

2(a), Income Tax Regs.   "Profit" in this context means

economic profit, independent of tax savings.    See Hayden

v. Commissioner, 889 F.2d 1548, 1552 (6th Cir. 1989), affg.

T.C. Memo. 1988-310; Antonides v. Commissioner, 91 T.C.

686, 694 (1988), affd. 893 F.2d 656 (4th Cir. 1990);

Landry v. Commissioner, 86 T.C. 1284, 1303 (1986).

     Whether a taxpayer engages in an activity with the

requisite profit motive is a question of fact to be

resolved on a consideration of all the facts and circum-

stances in the record.   See Lemmen v. Commissioner, 77

T.C. 1326, 1340 (1981); Allen v. Commissioner, supra; sec.

1.183-2(b), Income Tax Regs.   Petitioners bear the burden

of proving that they engaged in the subject activity with

the requisite profit motive, and greater weight is given to

objective facts than to petitioners' mere statement of

intent.   See Rule 142(a); Siegel v. Commissioner, 78 T.C.

659, 699 (1982); Churchman v. Commissioner, 68 T.C. 696,

701 (1977); sec. 1.183-2(a), Income Tax Regs.   All Rule

references are to the Tax Court Rules of Practice and

Procedure.
                           - 17 -


Single Activity

      Before determining whether, and to what extent,

section 183 and the regulations thereunder apply, the

activity or activities of the taxpayer must be ascertained.

Sec. 1.183-1(d)(1), Income Tax Regs.   In making this

determination, the general rule is that we must take all

the facts and circumstances of the case into account.

Id.   The regulations provide as follows:


      In ascertaining the activity or activities of
      the taxpayer, all the facts and circumstances of
      the case must be taken into account. Generally,
      the most significant facts and circumstances in
      making this determination are the degree of
      organizational and economic interrelationship
      of various undertakings, the business purpose
      which is (or might be) served by carrying on
      the various undertakings separately or together
      in a trade or business or in an investment
      setting, and the similarity of various under-
      takings. Generally, the Commissioner will accept
      the characterization by the taxpayer of several
      undertakings either as a single activity or as
      separate activities. The taxpayer's characteri-
      zation will not be accepted, however, when it
      appears that his characterization is artificial
      and cannot be reasonably supported under the
      facts and circumstances of the case. [Id.]


      Petitioners characterize all of the undertakings

relating to their horse breeding and boarding, including

holding the land on which those undertakings were

conducted, as a single activity for section 183 purposes.

Respondent, on the other hand, contends that petitioners'
                           - 18 -

holding the land for its appreciation in value should be

treated as a separate activity.     Respondent maintains that

any appreciation in the value of the Union County property

"is clearly not the result of, or even related to, the

horse-related activity."   Respondent also takes the

position that this appreciation was not attributable to

petitioners' horse breeding and boarding.     Respondent

argues that any appreciation in the value of the land

should therefore not be considered in determining whether

petitioners engaged in horse breeding and boarding with

the requisite profit motive.

     Section 1.183-1(d)(1), Income Tax Regs., provides the

following guidance for determining whether "farming" and

the holding of the farm land will be considered a single

activity:


     Where land is purchased or held primarily with
     the intent to profit from increase in its value,
     and the taxpayer also engages in farming on such
     land, the farming and the holding of the land
     will ordinarily be considered a single activity
     only if the farming activity reduces the net cost
     of carrying the land for its appreciation in
     value. Thus, the farming and holding of the
     land will be considered a single activity only
     if the income derived from farming exceeds the
     deductions attributable to the farming activity
     which are not directly attributable to the
     holding of the land (that is, deductions other
     than those directly attributable to the holding
     of the land such as interest on a mortgage
     secured by the land, annual property taxes
     attributable to the land and improvements,
     and depreciation of improvements to the land).
                           - 19 -


     Under its terms, the above rule applies only where

"land is purchased or held primarily with the intent to

profit from increase in its value".    See Engdahl v.

Commissioner, 72 T.C. 659, 668 n.4 (1979); Eldridge v.

Commissioner, T.C. Memo. 1995-384; Hoyle v. Commissioner,

T.C. Memo. 1994-592; Harston v. Commissioner, T.C. Memo.

1990-538, affd. without published opinion 936 F.2d 570 (5th

Cir. 1991); Fields v. Commissioner, T.C. Memo. 1981-550;

sec. 1.183-1(d)(1), Income Tax Regs.   "If the taxpayer's

primary intent is not to profit from appreciation of the

land, then the general rule of the regulation applies in

determining whether there is a single activity."    Hoyle v.

Commissioner, supra.   Under the general rule, all facts and

circumstances are taken into account in determining whether

several undertakings constitute one activity for purposes

of section 183.

     In this case, we find that petitioners' primary intent

was not to profit from the increase in the value of the

land used to conduct their horse breeding and boarding.

Rather, petitioners' primary intent was to breed and board

horses.   Cf. Fields v. Commissioner, supra.   In determining

whether petitioners' horse breeding and boarding and their

holding of the land constitute a single activity, we apply

the general rule contained in section 1.183-1(d)(1), Income
                           - 20 -

Tax Regs., and take all facts and circumstances into

account.   See Hoyle v. Commissioner, supra.

     We find petitioners' characterization of their horse

breeding and boarding, and holding of the land as a single

activity to be fully supported by the facts of this case.

See generally Keanini v. Commissioner, supra at 46.

Petitioners purchased the subject land in Union County,

Ohio, for the purpose of breeding and boarding horses

thereon.   They considered the cost of the land as part of

the cost of the horse breeding and boarding undertakings.

Petitioners constructed horse barns on the land, and

converted the use of the land to pasture, alfalfa, and hay

fields for the purpose of grazing and feeding their horses.

Thus, a close organizational and economic relationship

exists between the breeding and boarding operation and the

holding of the land for appreciation in value.   Cf. id.;

sec. 1.183-1(d)(1), Income Tax Regs.


Factors Relating to the Horse Breeding and Boarding
Activity

     Section 1.183-2(b), Income Tax Regs., lists the

following factors relevant to determining whether an

activity is engaged in for profit:   (1) The manner in

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

expertise of the taxpayer or his advisors; (3) the time

and effort expended by the taxpayer in carrying on the
                             - 21 -

activity; (4) expectation that the assets used in the

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

taxpayer in carrying on similar or dissimilar activities;

(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 involved.    See also Smith v. Commissioner, 937

F.2d 1089, 1093 (6th Cir. 1991), revg. 91 T.C. 733 (1988).

These factors are not exclusive, and no single factor or

number of factors is conclusive in determining whether an

activity is engaged in for profit.      See Dreicer v.

Commissioner, 78 T.C. at 645; Vandeyacht v. Commissioner,

T.C. Memo. 1994-148; sec. 1.183-2(b), Income Tax Regs.


     1.     Manner in Which the Taxpayer Carried On the Activity

     Petitioners did not have a formal business plan or

income projection prior to the time they began their horse

breeding and boarding operation.      Petitioners also did not

introduce any of their financial books or records into

evidence.    Petitioners testified that during the initial

stages of their operation, they simply retained receipts

and invoices arising from the activity in a box, which they

sorted with their accountant at the end of the year to

calculate their income tax liability.      Both petitioners
                           - 22 -

also testified that in or around 1988, they began recording

receipts and expenditures related to the horse activity on

a calendar, and that they later began transferring these

records to a financial ledger.   Petitioners further

testified that they maintained meticulous records of events

relating to their horses, such as births and inoculations,

throughout the years in issue.   We find petitioners'

testimony credible in this regard.

     We note that petitioners stopped purchasing thorough-

breds when they determined that they could not profit from

that undertaking.   Petitioners also placed advertisements

in local newspapers and magazines when they desired to sell

a horse or offer a stallion for stud services.


     2.   Expertise of the Taxpayer or His Advisors

     Petitioners were both raised on family farms, and both

had extensive experience in purchasing, breeding, training,

and selling horses.   Petitioners also sought and followed

the advice of Mr. Adkins, an experienced breeder of

Tennessee Walking Horses, prior to the time they began

their horse breeding and boarding activity.   Moreover,

petitioners learned to inoculate their horses and perform

other basic health care procedures themselves.   Petitioners

also joined the Tennessee Walking Horse Breeders Associa-

tion and educated themselves on bloodlines and markets for
                             - 23 -

Tennessee Walking Horses.    Petitioners appeared at trial to

be generally knowledgeable about purchasing, breeding,

training, caring for, and selling horses.   In light of all

this, we find that petitioners did have sufficient

expertise to indicate that they engaged in their horse

breeding and boarding activity with an actual and honest

objective of making a profit.


     3.   Time and Effort Expended by the Taxpayer

     While petitioners were both full-time employees of

General Motors during the years in issue, petitioners lived

on the property where they pursued their horse breeding and

boarding activity, and they performed all of the work

necessary for the activity themselves, with the exception

of veterinary and complicated farrier services.


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

     Section 1.183-2(b)(4), Income Tax Regs., provides in

pertinent part as follows:


     The term "profit" encompasses appreciation
     in the value of assets, such as land, used in
     the activity. Thus, the taxpayer may intend
     to derive a profit from the operation of the
     activity, and may also intend that, even if no
     profit from current operations is derived, an
     overall profit will result when appreciation
     in the value of land used in the activity is
     realized since income from the activity
     together with the appreciation of land will
     exceed expenses of operation.
                            - 24 -


     In this case, we note that petitioners realized an

economic gain of approximately $65,000 when they sold their

Union County property in 1994, computed as follows:


    Sale Price

      5.72-acre parcel
       with barns              $212,500
      10-acre parcel             35,000

        Total price                        $247,500

    Purchase Price

      1.72-acre parcel         (103,734)
      Small barn                (13,000)
      4-acre parcel             (10,000)
      Large barn                (30,700)
                              1
      10-acre parcel            (25,000)

        Total price                        (182,434)

      Total economic gain                    65,066

          1
           For purposes of this calculation, we accept
     petitioners' allocation of approximately one-half
     of the total $48,727.50 paid for the 19.491-acre
     parcel to the 10-acre portion sold in 1994.


We also note that at the time of trial, petitioners were

offering for sale at a total price of $83,000 the remaining

9.491 acres of Union County property, in which they had

an unadjusted cost basis of $23,727.50.

     The economic gain petitioners realized on the sale of

the Union County property in 1994 more than offsets the

total $53,391 in operating losses they claimed during the
                           - 25 -

years in issue.   Thus, appreciation in the value of the

land used in the activity helps to explain petitioners'

willingness to continue their horse breeding and boarding

operation despite the operating losses sustained during the

years in issue.   Cf. Allen v. Commissioner, 72 T.C. at 36.

This is strong evidence that petitioners conducted that

activity with an honest and actual objective of making a

profit.   See, e.g., id.; Fields v. Commissioner, T.C. Memo.

1981-550; Sanderson v. Commissioner, T.C. Memo. 1964-284.


     5.   Success in Similar or Dissimilar Activities

     Petitioners both testified that they had been

involved in purchasing, breeding, training, and selling

horses in the past.   While there is no evidence in the

record to substantiate their success in these activities,

we find their testimony to be credible.   There is no

evidence that Mr. Perry or Ms. Hofer was successful in

any dissimilar investment or business activities.


     6.   History of Income or Losses

     Petitioners reported a net loss from their horse

activity during each of the years in issue.   We also note

that petitioners suffered 2 years of extreme drought,

during which they were unable to produce their own feed,

the market price of feed increased, and the market for

horses decreased.   Cf. Fields v. Commissioner, supra.     We
                               - 26 -

also note that petitioners made various attempts to improve

the profitability of their horse-related activity, such as

converting land to pasture and alfalfa, constructing fences

and barns, and attempting to acquire and acquiring mares in

foal.    Petitioners also withdrew from the thoroughbred

business when it proved unprofitable and focused their

attention on breeding Tennessee Walking Horses.


        7.    Amount of Occasional Profits

        Petitioners did not report a net profit during any of

the years in issue.       However, petitioners did report a net

profit of $1,274 in 1994 and testified at trial that they

expected to realize a profit of $8,000 to $10,000 per year

once they established a viable stock of Tennessee Walking

Horses for breeding.       We also note that petitioners' losses

decreased gradually between 1991 and 1995, and that they

realized substantial gains from the sale of the Union

County property in 1994.


        8.    Financial Status of the Taxpayer

        Although petitioners were both full-time employees of

General Motors throughout the years in issue, neither of

them earned particularly high wages during any of those

years.       Petitioners also testified that they were forced to

cash in their stock options and retirement options with

General Motors to finance the purchase of the Union County
                             - 27 -

property.    Moreover, petitioners had two minor children

during each of the years in issue.     We find that

petitioners did not have substantial income or capital

from sources other than their horse breeding and boarding

activity during the years in issue.


     9.     Elements of Personal Pleasure or Recreation

     Petitioners argue that they did not derive significant

personal pleasure or recreational benefits from their horse

breeding and boarding operation.      Petitioners point out that

their entire experience with horses was purely commercial,

and that they did not participate in any horse shows during

the years in issue.    Petitioners also point out that Big

Shot had a bronchial condition which caused him to be too

dangerous to ride.    Moreover, petitioners fed their horses

alfalfa, which they contend made the horses unfit for

riding, and did not shoe any of their horses.     We find

petitioners' testimony credible in this regard and find that

they did not ride their horses for pleasure or recreation.

However, petitioners both clearly enjoyed working with

horses and certainly derived some personal enjoyment from

their horse breeding and boarding activity.

     Upon consideration of all the facts and circumstances

of this case, we conclude that petitioners engaged in their

horse breeding and boarding activity with an honest and
                           - 28 -

actual objective of making a profit.   We therefore overrule

respondent's adjustments to petitioners' and Mr. Perry's

tax for the years in issue.

     We note that on the basis of the section 183 adjust-

ments to petitioners' returns, respondent also disallowed

the casualty and theft loss deductions claimed by

petitioners in 1986 and by Mr. Perry in 1987 because the

section 183 adjustments increased petitioners' and

Mr. Perry's adjusted gross income in those years and had

the effect of decreasing the amount of the casualty losses

that could be claimed.   See sec. 165(c)(3), (h)(2).

Respondent does not dispute that petitioners suffered the

casualty losses claimed in 1986 and 1987.   Therefore, by

reason of the fact that we have not sustained respondent as

to the section 183 adjustments discussed above, there is no

basis to adjust the casualty and theft losses claimed by

petitioners.


Additions to Tax and Penalty

     Respondent determined that petitioners are liable for

the additions to tax for negligence prescribed by sections

6653(a)(1)(A) and (B) and 6653(a)(1) with respect to their

1986 and 1988 returns, and that Mr. Perry is liable for

the additions to tax for negligence prescribed by section

6653(a)(1)(A) and (B) with respect to his 1987 return.
                          - 29 -

Respondent also determined that Mr. Perry is liable for

the accuracy-related penalty prescribed by section 6662

with respect to his 1989, 1990, and 1991 returns.   Because

we have not sustained respondent's determination of tax

deficiencies in petitioners' or Mr. Perry's income tax for

the years in issue, there is no basis for the imposition of

the additions to tax and penalties determined by respondent

in the notice of deficiency.

     In light of the foregoing,


                                  Decision will be entered

                           for petitioners.
