                        T.C. Memo. 1995-526



                      UNITED STATES TAX COURT



                JOSEPH E. MACHADO, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

     ROBERT R. MACHADO AND KERRY S. MACHADO, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 17664-92, 17665-92.    Filed November 7, 1995.



     Joseph E. Machado and Robert R. Machado, pro sese.

     Maria D. Murphy, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     SWIFT, Judge:   Respondent determined deficiencies in and

additions to petitioners' 1988 Federal income taxes as follows:
                                   - 2 -

Joseph E. Machado

                                           Additions to Tax
Year     Deficiency   Sec. 6651(a)(1)       Sec. 6653(a)(1)   Sec. 6661

1988      $19,687         $4,441               $1,133          $4,922


Robert R. and Kerry S. Machado

                                           Additions to Tax
Year     Deficiency   Sec. 6651(a)(1)       Sec. 6653(a)(1)   Sec. 6661

1988      $19,576         $3,889               $1,422          $4,894


       Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for 1988, and all Rule

references are to the Tax Court Rules of Practice and Procedure.

       After settlement, the primary issues for decision in these

consolidated cases are whether petitioners Joseph E. Machado and

Robert R. Machado bred and raced horses for profit and whether

losses petitioners Joseph E. Machado and Robert R. Machado

realized from partnership investments are limited by the passive

activity loss provision of section 469.


                          FINDINGS OF FACT

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

the time the petitions were filed, petitioners Joseph E., Robert

R., and Kerry S. Machado resided in Long Beach, California.

Hereinafter, references to petitioners will be to petitioners

Joseph and Robert Machado.
                                 - 3 -

     From 1979 until 1990, petitioners owned and operated Machado

Trucking, Inc. (Machado Trucking), a trucking company that

transported cargo throughout California.   Petitioners each owned

50 percent of the outstanding shares of stock in Machado

Trucking.


1980-84

     In 1980, petitioners began, as informal partners, to

purchase, breed, and race horses.    Prior thereto, petitioners had

little involvement with or experience in breeding and racing

horses.   Joseph became interested in breeding and racing horses

through gambling on horses, and Robert became interested in

breeding and racing horses through a college horseback riding

class and through part-time employment for a horse trainer.

     With respect to their horse breeding activity, petitioners'

initial stated intention was to purchase broodmares, to breed the

broodmares with stallions owned by others, and then to sell the

foals as potential racehorses.

     With respect to their horse racing activity, petitioners'

initial stated intention was to purchase experienced racehorses

and to race the horses throughout California.

     Petitioners treated their horse breeding and their horse

racing activities as two separate activities.   When petitioners

began their horse breeding and horse racing activities,
                               - 4 -

petitioners did not consult experts regarding the business and

economic aspects of horse breeding and horse racing.

     During 1980 through 1984, petitioners purchased 5

broodmares, 16 racehorses, and a share interest in 2 stallions.

Prior to purchasing a horse, petitioners researched the horse's

lineage and success as a racehorse, and petitioners talked to

various trainers and breeding agents.   Prior to breeding their

broodmares with stallions, petitioners researched the stallions'

lineage and racing history.

     Petitioners read books and periodicals pertaining to the

techniques of horse breeding and horse racing.

     Generally, petitioners shared equally the ownership interest

in each of the broodmares, racehorses, and stallions, and they

shared equally the expenses and income associated with their

horse breeding and horse racing activities.

     Petitioners did not own facilities in which to stable their

horses.   Petitioners' broodmares and the two stallions in which

they purchased a share interest were stabled at commercial

stables in Kentucky, Maryland, and Florida.   Petitioners'

racehorses were stabled at commercial stables in California.

     The operators of the commercial stables were responsible for

the general care and maintenance of petitioners' horses and for

supervision of the breeding of petitioners' broodmares.

Trainers were hired for the training of petitioners' experienced

racehorses.
                               - 5 -

     Petitioners spent only a few hours a day 3 or 4 days a week

working on their horse breeding and horse racing activities.

Petitioners would talk to trainers regarding their racehorses,

determine in which races their horses would run, select the

stallions with which to breed their broodmares, and arrange for

veterinary care for their horses.

     For 1980 through 1984, the record does not indicate how many

foals were produced in petitioners' horse breeding activity.    In

1982 and 1984, petitioners spent approximately $630 and $380,

respectively, in advertising for sale foals that their broodmares

had produced.   Petitioners did not advertise the sale of their

horses in any other year.

     From 1980 through 1984, petitioners did not sell any foals

produced from their broodmares, and petitioners realized no

income from their horse breeding activity.

     With respect to the horse racing activity, from 1980 through

1984, petitioners' horses ran in 118 races in California, and

petitioners' horses placed first in 19 of the races.   The record

does not indicate the number of times petitioners' horses placed

second or third.

     From 1980 through 1984, petitioners won total prize money

from their horse racing activity of approximately $133,542, but,

after expenses, petitioners realized total combined net losses

from their horse breeding and horse racing activities of

approximately $613,538.
                               - 6 -

1985-90

     By 1985, the racehorses that petitioners had purchased in

prior years and that petitioners still owned were too old to

race.   To reduce expenses and stud fees, petitioners began to

breed their broodmares only with the older racehorses that

petitioners already owned.   Petitioners purchased no additional

racehorses, and petitioners moved their broodmares to California,

where their racehorses were then stabled.    Thereafter,

petitioners intended to obtain racehorses only from the offspring

of broodmares and racehorses that they owned.

     From 1985 through 1988, petitioners did not attempt to sell

any of their broodmares or racehorses through advertising or

auctions.

     From 1985 through 1988, petitioners' broodmares produced 11

horses that petitioners trained and raced.    From 1985 through

1988, these 11 horses ran in 35 races.   The record does not

indicate the number of races petitioners' horses won, nor how the

horses placed.

     Petitioners maintained information relating to their horse

breeding and horse racing activities on a calendar.

     During 1985 through 1988, petitioners realized no income

from their horse breeding activity, and they realized total prize

money of $7,316 from their horse racing activity.

     In spite of the above changes to the manner in which

petitioners operated their horse breeding and horse racing
                               - 7 -

activities, petitioners continued to realize substantial losses

from both activities.   During 1985 through 1988, petitioners

realized combined net losses of $518,277 from their horse

breeding and horse racing activities.

     In 1989, petitioners determined that they were no longer

able to continue their horse breeding and horse racing

activities.   In 1989, petitioners attempted to sell four of their

racehorses in a horse auction in California.   Three of

petitioners' horses were sold at a price of $200 to $400 each.

After 1989, Joseph was no longer involved in the horse breeding

and horse racing activities.

     In 1990, Robert sold or gave away the remainder of the

horses and terminated the horse breeding and horse racing

activities.

     During 1980 through 1990, petitioners continued to work full

time at Machado Trucking.   In 1990, at the time petitioners'

horse breeding and horse racing activities were terminated,

Machado Trucking became unprofitable and went out of business.

     Petitioners recorded their expenses with respect to their

horse breeding and horse racing activities on a handwritten

ledger and in a computer database that was also used by Machado

Trucking.   Checks, check stubs, and receipts relating to

petitioners' expenses with respect to their horse breeding and

horse racing activities were commingled and did not reflect
                              - 8 -

whether the expenses related to petitioners' horse breeding

activity or to petitioners' horse racing activity.

     The schedule below sets forth, for each of the years 1980

through 1988, combined net income, expenses, and losses of

petitioners' horse breeding and horse racing activities, as

reflected by petitioners on their individual Federal income tax

returns:




     Year       Income         Expenses          Losses

     1980      $  -0-         $   37,474     $   37,474
     1981        17,566           63,034         45,468
     1982        43,050          202,386        159,336
     1983        48,820          263,952        215,132
     1984        24,106          180,234        156,128
     1985         2,250          175,314        173,064
     1986         -0-            133,140        133,140
     1987           934          106,998        106,064
     1988         4,132          110,141        106,009
       Total   $140,858       $1,272,673     $1,131,815


     The schedule below reflects for 1980 through 1989, where

indicated in the record, Joseph's income from sources other than

horse breeding and horse racing activities and Joseph's share of

the above losses of petitioners' horse breeding and horse racing

activities as reflected on Joseph's individual Federal income tax

returns:
                                 - 9 -

                                                Joseph's Share of
                                                 the Losses From
  Year       Joseph's Other Income       Horse Breeding and Horse Racing

  1980             $   --                           $ 18,737
  1981                 --                             22,734
  1982                 --                             79,668
  1983                 --                            107,566
  1984                 --                             78,064
  1985               96,655                           87,336
  1986               87,386                           68,671
  1987               68,943                           52,875
  1988               99,799                           52,879
  1989                 --                               --
    Total          $352,783                         $568,530


       The schedule below summarizes for 1980 through 1990 Robert

and Kerry's joint income from sources other than horse breeding

and horse racing activities and Robert's share of the income,

expenses, and losses with respect to petitioners' horse breeding

and horse racing activities, as reflected on Robert and Kerry's

joint Federal income tax returns:

                                      Robert's Share of Income From
              Robert & Kerry's       Horse Breeding and Horse Racing
Year            Other Income          Income     Expenses    Losses

1980           $ 64,171              $  -0-      $ 18,737   $ 18,737
1981             72,650                8,783       31,517     22,734
1982            123,654               21,525      101,193     79,668
1983            138,220               24,410      131,976    107,566
1984            115,428               12,053       90,117     78,064
1985             90,036                1,125       86,853     85,728
1986             96,673                 -0-        64,469     64,469
1987             86,127                  467       53,656     53,189
1988            150,000                2,066       55,196     53,130
1989*              --                   --           --         --
1990             56,000                8,664       23,834     15,170
     Total     $992,959              $79,093     $657,548   $578,455

       * With respect to 1989, the record does not indicate any
       information regarding Robert's share of the income or
       losses from petitioners' horse breeding and horse racing
       activities nor his income from other sources.
                                 - 10 -

LB Partnership

     In 1983, petitioners and four other individuals formed a

partnership (the LB Partnership) to purchase a broodmare named La

Barbara.   From 1983 through 1990, petitioners were general

partners of and each owned a 12.5-percent interest in the LB

Partnership.

     In 1983, the LB Partnership purchased La Barbara, and La

Barbara was stabled in Kentucky.    The record does not indicate

the purchase price of La Barbara.

     Fred Hellman (Hellman) was the managing partner of the LB

Partnership.    Hellman was responsible for maintaining the books

and records of the LB Partnership and for paying all expenses of

the LB Partnership.

     The LB Partnership made decisions by majority vote of all

six partners.

     From 1983 through 1990, the LB Partnership bred La Barbara

with a number of stallions.   The record does not indicate the

number of times in each year the partners attempted to breed La

Barbara, and the record does not indicate how many foals were

produced by La Barbara.

     The schedule below summarizes for 1983 through 1988 the net

profits and losses allocated from the LB Partnership to

petitioners:
                                         - 11 -

                                  Net Profit and Losses
                             Allocated From LB Partnership
              Year           To Joseph          To Robert

              1983           ($10,199)               ($10,199)
              1984           ( 6,035)                ( 6,035)
              1985              5,713                   5,713
              1986           ( 9,436)                ( 9,436)
              1987           ( 8,112)                ( 8,112)
              1988           ( 15,394)               ( 15,394)
                 Total       ($43,463)               ($43,463)


Petitioners' 1988 Tax Returns and Respondent's Audit

     Petitioners filed Forms 4868 to extend to August 15, 1989,

the time to file their 1988 Federal income tax returns.                  On these

Forms 4868, petitioners estimated that for 1988 their respective

Federal income tax liabilities would be zero.

     On August 15, 1989, petitioners filed their respective 1988

Federal income tax returns and reported thereon tax liabilities

of zero.

     With their respective 1988 Federal income tax returns,

petitioners attached separate Schedule C's relating to the above-

described horse breeding and horse racing activities.

Petitioners reported on their respective 1988 Federal income tax

returns gross income, losses from their horse breeding and horse

racing activities, losses from the LB Partnership, and taxable

income, as follows:

                               Horse       Horse
                              Breeding     Racing                     Taxable
Petitioners    Tax Returns    Activity    Activity   LB Partnership    Income

 Joseph         $ 99,798      ($35,258) ($17,621)     ($15,394)       $18,898
 Robert*         150,000      ( 35,381) ( 17,749)     ( 15,394)        45,475
                             - 12 -

     * Robert's gross income as reported on Form 1040
     includes Kerry's gross income and Robert's taxable
     income includes Kerry's taxable income.


     On audit for 1988, respondent determined that petitioners

were not engaged in their horse breeding and horse racing

activities for profit, and respondent disallowed the losses

petitioners claimed relating to each activity.   With respect to

the LB Partnership, respondent determined that petitioners did

not materially participate in the LB Partnership and that the

losses realized from the LB Partnership were limited by the

passive income rules of section 469 and could not be used to

offset petitioners' nonpassive income.

     For 1988, respondent also determined that petitioners were

liable for additions to tax under section 6651(a)(1) for failure

to timely file their Federal income tax returns, under section

6653(a)(1) for negligence, and under section 6661 for substantial

understatement of income taxes.


                             OPINION

Petitioners' Horse Breeding and Horse Racing Activities

     Under section 183(b)(2), if an activity is not engaged in

for profit, expenses relating thereto are allowable but only to

 the extent gross income derived from the activity exceeds

deductions relating thereto that are allowable under section

183(b)(1) without regard to whether the activity constituted a
                              - 13 -

for-profit activity.   Allen v. Commissioner, 72 T.C. 28, 33

(1979).

     For purposes of section 183, an activity is not considered

engaged in for profit unless it constitutes an activity entered

into or continued by the taxpayer with an actual and honest or a

good faith objective of making a profit.   See Mercer v.

Commissioner, 376 F.2d 708, 710-711 (9th Cir. 1967), revg. T.C.

Memo. 1966-82; Antonides v. Commissioner, 91 T.C. 686, 693-694

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

Commissioner, 78 T.C. 642, 645 (1982), affd. without published

opinion 702 F.2d 1205 (D.C. Cir. 1983); Barter v. Commissioner,

T.C. Memo. 1991-124, affd. without published opinion 980 F.2d 736

(9th Cir. 1992); Larson v. Commissioner, T.C. Memo. 1986-542,

affd. without published opinion 833 F.2d 1016 (9th Cir. 1987);

Ruben v. Commissioner, T.C. Memo. 1986-260, affd. without

published opinion 852 F.2d 1290 (9th Cir. 1988).

     The regulations under section 183 provide a nonexclusive

list of factors to consider in determining whether an activity

was engaged in for profit.   Such factors include:   (1) The manner

in which the taxpayer carried 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 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; (6) the taxpayer's history of income or
                              - 14 -

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

     While the taxpayer's expectation of profit need not be

reasonable, the facts and circumstances must demonstrate that the

taxpayer engaged in the activity, or continued to engage in the

activity, with an objective of making a profit.       Golanty v.

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

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

Commissioner, supra at 33; sec. 1.183-2(a), Income Tax Regs.        In

determining whether an activity is engaged in for profit, greater

weight is given to objective facts than to the taxpayer's mere

statement of intent.   Sec. 1.183-2(a), Income Tax Regs.

     Although no one factor is conclusive, evidence that a

taxpayer did not engage in an activity with the objective to earn

a profit, a record of substantial losses over many years, and the

unlikelihood of achieving a profit are important factors bearing

on the taxpayer's true objective.    Golanty v. Commissioner, supra

at 426; sec. 1.183-2(b)(6), Income Tax Regs.     Petitioners have

the burden of proof on this issue.     Rule 142(a).

     Petitioners argue, among other things, that they conducted

their horse breeding and horse racing activities in a

businesslike manner, that they made appropriate adjustments to

the manner in which they operated both activities, and that they
                               - 15 -

spent substantial time participating in their horse breeding and

horse racing activities.    Petitioners argue, therefore, that they

engaged in their horse breeding and horse racing activities for

profit.

     Respondent argues, among other things, that petitioners did

not operate their horse breeding and horse racing activities in a

businesslike manner, that petitioners were not experts in the

breeding and racing of horses, and that losses incurred by

petitioners in 1988 with respect to both activities were not

incurred in an activity engaged in by petitioners for profit.

     We agree with respondent.   Petitioners advertised their

horses for sale in only 2 of the 10 years during which they

engaged in their horse breeding and horse racing activities.    The

fact that petitioners hired trainers, purchased horses, and read

periodicals and manuals is equally consistent with engaging in an

activity as a hobby and is insufficient in this case to establish

a good faith profit objective.   Rule 142; Golanty v.

Commissioner, supra at 430; Tripi v. Commissioner, T.C. Memo.

1983-483.   Petitioners did not operate their horse breeding and

horse racing activities in a businesslike manner.   Sec. 1.183-

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

     Petitioners devoted a minimal amount of time to their horse

breeding and horse racing activities.   Sec. 1.183-2(b)(3), Income

Tax Regs.
                             - 16 -

     Petitioners did not establish that any of their broodmares

or racehorses appreciated in value or were likely to appreciate

in value to the extent that they could earn an overall profit and

recoup losses incurred over a 10-year period.    See Tripi v.

Commissioner, supra; sec. 1.183-2(b)(4), Income Tax Regs.

     Petitioners testified that they expected the adjustments

they made to their horse breeding and horse racing activities to

make both activities profitable.    Petitioners, however, did not

present any credible evidence establishing that the adjustments

they made were likely to make the activities profitable.

     From the time petitioners began breeding and racing horses

in 1980 until at least 1988, petitioners incurred substantial

losses from both activities, and petitioners did not realize any

gross income from their horse breeding activity.

     Petitioners did not present sufficient evidence at trial to

establish that the losses they incurred were due to either

customary business risks or unforeseen circumstances.    See sec.

1.183-2(b)(6), Income Tax Regs.    The realization of continuous

and substantial losses over many years from both activities is a

strong indication, in this case, that petitioners did not engage

in either activity for profit.     Golanty v. Commissioner, supra at

426; see sec. 1.183-2(b)(6), Income Tax Regs.

     We conclude that petitioners have not established by a

preponderance of the evidence that they engaged in their horse
                                - 17 -

breeding and horse racing activities with an actual and honest or

good faith profit objective.


LB Partnership

     The passive loss rules of section 469 place limitations on

the deduction of losses relating to passive activities, namely,

from activities in which a taxpayer does not materially

participate.     Sec. 469(a)(1) and (2), (c)(1), (d)(1).

     As a general rule, a taxpayer will be regarded as not

materially participating in an activity if the taxpayer is not

involved in the operation of the activity on a basis which is

regular, continuous, and substantial.      Sec. 469(h)(1); sec.

1.469-5T(a)(7), Temporary Income Tax Regs., 53 Fed. Reg. 5726

(Feb. 25, 1988).

     The temporary regulations under section 469 contain seven

separate tests, the qualification under any one of which will

result in a taxpayer's being treated as materially participating

in the activity.     Sec. 1.469-5T(a), Temporary Income Tax Regs.,

53 Fed. Reg. 5726 (Feb. 25, 1988).       Of the seven separate tests,

petitioners presented evidence and made general arguments that

are applicable only to the test found in section 1.469-5T(a)(7),

Temporary Income Tax Regs., supra, which provides that a taxpayer

shall be treated as materially participating in an activity if,

based on all the facts and circumstances, the taxpayer

participates in the activity on a regular, continuous, and
                              - 18 -

substantial basis during the taxable year.    A threshold

requirement for meeting this test, however, is that the taxpayer

participate in the activity for more than 100 hours during the

taxable year.   Sec. 1.469-5T(b)(2)(iii), Temporary Income Tax

Regs., 53 Fed. Reg. 5726 (Feb. 25, 1988).

     A taxpayer may establish the extent of his or her

participation in a particular activity by any reasonable means

including "the identification of services performed over a period

of time and the approximate number of hours spent performing such

services during such period, based on appointment books,

calendars, or narrative summaries."    Sec. 1.469-5T(f)(4),

Temporary Income Tax Regs., 53 Fed. Reg. 5727 (Feb. 25, 1988).

     Petitioners argue that because they researched possible

stallions to breed with La Barbara, because they met with other

partners to discuss which breeding options to pursue, and because

they voted on which stallions to breed with La Barbara, they

should be regarded as materially participating in the LB

Partnership, and the losses petitioners realized on their

investments in the LB Partnership should be regarded as

nonpassive losses, not limited by the passive activity loss

provisions of section 469.

     Respondent argues that petitioners have not established that

they materially participated in the LB Partnership.    Respondent

argues, therefore, that for 1988, the section 469 passive

activity loss rule applies, and the $15,394 loss that petitioners
                               - 19 -

each realized in 1988 with regard to their investment in the

LB Partnership should not be allowed to offset petitioners'

nonpassive income.

     We agree with respondent.   The only evidence presented at

trial regarding petitioners' participation in the LB Partnership

was Joseph's uncorroborated testimony that he spent hundreds of

hours researching potential stallions to breed with La Barbara

and the 1988 calendar log that reflected 15 entries for phone

calls petitioners made relating to the LB Partnership.   The

evidence petitioners presented at trial does not establish that

petitioners spent over 100 hours participating in the LB

Partnership.   Petitioners have not met their burden of proof on

this issue.    See Rule 142; Goshorn v. Commissioner, T.C. Memo.

1993-578.

     We sustain respondent's determination that the section 469

passive activity loss rule applies and that petitioners are not

permitted to offset the loss from the LB Partnership against

their nonpassive income.


Additions to Tax

     Section 6651(a)(1) provides that where a taxpayer fails to

timely file a Federal income tax return (determined with regard

to any valid extension of time for filing) and where such failure

is not shown to be due to reasonable cause rather than to willful

neglect, there shall be added to the tax due, for each month the
                             - 20 -

return is not filed, 5 percent of the amount of tax required to

be shown on the return, not to exceed 25 percent in the

aggregate.

     In order for a taxpayer to qualify for an extension of time

to file a Federal income tax return, the regulations under

section 6081(a) provide that the taxpayer must show on an

application for extension of time, among other things, the full

amount properly estimated as tax for the year, and the

application must be accompanied by a full remittance of the

amount properly estimated as tax.     Crocker v. Commissioner, 92

T.C. 899, 905 (1989); Garrett v. Commissioner, T.C. Memo. 1994-

70; sec. 1.6081-4(a)(4), Income Tax Regs.

     A taxpayer will be treated as having "properly estimated"

the tax liability when a bona fide and reasonable estimate is

made on the extension application of the correct tax liability

based on information available to the taxpayer at the time the

application for extension is filed.    Crocker v. Commissioner,

supra at 908; Magowan v. Commissioner, T.C. Memo. 1994-152;

Garrett v. Commissioner, supra.

     For 1988, the addition to tax for negligence is equal to 5

percent of the underpayment of tax.    Sec. 6653(a)(1).   Negligence

is the failure to make a reasonable attempt to comply with the

provisions of the Internal Revenue Code.    Sec. 6653(a)(3).

Negligence is further defined as a lack of due care or failure to

do what a reasonable and ordinarily prudent person would do under
                               - 21 -

the circumstances.    Neely v. Commissioner, 85 T.C. 934, 947

(1985).

     The addition to tax for substantial understatement of tax is

equal to 25 percent of the amount of the underpayment

attributable to the understatement.     Sec. 6661(a).   In the case

of individuals, an understatement is substantial where it exceeds

the greater of $5,000 or 10 percent of the amount required to be

shown on the taxpayer's return.     Sec. 6661(b)(1)(A).   The amount

of the understatement is reduced by that portion of the

understatement that is attributable to the tax treatment of an

item by the taxpayer if there was substantial authority for such

treatment.   Sec. 6661(b)(2)(B).

      Respondent argues that petitioners did not properly

estimate their income tax liabilities when petitioners filed

their extension applications for their 1988 Federal income tax

returns and that therefore the extension applications that were

filed were invalid and petitioners should be treated as having

failed to timely file their 1988 Federal income tax returns.

Respondent also argues that petitioners were unreasonable and

negligent in, and lacked substantial authority for, claiming on

their 1988 Federal income tax returns the losses relating to

their horse breeding and horse racing activities and to the LB

Partnership.   Petitioners bear the burden of proof on each of the

additions to tax.    Rule 142(a).
                              - 22 -

     We disagree with respondent.    Petitioners herein lost the

two substantive tax issues in this case largely because of

objective factors not in their favor and because of their burden

of proof on those issues.   Petitioners, however, did impress us

with their general testimony and credibility.    We note the many

cases in which a profit objective has been found to be present in

connection with horse breeding and horse racing activities in the

face of substantial losses over a number of years.    See e.g.,

Engdahl v. Commissioner, 72 T.C. 659 (1979); Holbrook v.

Commissioner, T.C. Memo. 1993-383; Scheidt v. Commissioner, T.C.

Memo. 1992-9; Stephens v. Commissioner, T.C. Memo. 1990-376.

     We also believe it appropriate and necessary in this case,

particularly in considering additions to tax in the context of an

issue arising under section 183, to take into account, as

explained previously herein, the fact that the case law and

regulatory authority under section 183 establish very clearly

that a taxpayer's professed profit objective in engaging in an

activity need not be "reasonable".

     We conclude, under the facts of this case, that petitioners

filed valid extension applications for their 1988 Federal income

tax returns and on August 15, 1989, timely filed their 1988

Federal income tax returns.   We also conclude that petitioners

were not negligent in filing their 1988 Federal income tax

returns, and that petitioners had substantial authority for the
                             - 23 -

claimed losses relating to their horse breeding and horse racing

activities and to the LB Partnership.


                                        Decisions will be entered

                                   under Rule 155.
