                        T.C. Memo. 2011-188



                      UNITED STATES TAX COURT



         MARK E. AND PATTI L. BLACKWELL, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 29287-09.               Filed August 8, 2011.



     Thomas M. Regan and Benjamin A. Wagner, for petitioners.

     William R. Peck, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     SWIFT, Judge:   Respondent determined deficiencies in

petitioners’ Federal income taxes for 2005 and 2006 in the

respective amounts of $46,504 and $34,500.

     The issue for decision is whether petitioners’ horse

breeding activity constituted an activity carried on for profit
                                - 2 -

under section 183.1   The trial was held on March 3, 2011, in St.

Paul, Minnesota.

                          FINDINGS OF FACT

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

the time the petition was filed, petitioners resided in

Minnesota.

     Petitioner Mark Blackwell (Mark) has an M.B.A. degree and 30

years of significant experience in business management.

     In the early 1970s Mark was a motocross racer and

instructor.   He participated in national and international

motocross racing events, and in 1971 he was national motocross

champion.    Mark established the first motocross drivers’ school

for Suzuki.

     From the late 1970s through the present time Mark has had a

successful business career as manager and senior officer for a

number of motorcycle, snowmobile, ATV, and personal watercraft

manufacturing companies--for Suzuki as instructor and manager of

a winning professional motocross racing team, including six

national championships, and as head of Suzuki’s motorcycle and

ATV division; for Husqvarna Motorcycle Co.; for Arctic Cat; and




     1
      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.
                                  - 3 -

for Polaris Industries, manufacturer and seller of, among other

things, Victory motorcycles.

     At these various jobs Mark typically worked over 40 hours a

week.

     In the mid-to-late 1980s, while working full time, Mark

completed his college degree and earned an M.B.A. from Pepperdine

University.   Over the years Mark has participated in a number of

executive management programs, such as a business strategy course

at the Wharton School at the University of Pennsylvania.

     Petitioner Patti Blackwell (Patti) has a college degree in

nursing.   During 2000, 2001, and 2002 Patti did not work, apart

from her involvement in the horse activity described below.

Beginning in 2003 Patti worked approximately 30 hours a week as a

rehabilitation nurse counselor for the State of Minnesota,

generally working out of the family residence.

     In 2003 through 2009 petitioners’ salaries from their above

employment were as follows:

           Year         Mark               Patti       Total

           2003      $1,187,118           $36,157   $1,223,275
           2004         585,923            47,622      633,545
           2005         646,579            43,820      690,399
           2006         479,091            50,163      529,254
           2007         904,971            56,780      961,751
           2008         474,279            54,433      528,712
           2009         311,997            59,043      371,040
                                - 4 -

     Mark did not grow up around farm animals or horses and

learned how to ride horses on family vacations.

     Patti grew up around farm animals and horses and always

dreamed of owning and raising horses.

     In 1993 petitioners purchased their first horse, and from

then until 2000 petitioners purchased a number of additional

horses; read books and magazines, including the Quarter Horse

Journal, Quarter Horse News, and the Reiner magazine; and watched

videos about horse management and breeding, bloodlines, and horse

operations.    Petitioners also attended a number of national horse

shows.

     In the mid-1990s petitioners developed an interest in

starting up an activity of purchasing, breeding, and training

horses.

     In approximately 1996 Patti enrolled in the Equine Industry

Management bachelor’s degree program at the University of

Minnesota.    In that program Patti took courses relating to the

health care, showing, judging, breeding, bloodlines, and training

of horses; the management of a horse activity as a business; and

the economic aspects of horse breeding and training.    In that

program Patti in 1998 received another bachelor’s degree magna

cum laude.

     By the late 1990s, as a result of their reading and

research, their conversations with horsemen, and a number of
                                - 5 -

training programs they had participated in relating to horse

breeding and training, petitioners’ interest became focused on

western performance horses; namely, reining and cutting horses

and working cow horses.

     In 1999, in further preparation for starting up their horse

breeding and training activity, Mark, with Patti’s assistance,

prepared a detailed business plan relating to the purchase,

breeding, training, showing, and sale of reining horses.   The

business plan included sections entitled “Executive Summary”,

“Market Overview”, “Advertising and Promotion”, and “Proforma

Income Statement”.

     The business plan stated that Patti would act as the barn

and breeding manager and would be responsible for the health,

care, nutrition, and training of the horses, and that Mark would

be responsible for the business and marketing side of the horse

activity.

     In the business plan, the proforma income statement

projected estimated losses for 2000 and 2001 of $24,000 and

$7,000 and estimated profits for 2002 through 2005 of $3,000,

$33,000, $48,000, and $68,000, respectively.   The estimated

profits were based on projections petitioners made of breeding

fees and horse sale proceeds.

     Beginning in 2000, on their horse ranch property in Delano,

Minnesota, on which petitioners’ family residence also was
                                - 6 -

located, petitioners began an American Quarter Horse breeding

activity and training activity under the name of Fresh Horses

Farm (FHF) with the objective of purchasing, breeding, training,

and selling reining horses.    As planned, Patti was in charge of

the horses, and Mark was responsible for the business and

marketing side of the horse activity.

     Generally, petitioners sought to purchase quarter horses

that had already had some success in regional horse shows and/or

that had recognized bloodlines.

     Patti, with some advice from Mark, would make the decisions

as to which horses to purchase.   Patti and Mark jointly would

decide which stallions to hire to breed with their mares and

whether and when to sell their horses.

     During the years in issue petitioners did not hire anyone to

manage their horse activity.   Patti typically spent 15 to 20

hours a week taking care of the horses, and Mark spent 2 to 5

hours a week in the horse activity.

     Each day Patti would feed the horses, groom them, exercise

them, turn them out, and clean out the horse stalls.

     With her training in medicine and to avoid additional

expenses, Patti did much of the health maintenance on the horses
                                 - 7 -

without hiring a veterinarian.    Patti vaccinated and dewormed the

horses.   She did the “foal watch” and would assist in the

delivery of the foals.2

     In connection with their FHF horse activity, petitioners

maintained a bank account under the name of FHF, and petitioners

used BarnPro, a recognized horse farm software program, to record

and keep track of FHF income and expenses.

     In connection with their ownership of horses and the

activities of FHF, one or both of petitioners were members of the

following horse organizations:    American Quarter Horse

Association (1993 to present), National Reining Horse Association

(1998 to present), North Central Reining Horses Association (1998

to present), National Cutting Horses Association (2006 to 2010),

and Minnesota Cutting Horses Association (2006 to 2010).

     Both Mark and Patti occasionally rode their horses in horse

shows, won some nominal prize money, and participated in social

events at horse shows.

     In 2002 and later years petitioners sought and received

advice on their FHF horse activity from a number of expert

horsemen, including Bob Janssen of Janssen Performance Horses, a

nationally recognized horse trainer.




     2
      “Foal watch” consists of 24-hour observation of a mare
about to deliver a foal.
                                - 8 -

     Over the years petitioners advertised their horses on their

own FHF Web site, on business cards, calendars, clothing, flyers,

and in videos and magazine articles.

     Occasionally petitioners would hire professional horse

trainers to work with their horses and to show or ride their

horses in horse shows.

     In 2006 petitioners shifted their horse breeding and

training activity from reining horses to cutting horses because

by 2006 cutting horses were in greater demand in the horse

industry.

     At one point petitioners began trying to sell some of their

horses as long yearlings to avoid horse training expenses they

would incur if they kept the horses longer.

     Petitioners purchased three horses in 1998, one horse in

1999, three horses in 2000, one horse in 2003, one horse in 2004,

one horse in 2005, three horses in 2007, and two horses in 2008.

All but four of the horses petitioners eventually sold were sold

at a loss, three were sold at a small profit over petitioners’

purchase price (not taking into account expenses relating to the

horses), and one died for which petitioners received an insurance

payment.    The schedule below provides some detail about the

horses petitioners purchased and sold:
                                  - 9 -

                            Year      Purchase       Selling     Year
        Horse Name       Purchased      Price         Price      Sold

  Glo Jessie Glo          1998         $12,500        $7,500     2002
  Calico Catalyst         1998          12,500         7,000     2003
  ZF Zap Em               1998           2,000         3,200     2001
  Dunitz Midnight Glo     1999           5,000         3,750     2003
  Miss Bessie Westwind    2000          20,000        15,000     2007
  CeeCee Pauli            2000          13,000         5,500     2002
  Sheza Chexy DunIt       2000          11,000        15,000     2003
  Smart Little Dun It     2003          25,000        15,000     2007
  Smart Chic Hoo Does     2005          15,000        15,000     2005
  Sweet Sugar Boon        2007          30,000         8,300     2010
  U Neek Hickory          2007          11,000         6,100     2010
  Lenas Lucky Chic        2007           1,000         4,000     2008
  Memphis Chic            2008           3,500         1,500     2008
  To Smart Lil Juice      2008          15,000         9,800     2009

     Petitioners purchased the following five additional horses

which, as of the date of trial, either had died or were still

owned by petitioners:

                         Year        Purchase    Year    Petitioners
     Horse Name       Purchased        Price     Died     Still Own

  Dudes Jackie May       1993         $2,000     2007          ---
  Sonata Starlight       2004         48,000     2007
                                                 1
                                                               ---
  Smart Chicaway         2006         30,000      ---           Yes
  High Brow Madonna      2007         15,000      ---           Yes
  Jodies BH              2000         16,000      ---           Yes

          When Sonata Starlight died unexpectedly in 2007
            1

     from colic, petitioners received a $48,000 insurance
     payment.

     From 1999 through 2008 petitioners acquired and sold 21

additional horses which petitioners acquired by breeding their

mares to outside horses, for which stud services petitioners paid

fees.    The resulting foals, after being raised and trained for a

period by petitioners, were sold by petitioners as follows:
                                - 10 -

   Birth                                 Stud      Selling   Year
   Year            Horse Name            Fee        Price    Sold

   1999        Dunitz Fresh Dude          $300     $5,000    2002
               Jessies Gotta Whiz        2,500      4,000    2003
               Arcticatalyst               300      7,600    2002

   2000        Fresh N Dun                 300     1,000     2001
               Get Fresh With Me         3,000     7,000     2001
               Freshinic                   750     1,700     2003

   2001        Fresh Champagne             500      3,000    2002
               Fresh Victory             2,500      2,800    2002
               A Farm Fresh Chic         2,000      5,000    2006
               Mid West Whiz             1,500     12,500    2004

   2002        Over the Reinbow          2,500      2,750    2004
               To The Moon                 500      2,000    2004

   2003        Foxy Cleopatra              372      1,000    2005
               After Midnight              771      3,400    2005
               Lil Ruf Shagwell          3,050      9,800    2009

   2004        Ruf Talkin Dunit          1,500     50,000    2007

   2005        Chics Big Star               (1)    25,000    2006

   2006        Smart Lil Miss         6,000         8,000    2007
               Starry Eyed Chic      11,000        11,000    2009

   2007        Fresh Juice               1,291      6,600    2009
               Little Wrangler           4,500      1,550    2009
               Sonatas Rock Star            (2)     2,200    2010

   2008        Boonalicious          18,000         6,500    2009
     Total                           63,134       179,400

           The foal Chics Big Star was purchased in utero.
           1




          Petitioners incurred no stud fee for Sonatas Rock
           2

     Star as their mare was bred with one of their own
     stallions.

     A horse (Smart Chicaway) that petitioners purchased in 2006

for $30,000 and which petitioners still own has sired a number of

horses--all owned by others--which horses have won a number of
                             - 11 -

horse cutting competitions and have earned a total of $27,998 in

winnings for their owners in events sponsored by the National

Cutting Horse Association and a total of $22,952 in winnings in

events sponsored by the National Reining Horse Association.

     Petitioners still own a horse called Starbucks Fresh Brew

which petitioners acquired through breeding one of their mares

for a stud fee of $1,500.

     Petitioners believed that two particular horses--Smart Lena

and Sonata Starlight--that petitioners purchased in 2003 and 2004

had the potential (with the right breeding) to produce foals that

would have bloodlines attractive on the national horse market.

     Petitioners’ horse activity was marred by a number of

illnesses their horses experienced.    The sudden and unexpected

death of Sonata Starlight in 2007 was a major setback to

petitioners’ plans to have successful and profitable breeding

mares that would produce foals that would eventually be sold at

the national level.

     Petitioners propose, respondent does not object to, and we

find the following additional facts:

     Petitioners believed in 2004 they had a broodmare band
     which would allow them to sell their foals at the
     national level. They hoped the sale of Sonata’s foal
     would recoup much of FHF’s investment.

     At one point two of petitioners’ horses were shipped to
     Missouri for sale with the hope of selling each horse
     for $15,000. Because of a softening of the horse
     market, the horses were each sold for less than one-
     half of the price expected.
                             - 12 -

     One of petitioners’ foals (Boonalicious) was a filly by
     a leading cutting stallion. Boonalicious’ stud fee was
     $15,000. Petitioners were optimistic about their
     prospects with this filly.

     Petitioners hired an experienced horseman to fit and
     present Boonalicious at the National Reined Cow Horse
     Futurity in Reno, Nevada. They understood that the
     horseman was the best of the best. They were
     devastated when they received only $6,500 for the
     horse, less than 10 percent of what similar horses had
     sold for in prior years and what they thought she was
     worth.

     Petitioners consulted all the experts and did
     everything the experts told them to do, but finally in
     2009 petitioners determined that their FHF horse
     business was not sustainable.

     Petitioners kept track of the income and expenses of their

FHF horse activity by making entries into their BarnPro horse

management farm software.

     Annually, petitioners prepared a summary report of their

expenses involving their ownership of horses and FHF’s

activities.

     In 2009, because of the losses they continued to experience,

petitioners terminated their horse breeding activity.

     On the Schedules C, Profit or Loss From Business, attached

to their 2003 through 2009 Federal income tax returns,

petitioners reported gross income, total expenses (including

depreciation), net operating losses, and gain from the sales of

business property (Form 4797 gain), relating to their FHF horse

activity, as follows:
                                - 13 -

                                               Net
                             Total          Operating      Form
   Year      Gross Income   Expenses           Loss      4797 Gain

   2003         $1,011      $69,468        ($68,457)      $18,934
   2004          3,106       90,809         (87,703)       17,250
   2005         10,020      132,416        (122,396)        4,152
   2006         30,870      123,217         (92,347)         -0-
   2007         67,420      148,286         (80,866)       46,373
   2008          7,952      133,270        (125,318)         -0-
   2009         46,261      108,811         (62,550)         -0-
     Total     166,640      806,277        (639,637)       86,709

     On the Schedules C attached to their 2005 and 2006 Federal

income tax returns, petitioners claimed the following business

expenses relating to their FHF horse activity:

                 Expense                 2005             2006

          Advertising                $1,840              $3,505
          Commission/fees               562               3,752
          Depreciation               29,482              22,738
          Insurance                   3,610               4,529
          Repairs/maintenance           327                ---
          Supplies                    1,388                 202
          Board                       7,910               4,191
          Breeding                   25,061              11,892
          Farrier                     3,284               4,701
          Feed hay                    5,395               5,580
          Health maintenance          7,147               2,581
          Membership                    525                 210
          Miscellaneous                ---                  140
          Shavings                    1,026               1,225
          Show expense               13,540              10,282
          Training                   14,849              32,132
          Tack                         ---                  509
          Transportation              1,520                 620
          Vet                        14,950              14,428
            Total                   132,416             123,217

     On audit for 2005 and 2006 respondent determined that

petitioners’ FHF horse activity did not qualify as an activity

engaged in for profit, and respondent disallowed deductions for
                               - 14 -

all of the reported business expenses in excess of income

received.

                              OPINION

     Under section 183(a) and (b), if an activity is not engaged

in for profit by a taxpayer the deductions claimed by the

taxpayer relating to the activity are not allowed except to the

extent of income received from the activity.   To be treated as

“engaged in for profit” an activity must be carried on by the

taxpayer with an actual and honest profit objective.    Dreicer v.

Commissioner, 78 T.C. 642, 645 (1982), affd. without opinion 702

F.2d 1205 (D.C. Cir. 1983).

     Activities carried on primarily for sport, hobby, or

recreation do not qualify as for-profit activities.    Sec. 1.183-

2(a), Income Tax Regs.

     Whether a taxpayer has the requisite profit objective with

respect to an activity is a question of fact that is to be

decided on the basis of all the evidence in a case.    Generally,

the taxpayer bears the burden of proving that he or she carried

on the activity with a profit objective.3   Rule 142(a).

     In deciding this question, regulations under section 183 set

forth a nonexclusive list of nine factors which generally are




     3
      Petitioners do not argue for a shift of the burden of proof
to respondent under sec. 7491(a).
                             - 15 -

considered and which we discuss below.   Sec. 1.183-2(b), Income

Tax Regs.

Manner in Which the Activity Is Carried On

     Petitioners generally carried on their FHF horse activity in

a reasonably businesslike manner.   During the 1990s petitioners

prepared to start up a horse breeding and training activity by

taking educational courses relating to the care, management,

breeding, and economics of horses, and by purchasing, caring for,

training, and selling a number of horses.    Petitioners developed

a rather comprehensive written business plan relating to the

proposed horse activity.

     Beginning in 1994 petitioners took 6 or 7 years learning

about horse breeding and management before attempting to engage

in a for-profit horse breeding activity.    In Mark’s words:   “[W]e

were pretty cautious, so we didn’t jump into it.    We just kept

trying to learn and figure out is this a business that we could

* * * be in and be successful, and it took us some time to make

the final decision to get in.”

     Once petitioners started up their FHF horse activity in 2000

and during the years in issue, petitioners were not absentee,

aloof, or recreational horse owners.   Patti managed and worked

diligently and daily on the horse activity, doing essentially all

of the horse maintenance herself.   Petitioners consulted expert

horsemen, hired expert horse trainers to assist in training the
                              - 16 -

horses, advertised, showed the horses, and paid significant stud

fees to have their mares bred with stallions which they regarded

as having good bloodlines.

     In their efforts to make improvements to the horse activity,

petitioners made adjustments in their business plan, moving from

reining horses to cutting horses and selling their horses as

yearlings.

     Petitioners maintained reasonably good books and records of

income and expenses relating to their horse activity.

     In 2009 petitioners terminated their unprofitable horse

activity in light of the losses realized.

Expertise of the Taxpayer

     Through Patti’s experience with and her education relating

to horses and through Mark’s business experience, petitioners

were reasonably well qualified to engage in a horse breeding

activity for profit.   Mark’s business qualifications were

particularly strong and he had a gifted ability to make good

business decisions, to market and advertise effectively, and to

work successfully with others.

Time and Effort Expended in Carrying On the Activity

     The time, effort, and financial resources petitioners

personally put into and invested in their FHF horse activity are

not indicative of a hobby; rather, they are indicative of a for-
                               - 17 -

profit activity.   Of the time petitioners spent with the horses,

most of it was daily hard work.

Expectation That the Horses May Appreciate in Value

     Petitioners certainly had the expectation, and acted

thereon, that at least some of their horses would become valuable

as reining or cutting horses or as valuable mares or stallions

with recognized bloodlines with significant value for breeding

purposes.

Success in Other Activities

     Patti’s degree from the University of Minnesota relating to

horse management indicates some likelihood of success and a high

commitment to petitioners’ horse activity.

     Mark’s obvious business acumen and success in business

development and management with other companies, along with

petitioners’ credible testimony, indicate, to us, an ability,

determination, and savvy to make a profit and be successful in

petitioners’ horse activity.

History of Income or Losses

     A series of losses during the startup period of an activity

is not necessarily an indication that the activity is not engaged

in for profit, bearing in mind, however, that the objective must

be to realize a profit on the entire operation--future net

earnings and also enough earnings to recoup losses that have been

incurred in intervening years.    Bessenyey v. Commissioner, 45
                               - 18 -

T.C. 261, 274 (1965), affd. 379 F.2d 252 (2d Cir. 1967); Emerson

v. Commissioner, T.C. Memo. 2000-137.

     We note that in 2006, 2007, and 2009 petitioners did receive

significant gross income from their horse activity ($30,870,

$67,420, and $46,261, respectively), although not what

petitioners hoped for.

     The bottom line losses realized in petitioners’ horse

activity were substantial.    However, the losses were realized

during what we, in this case, regard as still the early or

startup years of the activity, and petitioners terminated the

horse activity in 2009 when it became clear to petitioners that

the likelihood of profitability was remote.

Amount of Occasional Profits

     An opportunity to earn a substantial ultimate profit in a

highly speculative venture may be sufficient to indicate that an

activity is engaged in for profit.      Sec. 1.183-2(b)(7), Income

Tax Regs.    Horse breeding and training is a speculative

venture.    Petitioners have convinced us that they had an

opportunity or the potential to earn a profit in their FHF horse

activity.

Financial Status

     Petitioners did have substantial wealth and resources not

related to their horse activity, but in light of the minimal

recreational aspects of petitioners’ horse activity, we do not
                                - 19 -

regard petitioners’ wealth as indicative of a nonprofit objective

for petitioners’ horse activity.

Elements of Personal Pleasure

     Although Patti had a lifelong interest in horses, the facts

of this case do not indicate that petitioners’ FHF horse activity

was motivated or driven by personal pleasure alone.   As we have

found, petitioners had actual hopes for the sale of their horses

at a profit, and petitioners’ horse activity is appropriately

described as a “business”.

     Petitioners’ business plan did not work out and income did

not exceed expenses, but we discern few recreational and sports

aspects in petitioners’ FHF horse activity; rather, in

petitioners’ motive, efforts, and investment in carrying on their

FHF horse activity during the years in issue we discern and find

a profit objective.   We so hold.


                                     Decision will be entered

                                for petitioners.
