                        T.C. Memo. 2007-309



                      UNITED STATES TAX COURT



     NORA E. KEATING AND RICHARD L. SHEARER, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 23856-05.              Filed October 11, 2007.



     Jon J. Jensen, for petitioners.

     Melissa J. Hedtke, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     SWIFT, Judge:   Respondent determined deficiencies in

petitioners’ joint and in petitioner Nora Keating’s individual

Federal income taxes as follows:
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                             Joint         Nora Keating’s
          Year             Deficiency        Deficiency
          1996               $7,784
          1997                6,507
          1998               18,181
          1999               16,191
          2000               20,219
          2001                                $29,066
          2002                                 35,815


     Unless otherwise indicated, all section references are to

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

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

Procedure.

     All references to petitioner in the singular are to

petitioner Nora Keating.

     The issue for decision is whether petitioner’s Arabian

horse-breeding activity (horse activity) constituted an activity

carried on for profit under section 183.


                           FINDINGS OF FACT

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

     At the time of filing the petition, petitioners resided in

Williston, North Dakota.

     In 1996, petitioner moved to Williston, North Dakota, began

work as an emergency room physician in a local hospital, and

purchased a home on a 10-acre farm.

     Throughout the years in issue, petitioner worked

approximately 60 hours a week as a physician--typically two 24-
                               - 3 -
hour shifts and one 12-hour shift.     Petitioner preferred this

work schedule because she felt “burned out” from medical school

and because it gave her more full days to spend with her six

children.

     For the years in issue, petitioner’s average annual income

from her medical practice was $238,134.

     Petitioner’s husband Richard Shearer was employed as a

firefighter-medic in North Dakota and did not participate in any

meaningful way in petitioner’s horse activity.

     Throughout her life, petitioner admired horses.     While in

high school, petitioner worked part time in a veterinary clinic

and was a member of several riding clubs.     Petitioner purchased

and boarded her first horse when she was 15 years old.

     In 1996, when petitioner began her horse activity,

petitioner realized a lifelong dream of working with horses.

     Petitioner was particularly interested in raising Arabian

horses.   Petitioner considers Arabian horses the “ballerinas of

the horse world”.

     Prior to 1996, petitioner had no experience in the business

of buying, selling, or showing horses.     Petitioner did have

experience in owning, caring for, and riding horses, and

petitioner possessed the knowledge and skill to perform basic

veterinary tasks.
                                - 4 -
     In starting up her horse activity, petitioner spoke with

several individuals about training and breeding and about

veterinary issues relating to horses.   In particular, petitioner

spoke with an award-winning breeder of Arabian horses, two horse

trainers, and a veterinarian.   Petitioner consulted these

individuals regarding breeding horses, selecting stallions and

mares, feed, training methods, artificial insemination of mares,

and factors that could result in early termination of pregnancy.

     Petitioner also spoke with individuals affiliated with horse

breeding and training who had been audited by respondent, who

recommended to petitioner that she keep good expense records and

that she keep track of receipts.

     Aware that, as a physician, her horse activity would be

“under the microscope”, petitioner consulted a C.P.A. to learn

how to keep track of receipts and to maintain records.

     Petitioner did not discuss with anyone the economic or

business aspects of breeding, training, and showing horses.

     The following schedule indicates when petitioner acquired

each of her horses, the purchase price, the type of horse, if in

the record the purpose for purchasing the horse, and the horse’s

physical condition.
                                          - 5 -

                     Year       Purchase          Type of    Purpose of    Physical
       Horse       Acquired      Price             Horse       Purchase    Condition

Santana Sun          1996        $1,500           Gelding

Benjy Bey            1996          300            Gelding

Honey                1996         1,100           Gelding      Riding      Crippled

Michaela             1996         1,500            Mare       Breeding

Angelette            1997         2,000            Mare

Mariah               1998         1,500            Mare       Breeding

Supreme Design       1998         3,000            Mare       Breeding

Lady                 1998         1,500            Pony        Riding

Trouble              1998         1,500            Pony        Riding

Sheer Energy         1998      Home-foaled        Gelding

Khat Ballou          1999      Home-foaled         Mare

Doc Wilder           2000      Home-foaled        Gelding      Riding      Crippled

Links Fame           2000      Home-foaled        Gelding

                                                                          Respiratory
River Freedom        2002          800            Gelding      Riding       Disease

Sabrinakov           2002          500             Mare

Secret Link          2002      Home-foaled         Mare


Rico de Angelo       2002      Home-foaled        Gelding

Tony Montana         2002      Home-foaled        Gelding

Dakota
Catalyst             2002          500            Gelding

Aw Fames
Ovation              2002         5,000           Gelding*

        * At trial we asked the parties to include in their posttrial briefs a
        schedule detailing purchase, sale, and condition of each of the horses
        involved in petitioner’s horse activity. Neither party produced such a
        schedule. Information in the schedule here provided is derived from the
        record. Some of the dates and amounts indicated are not completely clear in
        the record.



        During 1996 through 2002, petitioner sold only two of her

horses--each for less than its purchase price.                   In 2002, Lady was

sold for $750, and Trouble was sold for $750.
                                - 6 -
     Throughout the years in issue, petitioner received and read

publications and materials regarding horse breeding and horse

training.   Several of the publications discussed tax issues

relating to horse breeding.

     Once petitioner began her horse activity, petitioner

retained her emergency room work schedule to allow more time in

her horse activity.    On days not scheduled to work at the

hospital, petitioner spent approximately 7 to 10 hours working in

her horse activity.

     Petitioner’s horse activity involved training and feeding

the horses, cleaning horse stalls, riding recreationally,

competing in shows, performing basic veterinary work, and a host

of other activities.    Petitioner received much enjoyment and

satisfaction from her horse activity.    Petitioner’s favorite time

of day was working with the horses, and petitioner even found

cleaning the stalls to be a “stress reliever”.

     Ongoing care and training of the horses were performed by

petitioner and her family.    Before showing, petitioner hired a

professional trainer to “finish” training the horses.

     Petitioner’s daughter often rode in horse shows, and

petitioner was extremely proud of her daughter’s and her horses’

successes in the shows.    On four occasions, petitioner’s horses

participated in national competitive horse shows.
                              - 7 -
     In 2000, petitioner began building a barn to shelter the

horses during the breeding months and thereby to improve breeding.

     In 2001, petitioner began boarding horses for, and leasing

horses to, other individuals and providing horse clinics.

     During the years in issue, in an effort to reduce horse

activity expenses, petitioner changed types of feed and sought

out alternate sources of hay and specials on stud fees.

     During 1996 through 2002, petitioner advertised that her

horses were for sale by word of mouth, by showing horses at horse

shows, by placing advertisements on three Internet Web sites, and

by posting notices at a saddle shop.    Petitioner did not

advertise any of her horses for sale in any written publications.

In none of the years in issue did petitioner advertise the

boarding and leasing of horses.

     During 1996 through 2000, from two checking accounts

petitioner paid both personal and horse activity expenses.

     During 2001, from three different checking accounts

petitioner paid both personal and horse activity expenses.

     In 2002, petitioner opened a checking account in the name of

Nora Ellen Keating Stony Creek Arabians and two new personal

checking accounts from all three of which petitioner paid both

personal and horse activity expenses.
                              - 8 -
     In 2002, proceeds received from the sale of Lady and Trouble

were deposited into one of petitioner’s personal checking

accounts, not into the Nora Ellen Keating Stony Creek Arabians

bank account.

     Petitioner recorded horse activity expenses on a ledger by

category and retained receipts relating to her horse activity in

a folder by month of transaction.   Petitioner kept records of

training, ovulatory cycles, and vaccinations relating to each

horse.

     Petitioner did not associate her horse activity expenses

with individual horses.

     During the years in issue, petitioner did not prepare or

have prepared a written business plan or financial projections

relating to her horse activity.

     For 1996 through 2000, petitioners timely filed joint

Federal income tax returns, and for 2001 and 2002 petitioner

timely filed an individual Federal income tax return.

     Petitioners’ joint Federal income tax returns for 1996

through 2000 and petitioner’s individual Federal income tax

returns for 2001 and 2002 included a Schedule F, Profit or Loss

From Farming, on which it was indicated that the principal

activity was “horses”.
                                 - 9 -
     On Schedule F of the above respective tax returns the

following gross income, expenses, and net losses were reported

relating to petitioner’s horse activity:

      Year           Gross Income          Expenses      Net Losses
      1996             $ 144              $ 22,227       $ (22,083)
      1997               178                22,187         (22,009)
      1998               335                48,289         (47,954)
      1999               432                44,784         (44,352)
      2000               750                50,550         (49,800)
      2001              1,200               84,382         (83,182)
      2002              1,418              102,550        (101,132)
             Total     $4,457             $374,969       $(370,512)


     Petitioner’s horse activity losses reduced petitioners’

reported taxable income and resulted in claimed tax savings in

the amount of the tax deficiencies involved herein.


                                OPINION

     The deductibility under section 162 or section 212 of

taxpayer expenses attributable to an activity depends upon

whether the activity is carried on for profit.        See secs. 162,

183, 212.

     Section 183 specifically precludes deductions for expenses

relating to an activity not carried on for profit except to the

extent allowed by section 183(b).    For example, deductions are

not allowable under section 162 or section 212 for expenses of an
                               - 10 -
activity that a taxpayer carries on primarily as a hobby or for

recreation.   Sec. 1.183-2(a) Income Tax Regs.   For a taxpayer’s

expenses of an activity to be deductible under section 162 or

section 212, and not subject to the limitations of section 183,

the activity must be carried on with an actual and honest profit

objective.    E.g., Dreicer v. Commissioner, 78 T.C. 642, 645

(1982), affd. without opinion 702 F.2d 1205 (D.C. Cir. 1983).

     The regulations under section 183 provide a nonexclusive

list of nine factors to consider in determining whether an

activity is carried on for profit, as follows:   (1) The manner in

which the activity is carried on; (2) the expertise of the

taxpayer or his advisers; (3) the time and effort expended by the

taxpayer in carrying on the activity; (4) the expectation that

assets used in the activity may appreciate in value; (5) the

success of the taxpayer in carrying on other similar or

dissimilar activity; (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) whether elements of personal pleasure or

recreation are involved.   See sec. 1.183-2(b), Income Tax Regs.

     Neither a single factor, nor the existence of even a

majority of the factors, is controlling, but rather an evaluation

of all the facts and circumstances is necessary.    Golanty v.

Commissioner, 72 T.C. 411, 426-427 (1979), affd. without opinion
                                - 11 -
647 F.2d 170 (9th Cir. 1981).    Greater weight is given to

objective facts than to a taxpayer’s mere statement of intent.

Dreicer v. Commissioner, supra at 645.

     We consider each of these factors in turn.


Manner in Which Petitioner Carried On Her Horse Activity

     The regulations under section 183 provide that carrying on

an activity in a businesslike manner indicates a profit

objective.   Sec. 1.183-2(b)(1), Income Tax Regs.   The regulations

explain that businesslike operations typically would involve the

maintenance of complete and accurate books and records, the

conduct of the activity in a manner similar to profitable

businesses of the same nature, and changes to improve operations

and profitability.    See id.   Numerous court opinions mention that

a businesslike operation often would involve a business plan.

See, e.g., Wesinger v. Commissioner, T.C. Memo. 1999-372.

     With respect to books and records, we have held that the

maintenance of mere lists of and receipts for expenses without

any further cost accounting or analysis would not reflect good

business practices.   See Wesinger v. Commissioner, supra; Dodge

v. Commissioner, T.C. Memo. 1998-89, affd. without published

opinion 188 F.3d 507 (6th Cir. 1999); Burger v. Commissioner,

T.C. Memo. 1985-523, affd. 809 F.2d 355 (7th Cir. 1987).

     The term “businesslike manner” contemplates the use of cost

accounting techniques that provide the taxpayer with information
                              - 12 -
required to make informed business decisions.    Burger v.

Commissioner, supra.   The purpose of maintaining business books

and records is more than to “memorialize for tax purposes the

existence of the subject transactions” and includes providing a

“means of periodically determining profitability and analyzing

expenses”.   Id.; see also Dodge v. Commissioner, supra (minimal

records used to prepare tax returns not adequate to support a

finding that activity was carried on for profit).   The mere

ability to substantiate expenses does not establish that the

records were kept in a businesslike manner.

     In the context of animal-breeding activities, we have

indicated that the absence of detailed monthly expense records

for each animal may indicate a lack of profit objective.     See

McKeever v. Commissioner, T.C. Memo. 2000-288; Dodge v.

Commissioner, supra.

     Petitioner failed to keep track of expenses on a per-horse

basis and failed to prepare any financial projections which would

have aided her in evaluating the economic performance of her

horse activity.   The financial records maintained by petitioner

appear to have been maintained primarily for tax purposes.

     Petitioner emphasizes that she maintained detailed records

for each horse relating to vaccinations, training, and ovulatory

cycles.   The maintenance of these types of records, however, is

as consistent with a hobby as with a business.   See Golanty v.
                              - 13 -
Commissioner, supra at 430; Giles v. Commissioner, T.C. Memo.

2006-15; Burger v. Commissioner, supra.

     Petitioner contends that her methods of advertising were

similar to other horse-breeding operations and evidence her

profit objective.   While we recognize that participation in horse

shows provides some advertising, see Engdahl v. Commissioner, 72

T.C. 659, 662-663 (1979), we find in this case that petitioner’s

advertising efforts were minimal.   Where we have found that an

animal breeder operated in a businesslike manner, generally the

breeder not only participated in shows but engaged in other forms

of substantial advertising.   See Engdahl v. Commissioner, supra

at 667 (advertised in horse publications); Rinehart v.

Commissioner, T.C. Memo. 2002-9 (advertised in horse publications

and gave out promotional materials); Routon v. Commissioner, T.C.

Memo. 2002-7 (advertised in trade publications and mailed

promotional videos); Strickland v. Commissioner, T.C. Memo. 2000-

309 (advertised in local newspaper); Davis v. Commissioner, T.C.

Memo. 2000-101 (advertised in newspapers and distributed

promotional clothing); Phillips v. Commissioner, T.C. Memo. 1997-

128 (distributed promotional videos and participated in horse

associations for the purpose of advertising); Burrow v.

Commissioner, T.C. Memo. 1990-621 (prepared promotional videos

and advertised in horse publications).    As we have found,

petitioner’s advertising and promotion of her horse activity were
                                - 14 -
limited to word of mouth, participation in shows, placement of

advertisements on three Web sites, and posting of notices at a

saddle shop.    During the years in issue, petitioner did not

advertise in any trade magazines, journals, or written

publications.

     The commingling of personal and activity funds is not

indicative of businesslike practices.    Burrow v. Commissioner,

supra; Ballich v. Commissioner, T.C. Memo. 1978-497.     As

indicated, petitioner did not have a separate bank account for

her horse activity but instead paid horse-related and personal

expenses out of several personal accounts.

     With regard to changes in operating methods, small

improvements over several years may not reflect a businesslike

operation.     Wesinger v. Commissioner, supra.   The various changes

to petitioner’s horse activity appear to us to have been

relatively insignificant.

     While construction of barns and other facilities may

demonstrate a profit objective, Strickland v. Commissioner,

supra; Phillips v. Commissioner, supra, we note that petitioner’s

primary purpose for constructing the barn was to improve horse

breeding, and it is as consistent with a hobby as with a

business.

     Petitioner’s testimony that she had a simple and concise

business plan “to raise good quality horses, well-trained horses,
                               - 15 -
horses that will give * * * [petitioner] a good reputation,

horses that will do well in the market” is inadequate for us to

conclude that petitioner had an established business plan.     See

Wesinger v. Commissioner, T.C. Memo. 1999-372; Sanders v.

Commissioner, T.C. Memo. 1999-208 (finding similar testimony

inadequate).

     The fact that petitioner hired a professional trainer to

finish training her horses is not particularly helpful to

petitioner.    A hobby breeder who enters horses in shows to

enhance her reputation and to participate in competition also may

hire a professional trainer to finish training the horses.

     We conclude that petitioner did not operate her horse

activity in a businesslike manner.      This factor weighs in favor

of respondent.


Expertise of Petitioner and Her Advisers

     In considering this factor the focus is upon expertise and

preparation with regard to the economic aspects of a particular

business.   See, e.g., Golanty v. Commissioner, 72 T.C. at 432.

     While petitioner may have developed an expertise in the

breeding and training of horses, her expertise did not extend to

the economics thereof.    Petitioner testified that she consulted

with a successful breeder, several professional trainers, and a

veterinarian, but the discussions focused primarily on the
                             - 16 -
scientific and practical aspects of breeding and training and not

on the business aspects thereof.

     Petitioner’s discussions with a C.P.A. amounted to little

more than how to keep track of and to maintain expense receipts

for tax purposes.

     We conclude that petitioner was not an expert and did not

seek out expert advice regarding the economic aspects of carrying

on a horse activity for profit.    This factor weighs in favor of

respondent.


Time and Effort Petitioner Expended in Carrying On the Activity

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

devotion of much personal time to an activity and withdrawal from

another occupation may evidence a profit objective.   This is

particularly true where the activity does not have substantial

personal or recreational aspects.    Id.

     Petitioner contends that this factor weighs in her favor

because she voluntarily opted to work fewer shifts at the

hospital to spend more time on her horse activity.    However,

petitioner’s initial reason for working at the hospital only 2

and 1/2 days a week was because she felt “burned out” and wanted

to spend more time with her children.

     We recognize that feeding and watering horses and cleaning

stalls may be unpleasant tasks, but they are involved in caring

for horses regardless of whether an activity is pursued as a
                               - 17 -
hobby or as a business.   Giles v. Commissioner, T.C. Memo. 2006-

15; see Sullivan v. Commissioner, T.C. Memo. 1998-367, affd.

without opinion 202 F.3d 264 (5th Cir. 1999).

     It is evident that petitioner received much satisfaction

from raising and training horses.   Since childhood, petitioner

has dreamed of owning horses, and petitioner clearly enjoyed

riding in and entering horse shows.     While petitioner may have

spent a significant amount of time with her horse activity,

because the horse activity had significant personal and

recreational components, this factor is neutral.


Expectation of Appreciation in Value

     No evidence is before us as to the value of petitioner’s

horses, and it is not possible for us to determine the extent to

which petitioner’s significant losses from her horse activity

someday may be offset by appreciation in value.    See Wesinger v.

Commissioner, supra.

     This factor weighs in favor of respondent.


Success in Carrying On Other Activity

     Petitioner has not engaged in any activity similar to her

horse activity.

     This factor is neutral.
                               - 18 -
History of Income or Losses

       A history of substantial losses may indicate that an

activity is not conducted for profit.    See Golanty v.

Commissioner, supra at 427; sec. 1.183-2(b)(6), Income Tax Regs.

However, if the losses occur during the startup phase of an

activity, the losses do not necessarily indicate a lack of profit

objective.    See Engdahl v. Commissioner, 72 T.C. at 669.

       We have found that the startup phase of a horse-breeding

activity may be 5 to 10 years.    See id.; Davis v. Commissioner,

T.C. Memo. 2000-101; Phillips v. Commissioner, T.C. Memo. 1997-

128.

       Because petitioner began her horse activity in 1996, the

losses petitioner incurred during the years in issue may still be

considered part of the startup phase.    We treat this factor as

neutral.


The Amount of Occasional Profits

       The amount of occasional profits a taxpayer earns from an

activity may show that the taxpayer has a profit objective.    Sec.

1.183-2(b)(7), Income Tax Regs.    While petitioner realized no

profits, we treat this factor as neutral because, as stated,

losses are not unreasonable during the startup phase of a horse-

breeding activity.    See Strickland v. Commissioner, T.C. Memo.

2000-309.
                                - 19 -
Financial Status

     Substantial income from sources other than an activity may

indicate that the activity is not carried on for profit,

especially if losses from the activity generate substantial tax

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

     During the years in issue, petitioner’s average annual

salary was $238,134.   As a result of the losses in her horse

activity, petitioner claimed significant reductions in her

taxable income in each year in issue and a total of $133,763 in

claimed tax savings over 7 years.

     This factor weighs in favor of respondent.


Elements of Personal Pleasure

     Personal or recreational aspects of an activity may indicate

that the activity was not conducted with a profit objective.

McKeever v. Commissioner, T.C. Memo. 2000-288; sec. 1.183-

2(b)(9), Income Tax Regs.   However, the sole fact that a taxpayer

derives pleasure from an activity does not show lack of a profit

objective if the activity is, in fact, conducted for profit as

evidenced by other factors.   Sec. 1.183-2(b)(9), Income Tax

Regs.; see also Jackson v. Commissioner, 59 T.C. 312, 317 (1972)

(a business will not be turned into a hobby merely because the

owner enjoys the activity).

     In the context of horse breeding, a particularly relevant

fact is whether a taxpayer or the taxpayer’s family rides the
                             - 20 -
horses for pleasure or recreation.    See Montagne v. Commissioner,

T.C. Memo. 2004-252, affd. 166 Fed. Appx. 265 (8th Cir. 2006);

Bunney v. Commissioner, T.C. Memo. 2003-233.

     On the facts of this case, the recreational aspects of

petitioner’s horse activity suggest an activity without a profit

objective.

     This factor weighs in favor of respondent.


Conclusion

     Of the above factors, five weigh in favor of respondent,

four are neutral, while none weighs in favor of petitioner.      We

hold that petitioner’s horse activity during the years in issue

was an activity not carried on for profit within the meaning of

section 183(c).1

     This case is decided on the preponderance of the evidence,

and is unaffected by section 7491.    See Estate of Bongard v.

Commissioner, 124 T.C. 95, 111 (2005).

     To reflect the foregoing,

                                       Decision will be entered

                                 for respondent.




     1
       This opinion only applies to the years in issue, and
petitioner is not precluded from establishing a for-profit
objective in later years. See Rinehart v. Commissioner, T.C.
Memo. 2002-9.
