                  T.C. Memo. 2010-164



                UNITED STATES TAX COURT



             LINDA K. BETTS, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 22033-07.             Filed July 27, 2010.



     R determined deficiencies in P’s 2003, 2004, and
2005 Federal income tax. P and R dispute whether P is
entitled to business expense deductions in excess of
the gross income from her horse activities.

     Held: P is not entitled to the excess business
expense deductions.



Richard W. Craigo, for petitioner.

Miles D. Friedman and Robert H. Berman, for respondent.
                                - 2 -

              MEMORANDUM FINDINGS OF FACT AND OPINION


     WHERRY, Judge:    This case is before the Court on a petition

for redetermination of Federal income tax deficiencies that

respondent determined for petitioner’s 2003, 2004, and 2005 tax

years in the amounts of $7,389, $7,372, and $5,923, respectively.

Respondent issued petitioner a notice of deficiency on

September 7, 2007.    Petitioner then filed a timely petition with

this Court.   A trial was held on December 4, 2008, in Los

Angeles, California.

     Respondent concedes that petitioner has substantiated all of

her claimed expenses for all 3 years at issue.   The issue for

decision is whether petitioner is entitled to deductions arising

from her horse activities claimed on her Schedules C, Profit or

Loss From Business, to the extent they exceed her gross income

from those activities.   More specifically, the issue is whether

petitioner was engaged in her horse activities for profit.    See

sec. 183.1

                          FINDINGS OF FACT

     Some of the facts have been stipulated, and the stipulated

facts and the accompanying exhibits are hereby incorporated by

reference into our findings.   Petitioner was single and filed



     1
      Except as otherwise indicated, all section references are
to the Internal Revenue Code of 1986, as amended and in effect
for the tax years at issue.
                                - 3 -

Forms 1040, U.S. Individual Income Tax Return, for the taxable

years at issue.    Petitioner resided in California when she filed

her petition.

     During the years at issue petitioner worked full time

designing and selling packaging materials for the cosmetic and

pharmaceutical industries primarily out of her home in

California.   During those years she earned $91,664, $90,129, and

$88,631 from that job.

     Petitioner has an affinity for horses and enjoys riding and

competing in horse-related activities.   Petitioner began riding

horses when she was 9 years old and started showing them when she

was in her teens; except for a few years in college, she has been

involved with horses ever since.   Given her “circle of friends in

the horse industry”, her horse business activities serve as a

“social outlet”.

     During the years at issue petitioner was a member of the

following organizations:   United States Equestrian Foundation,

United States Dressage Federation, United States Eventing

Association, and the California Dressage Society.2   She

subscribed to periodicals concerning show horses, some of which



     2
      “Dressage” is a French word for “training”. Its “purpose
is to develop the horse’s natural athletic ability and
willingness to work, making him calm, supple and attentive to his
rider.” United States Dressage Federation,
http://www.usdf.org/about/about-dressage/index.asp (last visited
July 15, 2010).
                               - 4 -

she received as part of her memberships in those organizations.

Petitioner also read books on horses, watched several DVDs on the

subject of horses, and attended seminars and underwent testing as

part of her education for becoming a dressage judge.    During this

time she also volunteered with Reins in Fallbrook, a horse-

related organization for “kids that are developmentally

disabled”.   Petitioner’s developmentally challenged teenage

daughter participated in the organization.   During the years at

issue petitioner lived with her daughter on the 3-acre ranch she

purchased in 1995 for $274,000.   Petitioner conducted her horse

activities, described below, primarily on this ranch.

     Petitioner’s first horse business began in 1992 and lasted

through 1997.   Petitioner engaged in this activity under the name

of L & L Farms and used business cards and stationery bearing

that name.   During the years of this breeding, training, and

selling activity, petitioner purchased a mare and bred her twice

before she became too old.   She also tried to resell a dressage

horse but was unable to do so because the horse suffered an

injury.

     On her Schedules C attached to her 1996 and 1997 Forms 1040

petitioner listed “DRESSAGE SHOW AND SALE” as her principal

business or profession.   She reported no income for the 2 years

but claimed losses of $33,336 and $20,225, respectively.

Respondent examined petitioner’s 1996 and 1997 Federal income tax
                               - 5 -

returns but made no adjustments to them.    In 1997 petitioner

ceased those activities but remained on the ranch and continued

her involvement with horses, particularly her commendable

volunteer work with the therapeutic riding center.

     The horse activities in question in this case began in May

2001 when petitioner purchased a 4-year-old gelding named

Gallahad for $1,000, a price she negotiated down from the

original $15,000 asking price.3   Gallahad was well bred but not

well cared for and it was petitioner’s plan to rehabilitate and

resell him.   At some point shortly after petitioner purchased

Gallahad, his behavior allegedly changed.    He began, or perhaps

continued, “rearing and bucking and spinning”.    It was at this

time that petitioner took Gallahad to several trainers.    The

first two were not able to help; but then she contacted Natalie

Rooney Pitts (Ms. Pitts), who was able to resolve the problem.

     Petitioner hired Ms. Pitts because of her reputation as a

“pretty tough rider” who was “able to take on troubled horses and

be successful”.   Ms. Pitts has been an equestrian professional

for 15 years and is a certified instructor, a licensed dressage



     3
      Petitioner maintains that she engaged successfully in two
or three distinct businesses that carried on different
activities. She testified that her business from 1992 to 1997
was horse breeding, training, and selling, whereas the business
from 2001 through 2007 was purchasing and reselling horses. We
are not persuaded that the latter activity is truly a new and
different business. However, whether we characterize it as one
does not change the outcome of the case.
                                 - 6 -

judge, and has been awarded the United States Dressage Foundation

bronze and silver medal lifetime awards.    She is a member of the

U.S. equestrian team and rode in the World Cup in 2005 and other

prestigious events.   Ms. Pitts described Gallahad as “very well

bred on both sides for jumping especially”, “beautiful”, “very

well put together”, and “a lovely mover”.    She told petitioner

that Gallahad could potentially be worth $100,000.    Gallahad

performed well in subsequent horse shows but then about 1 year

later suffered multiple tendon injuries, developed severe stomach

ulcers, and suffered a check ligament injury.    These problems

were costly and sidelined Gallahad through 2004.

     Pursuant to her plan to sell Gallahad, petitioner advertised

him for sale in Horse Trader magazine for $12,000 in 2002 and

2003.   She raised the price to $20,000 in 2004.   She advertised

by word of mouth and by posting flyers at horse shows; these

methods did not require a significant cash outlay.    Taking into

account her expenses related to Gallahad, petitioner would not

have made a profit even if she had sold the horse at the highest

price listed ($20,000) in Horse Trader.    Petitioner still owned

Gallahad at the time of trial.    At that time she also owned 2

other horses, Western Star and Willing Accomplice, both of which

were acquired after the tax years at issue.

     On her 2001 through 2005 Schedules C, petitioner listed her

principal business or profession as “HORSE TRAINING”.    Petitioner
                                    - 7 -

then changed her manner of tax reporting for her horse activities

on her 2006 and 2007 Forms 1040, by substituting for Schedule C,

Schedules F, Profit or Loss From Farming, on which she listed her

principal product as “HORSE TRAINING”.         Although the emphasis may

have changed, the Court concludes that in fact she had only one

business, the horse business, which over the years conducted a

number of overlapping and interrelated activities.           From 2001

through 2007 petitioner reported on her Federal income tax

returns the following amounts of salary income, gross income from

her horse activity, expenses from her horse activity, net profit

or (loss) from her horse activity, and taxable income.

                          Gross     Expenses    Net Profit
                         Income       From      or (Loss)
             Salary    From Horse    Horse      From Horse     Taxable
      Year   Income     Activity    Activity     Activity       Income
      2001   $97,507         -0-     $8,088      ($8,088)      $45,107
      2002    94,364         -0-     22,449      (22,449)       26,330
      2003    91,664         -0-     49,631      (49,631)        -0-
      2004   90,129      $6,815      49,944      (43,129)        -0-
                         1
      2005   88,631       4,035      30,123      (26,088)        6,323
                         1
      2006   82,678       4,035      43,087      (39,052)        -0-
      2007   41,410           150    71,807      (71,657)        -0-
  1
   All of this income was from her instructing activities.

       Petitioner spent approximately 40 hours per week on her

horse activity during the years at issue.        Among other things,

she cleaned stalls, fed her horses, purchased and hauled

supplies, maintained the fencing and the grounds on her farm,
                                - 8 -

rode the horses, cleaned and prepared tack, attended appointments

with veterinarians and farriers, and went to shows and competed

on the weekends--usually 2 shows per month, except for December.

     Petitioner used the same name, L & L Farms, for this horse

activity as for the activity occurring from 1992 through 1997.

She also used the same business card for both activities, with

the same telephone number and Internet address.   Petitioner

maintained a checking account separate from her personal checking

account for her horse activities under the name L & L Farms, and

that checking account was different from the one used in the

prior horse-related activity.   Petitioner also kept a separate

file for each horse to keep track of “test results sent from

shows”, “farrier bills”, and its “pedigree.”

     Petitioner’s business plan apparently was not prepared until

the 2005 tax examination commenced and consisted of little more

than a summary of the horse industry; the plan did not determine,

even at that late date, what should be done to make the business

profitable.   For the second half of 2005 petitioner indicated

that she planned to do more advertising and sell the horse she

had, Gallahad, to recoup some of her losses.   Then she would

determine whether or not to continue in the sport horse industry.

Petitioner did not increase her advertising during that year or

in 2006 or 2007 and did not sell Gallahad, but she decided to

continue the activity.
                                - 9 -

     Petitioner never made a formal budget for her later horse

activity because she “just didn’t feel that was necessary for one

horse.”    Petitioner’s business plan was to “purchase prospective

sport horses that needed developing, some training, and resell

them at a much higher price to the amateur and young rider

market.”

     At some point during the years at issue, most likely 2003,

petitioner purchased another horse, Laddie, for $10,000.

Petitioner sold Laddie in 2004 for approximately $16,000.      Given

the expenses she paid with respect to Laddie, she did not make a

profit on the overall Laddie horse sale activity.      During the

years at issue petitioner supplemented the income received from

the sale of Laddie with “a few thousand dollars” of income she

earned from giving riding lessons, putting on clinics, and

running “a program to become a judge for dressage.”      Petitioner

used her salary, withdrawals from her savings and retirement

accounts, and loans to pay her horse activity expenses.

     Petitioner used a Microsoft Excel spreadsheet to track her

horse-related income and expenses.      Petitioner engaged a

professional accountant, Donald Gamble of Premier Business

Services, to prepare her Federal income tax returns for 2003,

2004, and 2005.

     When petitioner looked at her financial records, she saw a

large negative cashflow and continued significant losses in her
                              - 10 -

horse activity.   Petitioner contended that she attempted “cost

cutting measures and tried to get a lot of the things down on

costs and negotiated with vets on the care of Gallahad and

stretching things out a little bit with farriers and so on to try

to bring the costs down.”   But, in fact, petitioner’s losses were

fairly steady, and her largest claimed loss was in 2007.

      Petitioner indicated that she expected to sell Gallahad,

for “somewhere in the six figure amount”, noting that he was well

bred, that his relatives “all were big-time show jumpers”, and

his “half brother was Gold Fever, who won the gold medal at the

2004 Olympics.”   Nevertheless, it was obvious to petitioner by at

least 2002 that this expectation was unrealistic.   She purchased

the horse, after it had been exposed on the open market for some

time, for only $1,000, and she herself offered to sell Gallahad

for as little as $12,000 starting in 2002 and 2003.

     Petitioner considered the activity of purchasing,

developing, and reselling show horses to be “risky” but worth the

risk because “the rewards may be even higher if you hit the

jackpot with a really good horse that you can sell for a lot of

money.”   When it came to marketing, petitioner showed her horses

herself so she would not have to pay a trainer and because she

was trying to sell her horses to amateurs and as an amateur rider

herself “it makes it more believable that the horse can actually

be ridden by an amateur.”   Except for a relatively small, elite
                              - 11 -

group, an amateur rider does not generally ride a horse with a

value of six figures.

     Ms. Pitts saw petitioner engaged in her business and

believed that she was “very hardworking.”    Ms. Pitts had other

clients who carried on horse activities that, according to her,

made a profit and operated in essentially the same manner as

petitioner’s.   Ms. Pitts did not advise petitioner to do anything

differently and said that she thinks “she’s doing a great job.”

Ms. Pitts indicated that petitioner is “very up on everything

that’s going on” and that she “actually [depends] on her to help

me stay abreast of everything” going on in the industry.    She

testified that most other owners do not pay attention to the

industry at all.

                              OPINION

     Respondent argued that the expenses related to petitioner’s

horse activity were not deductible in excess of the gross income

because the horse activity was not engaged in for profit within

the meaning of section 183.

     Section 183(a) generally disallows deductions attributable

to activities not engaged in for profit.    Section 183(c) defines

an “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.”
                               - 12 -

     The Court of Appeals for the Ninth Circuit, to which an

appeal in this case would lie absent stipulation to the contrary,

has held that an activity is engaged in for profit if the

taxpayer’s “predominant, primary or principal objective” in

engaging in the activity was to realize an economic profit

independent of tax savings.    Wolf v. Commissioner, 4 F.3d 709,

713 (9th Cir. 1993), affg. T.C. Memo. 1991-212.   However, if the

investor’s primary or principal objective is to make a profit, it

is not necessary for the investor to show that his primary

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

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

nonexclusive list of factors to be considered in evaluating a

taxpayer’s profit objective:   (1) The manner in which the

taxpayer carries on the activity; (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 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 from the activity; (8) the

financial status of the taxpayer; and (9) elements of personal

pleasure or recreation.   No one factor is necessarily

determinative in the evaluation of profit objective, nor is the
                               - 13 -

number of these factors for or against the taxpayer necessarily

determinative.   Golanty v. Commissioner, 72 T.C. 411, 426 (1979),

affd. without published opinion 647 F.2d 170 (9th Cir. 1981);

sec. 1.183-2(b), Income Tax Regs.    All facts and circumstances

with respect to the activity must be taken into account.     Sec.

1.183-2(b), Income Tax Regs.

1.   The Manner in Which the Taxpayer Carries on the Activity

     The fact that the taxpayer carries on the activity in a

businesslike manner may indicate that the activity is engaged in

for profit.   Sec. 1.183-2(b)(1), Income Tax Regs.   In this

context we consider:   (1) Whether the taxpayer maintained

complete and accurate books and records for the activity; (2)

whether the taxpayer conducted the activity in a manner

substantially similar to comparable activities that were

profitable; and (3) whether the taxpayer changed operating

procedures, adopted new techniques, or abandoned unprofitable

methods in a manner consistent with an intent to improve

profitability.   Giles v. Commissioner, T.C. Memo. 2005-28; sec.

1.183-2(b)(1), Income Tax Regs.

     The first inquiry considers whether petitioner maintained

complete and accurate books and records of the activity.

Petitioner maintained a separate checking account, used business

cards, kept an Excel spreadsheet of her income and expenses, and

kept a file for each horse.    However, there is little evidence
                              - 14 -

that the books and records were kept for the purpose of “cutting

expenses, increasing profits, and evaluating the overall

performance of the operation.”   See Golanty v. Commissioner,

supra at 430.   When asked at trial, petitioner was unable to

allocate profits and expenses to the sale of Laddie because she

“didn’t break it out that Laddie used x amount of food and x

amount of shavings and x amount of farrier.”   Without such

knowledge, petitioner could not have known how profitable the

entire operation was.

     Petitioner claims to have written a business plan at the

beginning of her new activity, but she was unable to present it

to the auditing agent.   Petitioner testified that when she

purchased Gallahad to start up her second horse activity, her

plan was to “purchase prospective sport horses that needed

developing, some training, and resell them at a much higher price

to the amateur and young rider market.”   Petitioner produced a

written business plan some time after the activity had already

begun and revised it at the request of the auditing agent.4     Both

of these business plans are devoid of any meaningful financial

analysis.   The only “analysis” is a broad summary of the horse

industry indicating that there are 9.2 million horses in the


     4
      The original business plan indicates that petitioner
purchased the ranch 10 years before the plan was drawn up;
therefore, this plan was probably written in 2005, before July 28
of that year, the date on which the revised version was submitted
to the Internal Revenue Service.
                              - 15 -

United States and 700,000 in California and that the “amateur

market is the fastest growing market * * * These riders are

looking for safe, enjoyable mounts that are competitive.”

     A written business plan is not required if the “business

plan was evidenced by * * * actions”.     Phillips v. Commissioner,

T.C. Memo. 1997-128.   However, in Phillips the taxpayers knew the

amounts of income that would be required to cover their expenses

in future years.   Although petitioner kept an itemized Excel

spreadsheet of the income and expenses of the activity, she did

not “prepare any business or profit plans, profit or loss

statements, balance sheets, or financial break-even analyses” for

her activity.   See Dodge v. Commissioner, T.C. Memo. 1998-89,

affd. without published opinion 188 F.3d 507 (6th Cir. 1999).

Petitioner presented no evidence of a budget or that she knew how

much she could spend to maintain Gallahad and still make a

profit.   She merely testified that she saw a lot of money going

out in her horse activities and that she never made a formal

budget because it was not “necessary for one horse”.     Even if

petitioner had received $100,000 for Gallahad in 2005, by the end

of that year she would have already lost $49,395 (i.e. $149,395 -

$100,000) on the horse activities.     This favors respondent.

     As to the second inquiry, Ms. Pitts in her testimony

indicated that she had other clients who carried on horse

activities in a manner similar to petitioner’s and earned a
                              - 16 -

profit.   But her testimony was not corroborated; documentation of

practices in similar activities was not provided.

     The third inquiry asks whether petitioner changed operating

procedures, adopted new techniques, or abandoned unprofitable

methods in a manner consistent with an intent to improve

profitability.   Petitioner did aggressively negotiate down the

purchase price of both horses she purchased; however, this was

her practice from the beginning of the second activity and

indicates no change in method.   Petitioner testified that she

began to give riding lessons and put on dressage clinics to

supplement her income.   The record shows that petitioner has been

giving clinics since 2003 but quadrupled the amount of 2003

income from the clinic activity in 2005.    This does seem to

indicate that she at least updated her operating procedure to

increase this income.

     Petitioner negotiated down veterinarian bills, and Ms. Pitts

noted that petitioner brought her own shavings (the wood chips

used as a floor covering and bedding in horse stalls) to horse

shows for half the cost.   However, petitioner’s records indicate

that her vet expenses increased from about $4,000 in 2003 to more

than $7,000 in 2005, and her shavings expenses decreased from

about $560 in 2003 to about $100 in 2005.    Some of these minor

changes indicate that petitioner wanted to decrease expenses on

an activity that was not earning a profit.    But we are not
                               - 17 -

convinced that these changes would have had a material impact on

the overall profitability of petitioner’s activity or are

probative that she conducted the activity with an objective to

make a profit.   See Golanty v. Commissioner, 72 T.C. at 428.

     Respondent asserts that petitioner’s minimal advertisement

and promotion of the horse activities indicate that the

activities were not engaged in for profit.     This Court has found

that advertising at horse shows, by word of mouth, in print

media, and by participation in horse shows may indicate an intent

to make a profit.    Engdahl v. Commissioner, 72 T.C. 659, 667

(1979).   However, in 2005 petitioner spent only $35 on

advertising, almost $500 less than in 2004 and 2003.     Although

this indicates a change in operating procedure, the reduction in

the amount expended for advertising is at best ambiguous and may

not be consistent with an intent to improve profitability.     This

favors respondent.

     We conclude that petitioner did not carry on the horse

activity in a businesslike manner.      Therefore, this factor favors

respondent.

2.   The Expertise of the Taxpayer or Her Advisers

     Preparation for the activity by extensive study of its
     accepted business, economic, and scientific practices,
     or consultation with those who are expert therein, may
     indicate that the taxpayer has a profit motive where
     the taxpayer carries on the activity in accordance with
     such practices. * * * [Sec. 1.183-2(b)(2), Income Tax
     Regs.]
                               - 18 -

     We have no doubt that petitioner is an accomplished

horsewoman with an extensive background in riding and showing

horses.    She has certainly engaged in an extensive study of

training, dressage, and horsemanship as evidenced by her

collection of books and videos, and her dressage seminars and

testing.    However, none of the educational materials in the

record relate to the economics or business aspects of profitably

running a horse activity, and petitioner’s background as a

lifelong horsewoman is insufficient to indicate a profit

objective.    See Giles v. Commissioner, T.C. Memo. 2006-15

(discounting the probative value of reference materials that do

not relate to the business aspects of the horse activity); and

Giles v. Commissioner, T.C. Memo. 2005-28 (same); McKeever v.

Commissioner, T.C. Memo. 2000-288.

     Before entering into her second activity petitioner

consulted Robert Kellerhouse, a rider and competitor who

organizes horse shows, Teresa Williams, a horse broker, Elsa

Donnell, a dressage trainer, and Axle Steiner, a horse judge who

judges the Olympics and “all the high end equestrian sports.”

Petitioner continued to consult with those individuals after she

started her activity about:    Issues with training Gallahad, the

ups and downs of the market, what horses were being sold for, who

was winning equestrian competitions, what people were looking for

in horses, and what horses were selling.
                                - 19 -

     The main inquiry is whether petitioner received advice from

the experts as to the accepted principles and economics of

profitably running a business and not merely the general advice

that a horse enthusiast would seek in training and showing horses

as a hobby.   See Golanty v. Commissioner, 72 T.C. 411 (1979);

Chandler v. Commissioner, T.C. Memo 2010-92; Keating v.

Commissioner, T.C. Memo. 2007-309, affd. 544 F.3d 900 (8th Cir.

2008); Giles v. Commissioner, T.C. Memo. 2006-15; McKeever v.

Commissioner, supra (taxpayers received general advice on showing

and promoting horses, but not on how to run a profitable horse

business).    Other than Ms. Pitts, petitioner’s advisers did not

testify at trial or otherwise corroborate through evidence such

as correspondence or other documentation that they discussed the

specifics of profitably running a horse activity with petitioner.

When a party has the ability to introduce evidence and does not,

we may infer that the evidence would have been unfavorable to

that party.    Wichita Terminal Elevator Co. v. Commissioner, 6

T.C. 1158, 1165 (1946), affd. 162 F.2d 513 (10th Cir. 1947).

     Ms. Pitts discussed the economic state of the sport horse

industry with petitioner and observed petitioner discussing the

same with Robert Kellerhouse.    Although petitioner’s discussions

with the above experts may have touched on some information

relevant to running a horse activity for profit, the focus was on
                                - 20 -

the general aspects of training, showing, and selling horses and

not on the business aspects of the activity.

     We conclude that petitioner has not established that she

sought expert advice regarding the business and economic aspects

of carrying on her activity for profit; therefore, this factor

weighs in favor of respondent.

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

     The fact that the taxpayer devotes much of his personal
     time and effort to carrying on an activity,
     particularly if the activity does not have substantial
     personal or recreational aspects, may indicate an
     intention to derive a profit. A taxpayer’s withdrawal
     from another occupation to devote much of his energies
     to the activity may also be evidence that the activity
     is engaged in for profit. * * * [Sec. 1.183-2(b)(3),
     Income Tax Regs.]

     Petitioner spent 40 hours per week working on her horse

activity.    Ms. Pitts corroborated this testimony, confirming that

petitioner spent a minimum of 40 hours per week on the activity.

This is a significant amount.    Petitioner’s horse activity work

included:    Cleaning stalls, feeding horses, maintaining the

grounds/fencing, riding horses, cleaning tack, handling animals

for the vet or farrier, and competing in shows.    However, the

activity also had considerable personal and recreational aspects,

even if some of the activities were mundane, arduous, or

repugnant.    Petitioner received considerable enjoyment from
                              - 21 -

riding, owning, and competing with horses.5   She went to all-

weekend horse shows and competitions, which she enjoyed and which

took considerable time.   These activities are just as much a part

of a horse hobby as they are a horse business, and there is no

indication of what work she did on her horse activity that was

beyond what she would have done if the activity was a hobby.     See

Giles v. Commissioner, T.C. Memo. 2006-15 (“unpleasant tasks

associated with caring for horses are required regardless of

whether the activity is pursued as a hobby or a business.”);

Giles v. Commissioner, T.C. Memo. 2005-28.

     Although we found in Engdahl v. Commissioner, 72 T.C. at

670-671, that “35 to 55 hours per week caring for the horses,

mucking out stalls, and maintaining the horse facilities * * *

could hardly be called pleasurable”, the taxpayers in Engdahl did

not themselves ride or personally use the activity’s property for

social activities.   In contrast, petitioner received a great deal

of pleasure from riding and acknowledged that she had a circle of



     5
      Petitioner testified that she never rode “pleasure horses”,
and Ms. Pitts testified that she never saw petitioner ride a
pleasure horse. However, petitioner did not distinguish whether
she meant that she never rode horses for leisure time pleasure or
that she never participated in the discipline of “pleasure
riding”. “Pleasure riding” competitions at horse shows evaluate
horses on manners and suitability of the horse for a relaxed
gait. The horse is to appear to be a “pleasure” to ride.
Because petitioner is an accomplished horsewoman (and so is Ms.
Pitts), we believe that she may have been referring to the
discipline and not the fact that she never received pleasure from
riding her horses.
                               - 22 -

friends in the horse industry and that it was a social outlet for

her.

       Petitioner confirmed her lifelong love of horses and

competition.    That a business person derives pleasure from his or

her work does not necessarily show a lack of a profit objective.

See sec. 1.183-2(b)(9), Income Tax Regs.; see also Jackson v.

Commissioner, 59 T.C. 312, 317 (1972).    Petitioner did spend a

significant amount of time on her horse activity; however,

because the activity had so many personal and recreational

aspects, we find this factor neutral.

4.     The Expectation that Assets Used in the Activity May
       Appreciate in Value

       “A taxpayer’s expectation that assets such as land and other

tangible property used in an activity may appreciate in value to

create an overall profit may indicate that the taxpayer has a

profit objective as to that activity.”    Giles v. Commissioner,

T.C. Memo. 2005-28 (quoting sec. 1.183-2(b)(4), Income Tax

Regs.).


       There is no doubt that petitioner expected her horses to

appreciate.    Petitioner began her second horse activity after

purchasing Gallahad for $1,000 with the plan to “resell * * *

[him] at a much higher price”.    Gallahad was very well bred but

he had been neglected.    She was able to negotiate the original

asking price of $15,000 down to just $1,000 because the owners
                              - 23 -

wanted to “just get rid of him.”   Petitioner believed that she

would then be able to sell him “somewhere in the six figure

amount.”

     After petitioner purchased Gallahad, he had many physical

problems; however, Ms. Pitts testified that Gallahad could still

be worth $100,000.   The record does not support that testimony

but rather shows that petitioner had been unable to sell Gallahad

at much lower prices.   Although Gallahad did not appreciate

nearly as much as petitioner thought he would, we believe that

petitioner felt she had bought him for a bargain price and did

expect him to appreciate in value.

     We are unconvinced by petitioner’s argument that her

property should be included as part of her horse activity.     We do

accept that she believed the property would appreciate in value

and that it did in fact appreciate.    As we have already found,

petitioner also expected her horses to appreciate.    Petitioner

testified that a bank had appraised her property at around

$500,000 in 2003, and another appraisal (prepared for a line of

credit) indicates that the value was somewhere around $400,000

and $522,600.   Petitioner believed her property was worth

$675,000 in 2003 and that it was worth somewhere between $700,000

and $850,000 in 2005 based on a valuation by her realtor.

     The property also served as petitioner’s home and that of

her daughter.   There is no indication that petitioner expected to
                              - 24 -

hold the property for sale or to sell it as a profit center of

her horse activity.   See Rozzano v. Commissioner, T.C. Memo.

2007-177 (The taxpayer began the horse activity subsequent to the

purchase of the land, therefore there was no bona fide intention

of realizing profits from including the land in the horse

activity.).

     When there is little economic interrelationship between a

horse activity and the holding of the property for appreciation,

they cannot be considered the same activity.   Boddy v.

Commissioner, T.C. Memo. 1984-156 n.6, affd. without published

opinion 756 F.2d 884 (11th Cir. 1985).   Petitioner may have

purchased the land primarily for the purpose of her first horse

activity; however, it was also her primary residence, and she

remained on the property between her two horse activities.     If

petitioner’s intent to make a profit depended upon the

appreciation of her land, then “‘the horse farm was an

unnecessary economic burden to the holding of the land for

appreciation.’”   See Purdey v. Commissioner, T.C. Memo. 1989-657

(quoting Boddy v. Commissioner, supra), affd. without published

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

     Even if we assume that petitioner purchased the property

“with the intent to profit from increase in its value,”

petitioner has not shown that the horse activity actually

“reduces the net cost of carrying the land for its appreciation
                               - 25 -

in value.”    See Purdey v. Commissioner, supra; sec. 1.183-

1(d)(1), Income Tax Regs.   Farming and holding 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’”.    Faulkner v. Commissioner, T.C. Memo. 1985-536 n.9

(quoting section 1.183-1(d)(1), Income Tax Regs.).   Petitioner’s

income never came close to covering the expenses that were

related to the horse activity and were not directly related to

the holding of the land.6

     Because Laddie was sold for $6,000 over his purchase price

and Gallahad was purchased at a “bargain price”, we conclude that

petitioner expected the horses involved in the activity to

appreciate in value with the potential, although not achieved

here, of creating a profit.   This factor weighs in favor of

petitioner.

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

     “The fact that the taxpayer has engaged in similar

activities in the past and converted them from unprofitable to

profitable enterprises may indicate that he is engaged in the


     6
      Petitioner’s Excel spreadsheets for 2003, 2004, and 2005
list only expenses directly related to the care, show, and sale
of horses and do not include any property expenses. These
spreadsheets also include petitioner’s income from the horse
activity, which is a mere fraction of the listed variable horse-
related expenses.
                                - 26 -

present activity for profit, even though the activity is

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

     Although petitioner has a long history of working with and

showing horses, petitioner’s first horse activity was

unsuccessful.     Petitioner reported on Schedule C of her tax

returns that she had losses of $33,336 in 1996 and $20,225 in

1997.     Petitioner appears to be a successful packaging designer

for the pharmaceutical and cosmetics industry; however, the

record does not show that she conducted her horse activity in a

manner similar to her design business.     Giles v. Commissioner,

T.C. Memo. 2005-28 (citing Dodge v. Commissioner, T.C. Memo.

1998-89).

        Under this factor, petitioner’s previous lack of success in

carrying on a similar activity favors respondent.

6.      The Taxpayer’s History of Income or Losses With Respect
        to the Activity

             A series of losses during the initial or start-up
        stage of an activity may not necessarily be an
        indication that the activity is not engaged in for
        profit. However, where losses continue to be sustained
        beyond the period which customarily is necessary to
        bring the operation to profitable status such continued
        losses, if not explainable, as due to customary
        business risks or reverses, may be indicative that the
        activity is not being engaged in for profit. If losses
        are sustained because of unforeseen or fortuitous
        circumstances which are beyond the control of the
        taxpayer * * * such losses would not be an indication
        that the activity is not engaged in for profit. * * *
        Sec. 1.183-2(b)(6), Income Tax Regs.; see also Engdahl
        v. Commissioner, 72 T.C. at 669 (holding that horse
        breeding has 5-to 10-year startup stage); Burger v.
                               - 27 -

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

     For the years at issue petitioner claimed $118,848 in

losses.    She contends that the years at issue were well within

the 5-to 10-year startup stage of her activity and that the

losses were in part due to unforeseen problems with Gallahad.

     Petitioner argues that the activity beginning in 2001 was

distinct from the activity beginning in 1992.    Petitioner asserts

that because she took a 3-1/2 year hiatus from conducting or

reporting any operations and because the first activity consisted

primarily of breeding, development, and sale, while the second

activity consisted of purchasing, development, and sale, the two

activities are different.    Petitioner argues that this

distinction is important with respect to the presumption under

section 183(d) and the allowance of an appropriate startup period

for the second activity.    Even if petitioner began a new activity

in 2001, we are unconvinced that the extensive losses can be

explained because the activity was still in its startup phase.

     Section 183(d) provides that “If the gross income derived

from an activity for 3 or more of the taxable years in the period

of 5 consecutive taxable years which ends with the taxable year

exceeds the deductions attributable to such activity * * * such

activity shall be presumed * * * to be an activity engaged in for

profit.”    This section expands the timeframe so the presumption

arises if in 2 of 7 taxable years the gross income exceeds the
                                - 28 -

deductions for “an activity which consists in major part of the

breeding, training, showing, or racing of horses”.    Id.

     If her second activity was truly a new and distinct

activity, the years at issue are only the third, fourth, and

fifth of the activity.   It was possible that petitioner could

then have had 2 profitable years before the 7 years were up as of

the end of the 2005 tax year.    In fact, as of chart above notes,

losses were also incurred in 2006 and 2007.   Petitioner’s main

business prospect, Gallahad, had not sold even at prices

substantially below $100,000 (the record includes advertisements

where petitioner listed Gallahad at $12,000 to $20,000).    We are

unconvinced that petitioner would have been able to sell Gallahad

at a price that would cover her losses.   See Boddy v.

Commissioner, T.C. Memo. 1984-156 (“‘the presence of losses in

the formative years of a business * * * is not inconsistent with

an intention to achieve a later profitable level of operation,

bearing in mind, however, that the goal must be to realize a

profit on the entire operation, which presupposes not only future

net earnings but also sufficient net earnings to recoup the

losses which have meanwhile been sustained in the intervening

years’” (quoting Bessenyey v. Commissioner, 45 T.C. 261, 274

(1965), affd. 379 F.2d 252 (2d Cir. 1967), cert. denied 389 U.S.

931 (1967))).
                              - 29 -

     Although petitioner cites numerous cases in which we have

allowed lengthy startup periods (5 to 11 years) for horse

activities, those cases generally involve horse breeding.   See

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

Commissioner, T.C. Memo. 2002-7; McKeever v. Commissioner, T.C.

Memo. 2000-288; Dodge v. Commissioner, T.C. Memo. 1998-89; Appley

v. Commissioner, T.C. Memo. 1979-433.   Petitioner, in the years

at issue, was not involved in a horse-breeding activity, and she

did not present testimony or other evidence at trial with respect

to a reasonable startup period for her actual activity.

Petitioner asserts that her activity was “essentially a ‘one-

horse’ operation”, and the record indicates that she attempted to

sell Gallahad relatively soon after purchase.   Moreover, there is

no indication that she would have made a profit from her activity

if the problems affecting Gallahad had not occurred.   See Dodge

v. Commissioner, supra.

     Quoting section 1.183-2(b)(6), Income Tax Regs., petitioner

also argues that the losses were “‘sustained because of

unforeseen or fortuitous circumstances which are beyond the

control of the taxpayer’”.   It is true that there were many

problems with Gallahad.   While in petitioner’s possession, he had

a problem, multiple tendon injuries, and ulcers.   As unfortunate

as these issues are, we do not beleive they were entirely
                                 - 30 -

unforeseeable.   Petitioner purchased this horse for a nominal

amount of $1,000 from people who wanted to “just get rid of him.”

     Even if petitioner was in the startup phase of her second

horse activity, the substantial and consistent losses were not

attributable to the costs required to start up a business.       Nor

were they from unforeseen circumstances.       The losses resulted

from her inability to sufficiently control expenses and

effectively market and sell the activity’s only significant asset

and only possible source of profit.       Accordingly, this factor

favors respondent.

7.   The Amount of Occasional Profits, If Any, Which Are
     Earned From the Activity

     “The amount of profits in relation to the amount of losses

incurred, and in relation to the amount of the taxpayer’s

investment and the value of the assets used in the activity, may

provide useful criteria in determining the taxpayer’s intent.”

Sec. 1.183-2(b)(7), Income Tax Regs.       “[A]n opportunity to earn a

substantial ultimate profit in a highly speculative venture is

ordinarily sufficient to indicate that the activity is engaged in

for profit even though losses or only occasional small profits

are actually generated.”   Id.

     Petitioner argues that when she purchased Gallahad and

started the activity, she could make a substantial amount of

money from the sale of Gallahad.     Yet she and Ms. Pitts also

admitted that the sale of horses is a high-risk activity.       We
                              - 31 -

have held that horse activities are highly speculative ventures,

even likening show horses to a wildcat oil well.    Dawson v.

Commissioner, T.C. Memo. 1996-417.

     Although petitioner has generated no profit from her

activity, “A taxpayer’s belief that she could one day sell a

horse for a substantial amount of revenue and a correspondingly

large profit may be indicative of a profit motive if that belief

is adequately supported.”   See Giles v. Commissioner, T.C. Memo.

2006-15 (citing McKeever v. Commissioner, supra).    When

petitioner began her second horse activity, she believed that she

could hit the “jackpot” with Gallahad.    We are less certain that

this belief reasonably continued through the years at issue.

     Petitioner’s horse activity generated no profits in the

first 4 years of existence; however, show horses are a highly

speculative venture, and petitioner initially believed that she

could sell Gallahad for a large profit.   We find this factor

slightly favors petitioner.

8.   The Financial Status of the Taxpayer

     “Substantial income from sources other than the activity

(particularly if the losses from the activity generate

substantial tax benefits) may indicate that the activity is not

engaged in for profit especially if there are personal or

recreational elements involved.”   Sec. 1.183-2(b)(8), Income Tax

Regs.   Petitioner earned substantial income from her product
                               - 32 -

design business, and the losses from her horse activity resulted

in substantial tax benefits.   Moreover, petitioner derived great

personal pleasure from her activity.     During the years at issue

petitioner earned an average of $90,000 a year from her product

design business which, coupled with the tax benefits she enjoyed,

enabled her to fund her profitless horse activity.

     Petitioner cites several cases in which the Court found that

a taxpayer’s investment of unrelated income into the activity was

indicative that it was not a mere hobby.     See, e.g., Engdahl v.

Commissioner, supra at 670; Phillips v. Commissioner, T.C. Memo.

1997-128; Mary v. Commissioner, T.C. Memo. 1989-118; Eisenman v.

Commissioner, T.C. Memo. 1988-467; Appley v. Commissioner, supra.

In each of those cases, however, the Court found facts and

circumstances not present here, including that the taxpayer

either derived no personal pleasure or recreation from the

activity or derived much less than petitioner does from her

activity.

     Petitioner did spend a significant amount of money on her

horse activity.   She also received substantial tax benefits (in

fact dropping her taxable income to zero in 2 of the years at

issue) and considerable personal pleasure.     See McKeever v.

Commissioner, T.C. Memo. 2000-288.      We are also mindful that as a

parent she saw the activity as important to her daughter’s

development and happiness.
                               - 33 -

     We agree that petitioner expended more money on her horse

activity than she could prudently afford given her apparent lack

of other independent sources of wealth, divorced status, and

dependent daughter.    Further, by funding the activity in part

with funds from loans, the hoped-for tax savings at issue in this

case, and withdrawals from her savings and retirement accounts,

she has put herself and her daughter in substantial financial

jeopardy.   See Helmick v. Commissioner, T.C. Memo. 2009-220.     So

long as Federal and State combined income tax rates are less than

100 percent, there is no financial “benefit” from losing money.

Engdahl v. Commissioner, 72 T.C. at 670.    On the basis of these

facts petitioner asserts that this was not a hobby.    Respondent,

focusing on the substantial tax benefits, consistent history of

losses, recreational elements, and petitioner’s daughter’s

therapeutic aspects, concludes it was not a for-profit activity.

We believe there is some truth to both parties’ assertions, but

we do not fully accept either party’s conclusion.     McKeever v.

Commissioner, supra.    We find this factor is neutral.

9.   Elements of Personal Pleasure or Recreation

     “The presence of personal motives in carrying on of an

activity may indicate that the activity is not engaged in for

profit, especially where there are recreational or personal

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

However, “We also note that a business will not be turned into a
                                - 34 -

hobby merely because the owner finds it pleasurable; suffering

has never been made a prerequisite to deductibility.”    Jackson v.

Commissioner, 59 T.C. at 317.

     Petitioner loves horses and clearly derives great pleasure

from her horse-related activity.    She has ridden horses since she

was 9 years old and sought to surround herself with horses her

entire life.7   Moreover, her activity is also a social outlet for

her, and she believes it has therapeutic benefits for her

daughter.   See Keating v. Commissioner, T.C. Memo. 2007-309

(citing Montagne v. Commissioner, T.C. Memo. 2004-252, affd. 166

Fed. Appx. 265 (8th Cir. 2006)) (particularly attaching relevance

to whether the taxpayer or a member of the taxpayer’s family

rides the horses); Bunney v. Commissioner, T.C. 2003-233 (the

parent supported his daughter’s interest in horses.).    We note

that, “‘an enterprise is no less a “business” because the

entrepreneur gets satisfaction from his work; however, where the

possibility for profit is small (given all the other factors) and

the possibility for gratification is substantial, it is clear

that the latter possibility constitutes the primary motivation

for the activity.’”   Dodge v. Commissioner, T.C. Memo. 1998-89

(quoting Burger v. Commissioner, T.C. Memo. 1985-523).




     7
      Again petitioner argues that she never rode “pleasure
horses.” We do not take this to mean, nor do we find, that she
received no pleasure from riding horses. See supra note 5.
                              - 35 -

     Petitioner’s horse activity clearly involved substantial

elements of personal pleasure and recreation for herself and her

daughter.   This factor strongly favors respondent.

     After considering all of the above factors, as applied to

the unique facts and circumstances of this case, we conclude that

petitioner’s horse activity was not engaged in for profit within

the meaning of section 183.   This activity, during the 3 years at

issue, essentially involved two horses, Gallahad and Laddie.     As

early as 2002, when Gallahad was offered for sale by petitioner

for $12,000 without attracting a buyer, it was or should have

been evident to petitioner that she would not hit the jackpot

with him.   Laddie was sold in 2004 for $6,000 more than the

acquisition cost, far short of a sufficient amount to cover

losses of the horse activity and show a profit.    The activity was

always in the red and continued that way through at least 2007

with the greatest loss occurring in that year.    The business

never underwent substantial change.    Therefore petitioner is not

entitled to deduct expenses to the extent they exceed gross

income from the horse activity.8




     8
      We note that petitioner is entitled to the sec. 183(b)
deductions up to the amount of income received in the horse
activity. Respondent only disallowed petitioner’s Schedule C net
losses, which petitioner determined after accounting for any
income from the horse activity in the years at issue.
                             - 36 -

     The Court has considered all of petitioner’s contentions,

arguments, requests, and statements.   To the extent not discussed

herein, we conclude that they are meritless, moot, or irrelevant.

     To reflect the foregoing,


                                         Decision will be entered

                                   for respondent.
