                        T.C. Memo. 2002-200



                      UNITED STATES TAX COURT



   TIMOTHY THOMAS AND JANICE KATHLEEN KUBERSKI, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 1174-01.                  Filed August 12, 2002.



     Timothy Thomas Kuberski and Janice Kathleen Kuberski,

pro sese.

     Charles J. Graves, for respondent.


             MEMORANDUM FINDINGS OF FACT AND OPINION


     COHEN, Judge:   Respondent determined deficiencies in

petitioners’ Federal income taxes and an addition to tax as

follows:
                                  - 2 -

                                           Addition to Tax
     Year            Deficiency            Sec. 6651(a)(1)

     1994             $25,014                 $5,628.38
     1995              31,785                    –-
     1996              20,543                    –-
     1998              19,554                    --

The issue for decision is whether petitioners are entitled to

deduct losses claimed on their Schedule C, Profit or Loss From

Business, for Caduceus Thoroughbreds, a horse breeding and racing

operation.   Respondent determined that petitioners’ horse

activity was not an activity engaged in for profit within the

meaning of section 183.   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.

                          FINDINGS OF FACT

     Petitioners were residents of Phoenix, Arizona, at the time

they filed their petition.   At all material times, Timothy Thomas

Kuberski (petitioner) was a physician.    Petitioners filed joint

Federal income tax returns for 1994 through 1998, reporting

annual combined earnings from employment ranging from

approximately $287,000 to approximately $342,000.

     Petitioner has been involved in the thoroughbred horse

industry in Arizona since 1980.     Petitioner’s goal was to breed,

raise, and race thoroughbred horses.
                                 - 3 -

     During the years in issue, petitioner operated Caduceus

Thoroughbreds in conjunction with Sun State Farm, an

S corporation.   Petitioner and Fillipo Santoro (Santoro) formed

Sun State Farm in 1986 to develop a modern and complete

thoroughbred horse facility capable of dealing with all facets of

the thoroughbred industry.   In 1986, Sun State Farm purchased a

36-acre parcel of land in Wickenburg, Arizona (the farm).    The

farm was flat, was zoned for farming, had good access to nearby

highways, and had a good water supply.   Petitioner, with the help

of his uncle and ranch manager, made certain improvements to the

farm, including constructing barn facilities for the horses.

     Horses that Caduceus Thoroughbreds owned were boarded at the

Sun State Farm facility from 1986 through 1996.   Caduceus

Thoroughbreds deducted boarding fees totaling $416,236 that were

paid to Sun State Farm from 1986 through 1996.

     Petitioner and Santoro dissolved Sun State Farm after a

“falling out” in 1996.   Petitioner’s horses remained at the

property, and petitioner continued to market his thoroughbreds

using the name Sun State Farm.

     Petitioner wrote a business plan in 1995 for Caduceus

Thoroughbreds that was a supplement to a plan written for Sun

State Farm in 1987.   Although the name on the 1995 business plan

had changed, petitioner had not significantly changed the

operations.
                               - 4 -

     The business plan that petitioner wrote in 1987 for Sun

State Farm identified key advisers to the business, such as a

veterinarian, an accountant, a nutritionist, and other experts in

the thoroughbred horse industry.   The 1987 plan identified farm

assets and their potential appreciation and outlined expenses

such as wages, utilities, boarding fees, race training fees, and

sale preparation fees.   The business plan included a cashflow

projection, an income and loss statement, a description of

additional revenue sources, and a listing of potential capital

improvements for the farm.   Petitioner projected annual expenses

of $93,100 and annual income of $102,600.   The plan also

projected the acquisition of a stallion to proceed with the

breeding operation.   The plan included an economic analysis

compiled by the University of Arizona, which studied the impact

of the thoroughbred horse breeding industry on the Arizona

economy.

     The 1995 supplement gave a general description of the

operations of Caduceus Thoroughbreds but did not include any

financial data or income projections other than a projected cost

of between $7,000 and $10,000 to prepare a horse for the

racetrack.   The new plan emphasized a change in focus from

breeding to racing.   The plan also cautioned that, despite

increasing purses, the value of Arizona thoroughbreds had not

improved commensurately, and owners were still buying expensive
                               - 5 -

horses elsewhere.   Petitioner projected that, as his operation

became more experienced and recognized, the potential for profit

would increase.

     Petitioner believed that he could breed a better-than-

average thoroughbred horse because of his medical background and

his understanding of physiology and statistical analysis.

Petitioner is a licensed trainer and owner, as well as a

certified horse appraiser.   He has taken annual classes on taxes,

business, shoeing horses, veterinary problems, animal husbandry,

and sales preparation.   Petitioner wrote several articles for the

thoroughbred horse industry, including one explaining the dosage

system, a horse breeding theory, and others related to various

medical problems in the racehorse industry.    Petitioner sent out

bills every month, knew all the mares on the farm, and knew why

particular mares were bred with his stallion.

     Petitioners characterize the thoroughbred horse industry as

a “loss” industry and contend that statistically it is possible

to make a profit only once every 25 years.    Petitioners have

never made a profit from their Schedule C horse breeding and

racing activity.

     From 1980 through 1998 (excluding 1981, 1983, and 1985 for

which no information was introduced), petitioners reported the

following gross receipts and losses with respect to the horse-
                                          - 6 -

related activity on Schedules C of their Federal income tax returns:

                   Year        Gross Receipts         (Loss)

                   1980            -0-               $(1,825)
                   1982            -0-                  (435)
                   1984            $136              (22,690)
                   1986           5,375              (44,320)
                   1987          13,832              (46,440)
                   1988           5,935              (39,684)
                   1989           3,434              (38,602)
                   1990           2,306              (33,662)
                   1991          14,388              (89,355)
                   1992          33,280             (106,041)
                   1993          39,662              (96,738)
                   1994          40,485              (62,142)
                   1995          19,824              (80,205)
                   1996          26,630              (67,605)
                   1997          24,931              (95,432)
                   1998          52,492              (63,087)
           Total               $282,710            $(888,263)

Petitioners’ returns for 1994, 1995, and 1996 reported, on

Schedule E, Supplemental Income and Loss, losses from Sun State

Farms.    Their returns for the years in issue reported, on

Forms 4797, Sales of Business Property, the following sales of

horses:

           1994           2 horses @ $1,000

           1995           1   horse   @   $500
                          1   horse   @   $1,000
                          1   horse   @   $1,500
                          1   horse   @   $2,000

Only two of the horses were sold for more than they cost, for a

combined profit of $333.

     Petitioners’ 1994 return was signed by petitioner on

February 18, 1997.
                                - 7 -

                               OPINION

     Respondent determined that petitioners’ horse breeding was

not an activity engaged in for profit within the meaning of

section 183.   Section 183(a) provides that, if an activity is not

engaged in for profit, no deductions attributable to the activity

shall be allowed except as provided in section 183(b).     Section

183(b)(1) allows only those deductions that are not dependent

upon a profit motive, such as taxes.     Section 183(b)(2) allows

the deductions that would be allowable if the activity was

engaged in for profit, but only to the extent that gross income

attributable to the activity exceeds the deductions permitted by

section 183(b)(1).   An “activity not engaged in for profit” is

defined in section 183(c) 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.”

     Petitioners bear the burden of proving that the requisite

profit motive exists.    Rule 142(a); Golanty v. Commissioner, 72

T.C. 411, 426 (1979), affd. without published opinion 647 F.2d

170 (9th Cir. 1981).    Section 7491(a), which is effective with

respect to court proceedings arising in connection with

examinations by the Commissioner commencing after July 22, 1998,

the date of its enactment by section 3001(a) of the Internal

Revenue Service Restructuring and Reform Act of 1998, Pub. L.

105-206, 112 Stat. 726, does not apply to place the burden of
                               - 8 -

proof on respondent in this case.   Petitioners have neither

argued that section 7491 is applicable nor established that they

complied with the requirements of section 7491(a)(2)(A) and (B)

to substantiate items, to maintain required records, and to

cooperate fully with respondent's reasonable requests.   In

addition, as discussed below, they have failed to introduce

credible evidence with respect to certain factual issues.

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

appeal in this case would lie, has held that, for a deduction to

be allowed under section 162 or section 212(1) or (2), a taxpayer

must establish that he engaged in the activity with the primary,

predominant, or principal purpose and intent of realizing an

economic profit independent of tax savings.   Wolf v.

Commissioner, 4 F.3d 709, 713 (9th Cir. 1993), affg. T.C. Memo.

1991-212; Dunn v. Commissioner, 70 T.C. 715, 720 (1978), affd.

615 F.2d 578 (2d Cir. 1980).   The taxpayer's expectation need not

be a reasonable one, but the profit objective must be bona fide.

Golanty v. Commissioner, supra at 426; sec. 1.183-2(a), Income

Tax Regs.   In determining whether the requisite intention to make

a profit exists, greater weight is to be given to the objective

facts than to the taxpayer's self-serving characterization of his

intent.   Indep. Elec. Supply, Inc. v. Commissioner, 781 F.2d 724,

726 (9th Cir. 1986), affg. Lahr v. Commissioner, T.C. Memo. 1984-

472; sec. 1.183-2(a), Income Tax Regs.
                               - 9 -

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

nonexclusive list of factors to be considered in determining

whether the taxpayer has the requisite profit objective.    The

factors are:   (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 loss with respect to the

activity; (7) the amount of occasional profits, if any, that are

earned; (8) the financial status of the taxpayer; and

(9) elements of personal pleasure or recreation.

     These factors are not intended to be exclusive, and no one

factor or majority of the factors need be considered

determinative.   Golanty v. Commissioner, supra at 426-427;

sec. 1.183-2(b), Income Tax Regs.   The most significant factors

in this case are the manner in which petitioner carried on his

thoroughbred horse breeding and racing activity, the history of

income and loss, the absence of occasional--or any--profits, and

the financial status of the taxpayer.

     Petitioners argue that they conducted their thoroughbred

breeding and racing operation in a businesslike manner.

Maintaining complete and accurate books and records, conducting
                              - 10 -

the activity in a manner substantially similar to comparable

businesses that are profitable, and making changes in operations

to adopt new techniques or abandon unprofitable methods are

factors that may indicate that a taxpayer conducted the activity

for profit.   Engdahl v. Commissioner, 72 T.C. 659, 666-667

(1979); sec. 1.183-2(b)(1), Income Tax Regs.

     Petitioners argue that they kept detailed and well thought

out business plans, maintained business account records with

yearly profit and loss statements, filed stallion reports and

reports of all broodmares and registered all foals with the

Jockey Club, used a bookkeeping service, used business stationery

and a business checking account, made a yearly assessment of the

market, culled nonproductive mares or poorly marketable horses,

made an economic forecast of each horse’s productivity, and

tracked the annual cost of getting each mare and foal to the

thoroughbred sales.   Petitioners’ arguments, however, appear to

have been copied from the tax guides for horse owners that they

presented at trial and have little support from the evidence.

Their briefs do not cite the record, and, in most instances,

there is no support in the record for their assertions.

     Petitioners offered the 1987 business plan, the 1995

supplement thereto, a 1996 brochure for the Arizona Thoroughbred

Breeders Association Yearling Sale, and Federal income tax

returns for the years in issue to support and substantiate their
                                - 11 -

claims.   Petitioner’s testimony was generally vague and focused

on the nature of the Arizona thoroughbred industry, rather than

on the manner in which he conducted the breeding and racing

operations.    Petitioner alluded to one instance in which he

consulted a nutritionist to eliminate a condition called

epiphycytis.    Petitioner’s testimony was uncorroborated by

witnesses or documents.

     The evidence presented at trial does not persuade us that

petitioner maintained records for the purpose of “cutting

expenses, increasing profits, and evaluating the overall

performance of the operation”.     Golanty v. Commissioner, supra at

430; see also Sullivan v. Commissioner, T.C. Memo. 1998-367

(generally no profit motive where lack of evidence that taxpayer

used records to improve losing venture), affd. without published

opinion 202 F.3d 264 (5th Cir. 1999).    Petitioner testified that

“all the records in the world, or business plans in the world are

not going to make a difference on whether you make a profit in

this”.    A businesslike operation, however, would include analyses

on why large losses recurred over a long period and whether any

possibility of recouping them existed.

     A taxpayer’s history of income or loss with respect to an

activity may indicate the presence or absence of a profit

objective.     Golanty v. Commissioner, 72 T.C. at 426.   The

magnitude of the activity’s losses in comparison with its
                              - 12 -

revenues is an indication that the taxpayer did not have a profit

motive.   Burger v. Commissioner, 809 F.2d 355, 360 (7th Cir.

1987), affg. T.C. Memo. 1985-523.   A continuous series of losses

during the startup stage will not necessarily be deemed

indicative that the activity was not engaged in for profit.      Sec.

1.183-2(b)(6), Income Tax Regs.   However, the cumulative loss

should not be of such a magnitude that an overall profit from a

combination of operations and realized appreciation of business

assets could not possibly be achieved.     Bessenyey v.

Commissioner, 45 T.C. 261, 274 (1965), affd. 379 F.2d 252 (2d

Cir. 1967); sec. 1.183-2(b)(4), Income Tax Regs.

     From 1980 when petitioner began the thoroughbred horse

activity through 1998, Caduceus Thoroughbreds had cumulative

losses exceeding $888,000.   The Court has recognized that the

startup phase of a horse breeding activity is 5 to 10 years.

Engdahl v. Commissioner, 72 T.C. at 669.    In this case, the years

in issue are well beyond the period customarily necessary to

bring a similar operation to profitable status.    Sec. 1.183-

2(b)(6), Income Tax Regs.

     Petitioners’ Schedule C losses for 1994, 1995, 1996, and

1998 are $62,142, $80,205, $67,605, and $63,087, respectively.

Petitioners claim that the losses were due to unforeseen

circumstances such as lawsuits against the business, downturns in

business, changes in the purse structure at races, a decrease in
                              - 13 -

Breeder’s awards, and death or problems with important horses.

However, petitioners presented no evidence at trial to

corroborate their claims.   In fact, the 1995 business plan

supplement states that purses in races had increased over the

years but that the value of Arizona thoroughbreds had not

increased commensurately.   The evidence available from the record

indicates that, despite petitioner’s realization that the

thoroughbred horse activities had not proved profitable, no

substantial changes were made to the operations.

     The amount of profits earned in relation to the amount of

losses incurred, the amount of the investment, and the value of

the assets in use may indicate a profit objective.   Sec. 1.183-

2(b)(7), Income Tax Regs.   Profit means economic profit,

independent of tax savings.   Drobny v. Commissioner, 86 T.C.

1326, 1341 (1986); Engdahl v. Commissioner, 72 T.C. at 670.

Petitioners’ Federal income tax returns reflect that, without the

effect of depreciation deductions, two horses were sold at a

profit of $333 during the 4 years in issue.   Petitioner has never

made a profit in his horse activities, although they have

generated generous tax savings in the form of depreciation

deductions and net losses that offset his substantial income as a

physician.

     Petitioners argue that the Internal Revenue Service unfairly

pursues high income taxpayers who engage in breeding and racing
                                - 14 -

horses.   Obviously, petitioners’ financial status permits them to

engage in an activity reporting large losses over decades.     The

financial status of the taxpayers is an appropriate inquiry under

the regulations, section 1.183-2(b)(8), Income Tax Regs., and in

the case law.   See Golanty v. Commissioner, 72 T.C. at 428.

Petitioners’ level of income permitted them to continue the horse

activity without a profit.   If they had regarded the activity as

a business, they would have focused more on the financial aspects

and ways to cut their losses.    Only their other income allowed

their continued pursuit of losing operations.

     Petitioners argue that many years of losses are necessary

to make a profit in the horse breeding and racing industry.    They

cite Duley v. Commissioner, T.C. Memo. 1981-246, for the

proposition that the opportunity to earn a profit in a highly

speculative venture is sufficient to demonstrate profit motive.

Petitioner claims that he bred Quinton’s Fan Club, a horse that

sold as a yearling for $7,500 and, after the sale, went on to

become a world record holder and stakes winner of over $100,000.

No evidence was presented regarding petitioner’s reliance on a

professional trainer or petitioner’s own ability to train and run

a racehorse whose winnings would provide him with a realistic

chance of recovering the losses incurred in prior years.

     Petitioners contend that certain assets that have

appreciated in value over the years should be considered when
                                 - 15 -

analyzing whether the requisite profit motive exists.   They claim

that the farm where the horses were boarded appreciated over the

years.   There is no reliable evidence in the record, however, of

the value of the land.   Petitioner gave evasive and inconsistent

testimony about disposition of the land when Sun State Farm was

dissolved.    Petitioner testified:

          Q [Respondent’s counsel] When Sun State Farm was
     dissolved, the property was sold; is that correct?

          A   [Petitioner]   Yes.

          Q    In 1996, after Sun State Farm was dissolved,
     who purchased that property?

          A      I don’t know.

          Q      You don’t know?

          A      No.

          Q      Did you purchase that property?

          A      No.

          Q    So, you just previously testified that you
     currently own that property; is that correct?

          A      Yes.

          Q    So at what point did you purchase the
     property?

          A      I never purchased it.

It is unclear from this testimony how petitioner would have had

an interest in appreciation of the land after 1996, and there is

no evidence that any appreciation was realized in or before 1996.
                              - 16 -

     Petitioners also argue that the stallion Sunny Feet was

purchased at no cost but was one of the most successful stallions

in Arizona, producing 10-percent stakes winners and over $100,000

in futurity stakes races.   Petitioner stated that the stallion’s

untimely death had compromised his chances of making a profit

from breeding fees and awards.   No credible evidence was offered

by petitioners with regard to Sunny Feet to substantiate their

claims.

     Petitioner considers himself an expert in the thoroughbred

industry and believes that, as a physician with a background in

statistical analysis, he can produce a higher quality

thoroughbred than other Arizona breeders.    A taxpayer’s

expertise, research, and study of an activity, as well as his

consultation with experts, may be indicative of a profit motive.

Sec. 1.183-2(b)(2), Income Tax Regs.    In the 1995 supplement to

the business plan, petitioner stressed that the focus of Caduceus

Thoroughbreds would be on nutrition and training.    Although

petitioner named several key advisers to the breeding and racing

operation in the 1987 and 1995 business plans, he did not present

any further evidence of their expertise in the industry or that

he actually relied on such experts.    Petitioner has no formal

training in equine science and has not shown that he performed

any research or analysis on the profitability of his operations.
                              - 17 -

     Petitioners devote considerable attention in their brief to

arguing that the regulations set an impossible mandate for

profitability in the horse racing and breeding industry.

Specifically, petitioners point to the presumption under section

1.183-1(c), Income Tax Regs., that a horse breeding or racing

activity is engaged in for profit if its gross income exceeds

deductions for any 2 of 7 consecutive years.   Petitioners

emphatically argue that it is only possible to make a profit once

in 25 years.   Although petitioners seem to think otherwise, an

activity’s history of losses is not an exclusive factor, nor is

it an impossible obstacle to overcome in successfully proving a

profit motive in horse breeding activities.    See Rinehart v.

Commissioner, T.C. Memo. 2002-9; Routon v. Commissioner, T.C.

Memo. 2002-7; Jordan v. Commissioner, T.C. Memo. 2000-206; Yancy

v. Commissioner, T.C. Memo. 1984-431; Ellis v. Commissioner, T.C.

Memo. 1984-50; Coe v. Commissioner, T.C. Memo. 1974-129; Deerman

v. Commissioner, T.C. Memo. 1974-84; Foster v. Commissioner, T.C.

Memo. 1973-13.   It is a persuasive factor in this case, however,

because of the amount of the losses, the length of the period of

losses, and the absence of offsetting considerations.

We conclude that petitioner’s horse breeding and racing operation

was not an activity engaged in for profit.

     Section 6651(a)(1) imposes an addition to tax for failure to

file a required return on the date prescribed, unless it is shown
                               - 18 -

that such failure is due to reasonable cause and not willful

neglect.    Petitioners’ 1994 tax return was signed February 18,

1997.    Petitioners presented no evidence and did not offer any

explanations as to why they failed to file timely their 1994

return.    Neither petitioners’ trial memorandum nor their opening

brief mentioned the late filing of their return.     They are thus

deemed to have conceded the issue.      They belatedly claim in their

reply brief that they were not given enough time to address this

issue.    The trial of this case substantially exceeded the time

estimated by the parties.    Much time was wasted by petitioner’s

refusal to execute an appropriate stipulation or to heed the

Court’s attempts to direct his testimony to relevant facts.

Petitioners are liable for the addition to tax for 1994.

     We have considered petitioners’ remaining arguments.     To the

extent that they are not discussed above, those arguments are

totally lacking in merit.

     To reflect the foregoing,

                                            Decision will be entered

                                     for respondent.
