                       T.C. Memo. 1996-388



                     UNITED STATES TAX COURT



              CLARENCE A. HUNT, JR., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket No. 23753-94.                    Filed August 20, 1996.


     Clarence A. Hunt, Jr., pro se.

     Elizabeth L. Groenewegen, for respondent.



                       MEMORANDUM OPINION


     COUVILLION, Special Trial Judge:   This case was heard

pursuant to section 7443A(b)(3)1 and Rules 180, 181, and 182.

     Respondent determined a deficiency of $6,787 in petitioner's

1990 Federal income tax and an accuracy-related penalty of $1,357


1
     Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the year at issue. All Rule
references are to the Tax Court Rules of Practice and Procedure.
                               - 2 -


under section 6662(a) for negligence or disregard of rules or

regulations under section 6662(b)(1) and for a substantial

understatement of income tax under section 6662(b)(2).

     The issues for decision are:   (1) Whether petitioner's horse

racing activity was an activity "not engaged in for profit" under

section 183(a), and (2) whether petitioner is liable for the

accuracy-related penalty under section 6662(a).

     Some of the facts were stipulated, and those facts, with the

annexed exhibits, are so found and are incorporated herein by

reference.   At the time the petition was filed, petitioner's

legal residence was Oakland, California.

     Petitioner grew up near the Fairgrounds, a thoroughbred

horse racing track in New Orleans, Louisiana.    His cousin, who

was a groom at the track, introduced petitioner to the grooming,

training, and racing of thoroughbred horses.    Petitioner

developed a love for racehorses and fantasized of one day owning

the winning horse in the Kentucky Derby.   Petitioner realized

that accomplishing such a goal would require a great deal of

capital.   In the meantime, petitioner frequented different horse

racing tracks, met with trainers, and began studying horses.

     In 1980, petitioner began a temporary employment business

called Allied Temporaries (Allied).    Through the success of this

business, petitioner accumulated the resources necessary to begin

a horse racing activity.   In 1985, petitioner obtained a license
                               - 3 -


to be a horse owner and purchased his first thoroughbred racing

horse.   He later acquired other horses but never owned more than

three horses at any given time.   Prior to acquisition of his

first horse, petitioner did research as to the cost of

maintaining and training a racehorse, the potential revenue that

could be made if a horse won a "certain caliber of race", and the

rules and regulations of horse racing.   Petitioner hired horse

trainers and boarded his horses at various race tracks.    In 1990,

the year at issue, petitioner owned three thoroughbreds.    None of

these were able to race during 1990 because they were all

injured.   From 1985 to 1990, horses owned by petitioner won a few

minor races.   The activity never realized a profit.   Following

1990, petitioner continued the activity with no greater degree of

success until 1992 or 1993.

     On his 1990 Federal income tax return, petitioner reported

expenses for training and veterinarians of $22,100, no gross

income, and a net loss of $22,100 from his horse racing activity.

Petitioner reported wage income of $91,423 from Allied.

     In the notice of deficiency, respondent disallowed the horse

racing activity loss, determining the horse racing activity was

an activity not engaged in for profit under section 183, and that

petitioner had not properly substantiated the claimed expenses.

At trial, respondent conceded that the claimed expenses had been

substantiated.
                               - 4 -


     Section 183(a) provides generally that, if an activity is

not engaged in for profit, no deduction attributable to such

activity shall be allowed.   Section 183(b)(1), however, provides

that deductions that are allowable without regard to whether the

activity is engaged in for profit shall be allowed.   Section

183(b)(2) further provides that deductions that would be

allowable only if the activity were engaged in for profit shall

be allowed, "but only to the extent that the gross income derived

from such activity for the taxable year exceeds the deductions

allowable by reason of" section 183(b)(1).

     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."   The Court inquires whether

the taxpayer is engaged in the activity with the "actual and

honest objective of making a profit."   Ronnen v. Commissioner, 90

T.C. 74, 91 (1988); Dreicer v. Commissioner, 78 T.C. 642, 645

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

1983).   The taxpayer's expectation of profit need not be a

reasonable one, but there must be a good faith objective of

making a profit.   Dreicer v. Commissioner, supra at 645; sec.

1.183-2(a), Income Tax Regs.   The determination of whether the

requisite profit objective exists is to be resolved on the basis

of all the surrounding facts and circumstances of the case.
                               - 5 -


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.   Greater weight is to be given to the objective

facts than to the taxpayer's mere statement of his intent.

Dreicer v. Commissioner, supra at 645; sec. 1.183-2(a), Income

Tax Regs.   The taxpayer has the burden of proving the requisite

intent, and that the Commissioner's determination that the

activity was not engaged in for profit is incorrect.     Rule

142(a); Welch v. Helvering, 290 U.S. 111 (1933).

     Although the question of the taxpayer's profit objective is

a subjective one, objective indicia may be considered to

establish the taxpayer's true intent.   Sec. 1.183-2(a), Income

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

nonexclusive list of nine objective factors to be considered when

ascertaining a taxpayer's intent.   These 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 the 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; (8) the financial status of

the taxpayer; and (9) the elements of personal pleasure or
                               - 6 -


recreation involved in the activity.    These factors are not

merely a counting device where the number of factors for or

against the taxpayer is determinative, but rather all facts and

circumstances must be taken into account, and more weight may be

given to some factors than to others.    Cf. Dunn v. Commissioner,

70 T.C. 715, 720 (1978), affd. 615 F.2d 578 (2d Cir. 1980).     Not

all factors are applicable in every case, and no one factor is

controlling.   Abramson v. Commissioner, 86 T.C. 360, 371 (1986);

Allen v. Commissioner, 72 T.C. 28, 34 (1979); sec. 1.183-2(b),

Income Tax Regs.

     In considering the objective factors relevant to this case,

the Court is satisfied, based on the record, that petitioner has

not sustained his burden of establishing that he conducted his

horse racing activity with an actual and honest objective of

making a profit in 1990.   Petitioner did not present any

documentary or other evidence to show that his activity was

carried on in a businesslike manner or that he maintained

complete and accurate books and records of the activity.    Nor did

petitioner present any evidence of the amount of time he expended

on the activity.   On the other hand, it is clear from the record

that petitioner's employment with Allied was full time.     Further,

the Court cannot ignore the fact that petitioner realized only

nominal gross income and never realized a profit from the

activity over the period from 1985 to 1990 and thereafter.
                                - 7 -


Petitioner acknowledged at trial that "I didn't have any success

at all."   However, he produced no evidence to show that he

changed the manner in which he operated his activity in order to

make the activity profitable.   It is quite evident that

petitioner derived tremendous pleasure from the activity.     He had

a great love for horses and fantasized winning the Kentucky

Derby.   Despite that fantasy, however, he failed to conduct the

activity with an intent that, at some realistic point, it would

attain a profitable status.   Respondent, therefore, is sustained

on this issue.

     The next issue is whether petitioner is liable for the

addition to tax under section 6662(a).   Section 6662(a) provides

that, if that section is applicable to any portion of an

underpayment in taxes, there shall be added to the tax an amount

equal to 20 percent of the portion of the underpayment to which

section 6662 applies.   Under section 6664(c), no penalty shall be

imposed under section 6662(a) with respect to any portion of an

underpayment if it is shown that there was a reasonable cause,

and that the taxpayer acted in good faith with respect to the

underpayment.

     Section 6662(b)(1) provides that section 6662 shall apply to

any underpayment attributable to negligence or disregard of rules

or regulations.   Negligence is defined as lack of due care or

failure to do what a reasonable and ordinarily prudent person
                                - 8 -


would do under like circumstances.      Neely v. Commissioner, 85

T.C. 934 (1985).   The term "negligence" includes any failure to

make a reasonable attempt to comply with the provisions of the

Internal Revenue laws, and the term "disregard" includes any

careless, reckless, or intentional disregard of rules or

regulations.

     Section 6662(b)(2) provides that section 6662 shall apply to

any portion of the underpayment attributable to any substantial

understatement of income tax.   There is a substantial

understatement of income tax if the amount of the understatement

exceeds the greater of (1) 10 percent of the tax required to be

shown on the return, or (2) $5,000.     Sec. 6662(d)(1)(A).   For

purposes of section 6662(d)(1), "understatement" is defined as

the excess of tax required to be shown on the return over the

amount of tax that is shown on the return reduced by any rebates.

     Petitioner improperly claimed on his 1990 Federal income tax

return a $22,100 net loss from his horse racing activity.

Furthermore, petitioner presented no evidence to establish that

he was not negligent or did not disregard rules or regulations.

The Court concludes that petitioner was negligent or in disregard

of rules or regulations for purposes of section 6662(b)(1).

Petitioner has not established that any of the reductions under

section 6662(d)(2)(B) would apply to show that he did not have a

substantial understatement of income tax for 1990 for purposes of
                               - 9 -


section 6662(b)(2) relating to the penalty for any portion of the

underpayment attributable to any substantial understatement of

income tax.

     The maximum accuracy-related penalty imposed on an

underpayment of tax may not exceed 20 percent of such

underpayment, notwithstanding that such portion is attributable

to more than one of the types of misconduct described in section

6662(a).   Sec. 1.6662-2(c), Income Tax Regs.    Therefore, although

the underpayment of tax required to be shown on petitioner's 1990

income tax return was attributable to both negligence and a

substantial understatement of income tax, the maximum accuracy-

related penalty petitioner is liable for is 20 percent.

     Petitioner did not make a showing that there was a

reasonable cause for the understatements of income under section

6664(c).   Accordingly, respondent is sustained on the imposition

of the accuracy-related penalty under section 6662(a).



                                         Decision will be entered

                               for respondent.
