                         T.C. Memo. 2007-92



                       UNITED STATES TAX COURT



                TRACEY L. TOPPING, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 22589-04.               Filed April 17, 2007.



     David D. Aughtry and Hale E. Sheppard, for petitioner.

     Travis T. Vance III, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     GOEKE, Judge:    Respondent determined the following

deficiencies in petitioner’s Federal income tax:

               Year                  Deficiency

               1999                    $47,425
               2000                     91,967
               2001                    112,070
                                - 2 -

     After concessions,1 the issues for decision are:   (1)

Whether petitioner conducts her equestrian and related activities

as part of her design business; (2) whether these activities are

for profit under section 183(a);2 and (3) if the activities are

for profit, whether the expenses associated with the equestrian

activity are ordinary and necessary expenses under section

162(a).   We hold that:   (1) Petitioner conducts her equestrian

and related activities as part of her design business; (2)

petitioner’s design and equestrian activities are conducted for

profit; and (3) the equestrian-related expenses associated with

her activity are ordinary and necessary expenses.

                          FINDINGS OF FACT

     Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference.

Petitioner resided in Wellington, Florida, at the time of filing

the petition.

     In 1998, petitioner was 46 years old and in the middle of a

bitter divorce.   She had no means of supporting herself.

Petitioner held no job, had no college degree, and had not had



     1
      Petitioner concedes that she is not entitled to claim
Schedule C, Profit or Loss From Business, expenses amounting to
$26,158 and $7,402 for her interior design activity in 1999 and
2000, respectively.
     2
      All section references are to the Internal Revenue Code in
effect for the years at issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure, unless otherwise
indicated.
                                - 3 -

any full-time employment for the past 25 years.   Her significant

assets consisted of a 16-year-old horse and a debt-encumbered

condo in Wellington, Florida.

     Forced to make a living to support herself, petitioner

developed a plan to use her prominence in the equestrian world to

build a business designing horse barns and homes.   Her plan was

to establish and maintain herself as a peer worthy of trust among

the exceptionally wealthy families who participate in the upper

realms of the equestrian circuit, own multiple residences, and

use interior designers.   Even though she had no written business

plan, she discussed her plan for her business venture with her

certified public accountant, Jeffrey Borofsky (C.P.A. Borofsky).

She also discussed her plan with a longtime friend who had

successfully started her own business.   Petitioner did not

conduct a formal market study, nor did she prepare any cashflow

projections in anticipation of starting her new business.     She

did not have any experience in design other than taking a few

design courses in college.   However, petitioner possessed the

artistic ability to draft structural designs freehand.

Petitioner also was an experienced equestrian, having ridden

horses and competed on an amateur level since she was 12 or 13

years old.

     In 1999, petitioner formed a limited liability company,

Topping White Design, L.L.C. (Topping White), in Florida.     The
                                 - 4 -

address of Topping White is in West Palm Beach, Florida, which is

also petitioner’s place of residence.    Petitioner uses her home

office to handle all financial aspects of her design business.

The assets of petitioner’s activities include horses, a truck, a

trailer, and an automobile.    Petitioner uses the truck, trailer,

and automobile for both the equestrian and design activities.     In

May of 1999, petitioner hired Deborah Martin (Ms. Martin).    Ms.

Martin’s primary responsibilities include general administrative

work, such as preparing invoices, dealing with clients,

collecting money, ordering supplies, scheduling contractors, and

entering information into a computer.    Petitioner also relies

upon trainers both to refer clients and improve her performance

as a competitor.    Moreover, petitioner works with architects,

electricians, plumbers, furniture manufacturers, and other

experts in their trades in order to run the interior design

aspect of her business.    Every one of the trainers that

petitioner has worked with has referred at least one design

client to petitioner.    Petitioner also engages C.P.A. Borofsky to

handle her accounting matters.

     Petitioner’s business methodology consists of entering in

and attending horse shows, and making contacts with prospective

clients at the shows.    Potential clients develop from horse show

contacts, and then petitioner and Ms. Martin meet with the

potential client.    Early on in her business, petitioner tried to
                               - 5 -

develop clients through her longtime experience playing golf.

When golf failed to produce any clients, she dropped her golf

club membership.

     Petitioner develops her equestrian contact clients for

Topping White while competing during the Winter Equestrian

Festival, which takes place at the Jockey Club.   The Jockey Club

is an elite, private club, which is not open to the general

public.   The Jockey Club consists of a large concentration of

extraordinarily wealthy people.   Most of the attendees in the

Jockey Club own horses, and all come to watch the equestrian

competition on either side of the competing rings.   The Jockey

Club has up to 90 tables with six seats per table.   These tables

are reserved at the beginning of the season.   During the period

1999 through 2001, the cost of a table reservation was $5,000 for

the 7-week season.   Since then, the price has climbed to $25,000.

Petitioner originally owned a table at the Jockey Club, but when

the cost of a table increased, she initially split the cost with

one client, and then later split the cost with two clients.

     At the Jockey Club there is a rectangular tent situated

between two competing rings--the DeNemethy Ring, where petitioner

sometimes competes, and the Grand Prix Ring, where petitioner

frequently competes.   The rings contain large leaderboards that

are visible throughout the Jockey Club.   The events are announced

over the loudspeaker, which can be heard throughout the Jockey
                                - 6 -

Club.    When petitioner enters the Grand Prix Ring during

competition, her name is flashed on the leaderboards and

announced over the loudspeaker as the owner of the horse and once

again as the rider.    She rides her horses in the Grand Prix Ring

where the amateur-owner classes are held.    The Grand Prix Ring is

a grass field where riders compete with jumps that can exceed 4

to 6 feet in height.    Those who compete must finish within a

prescribed period without any faults to be successful.    Those who

successfully complete the first round advance to the second

round.    When petitioner advances to the second round, upon entry

into the ring, her name is once again flashed on the leaderboards

and called over the loudspeaker.    If she finishes in the ribbons

class, her name is displayed yet again on the leaderboards and

announced over the loudspeaker.    Win or lose, petitioner returns

to the Jockey Club among competitors and observers, where

conversations take place over the just-completed competition.     To

continue to develop her design business, petitioner believes she

cannot rest on her reputation and disappear from the scene, but

she must continue her client development efforts on the

equestrian circuit.

     The membership requirements for the Jockey Club do not

necessitate ownership of a horse or to be a competitor.      However,

petitioner believes that if she were to sell all of her horses or

were to give up amateur riding, both current and prospective
                                - 7 -

clients would perceive that she had failed financially, would not

rely on her as a designer, and thus not trust her with the keys

to their homes and their barns.    Petitioner also testified that

she has to maintain the reputation she has cultivated as a

skilled competitor in order to keep her existing relationships

and to cultivate new ones.    We find petitioner’s testimony

plausible in this regard.

     Petitioner does not advertise her interior design business

through advertising media such as equestrian-related magazines,

Web sites, or newspapers.    In addition, she does not display

banners or sponsor any events through Topping White.    Petitioner

intentionally rejects this type of advertising because the ethos

of the Jockey Club and its members perceive that kind of generic

advertising of a personal service business as tacky or gauche.

In addition, petitioner does not want to convey the impression

that she is desperate for or needs the work.    Rather, petitioner

relies on her exposure and reputation as both a rider and owner,

and also her popularity among the members of the Jockey Club.

Instead of actively seeking new clients, petitioner adopts a more

subtle approach to attracting prospective clients by making

herself available at the Jockey Club during key times in order

for prospective clients to find her.    In addition, petitioner

also relies on word of mouth and referrals by members of the

Jockey Club.
                               - 8 -

     The normal evolution of a design project involves a

prospective client’s contacting petitioner at a horse show.

Normally, the Monday after the horse show, Ms. Martin arranges a

meeting between petitioner and the prospective client.    The

meeting typically takes place at the design site with the

potential client, petitioner, and Ms. Martin.    In most meetings,

approximately half of the discussion is design-related to the

actual project, while the other half consists of discussion on

equestrian-related subjects.   For each of her clients, petitioner

has designed at least one horse barn.   Petitioner’s clients,

often very wealthy, entrust her with the keys to their home, even

after the projects are completed.

     Petitioner uses her general knowledge of horses and

specifically her knowledge of the idiosyncracies of each of her

client’s horses to evolve her barn designs.    For example, her

knowledge of a horse’s particular injury or temperament leads her

to design a barn with stalls tailored to each horse’s individual

needs.   Interior design of a client’s home often requires

knowledge related to horses.   Though generally most families do

not want an equestrian theme of decoration in their homes, the

designing process requires petitioner to know the needs of the

families who are essentially “horse people”.    Some of the designs

incorporate mudrooms and expanded storage for boots, saddles, and

other equipment.   In addition, in the interior design process,
                               - 9 -

petitioner has to consider bringing “the outside lifestyle as

coming to the inside” by testing fabrics for durability, cleaning

ability, and recovery relative to the client's everyday

livability.

     Petitioner keeps records for her horse barn/interior design

activities.   All of the files relating to client development and

design implementation are kept together by year.   Petitioner

maintains records that keep an inventory of expenses related to

both interior design and equestrian-related activities.

Initially, petitioner used a manual accounting system, but then

upgraded to Excel and then QuickBooks.   Petitioner uses

QuickBooks to keep records for both the equestrian and interior

design activities on a consolidated basis.   Petitioner does not

keep records of training costs or costs associated exclusively

with horse shows for the purposes of projecting a budget.    Nor

does she or C.P.A. Borofsky prepare monthly budgets or cashflow

projections for either the interior design or equestrian

activities.   According to petitioner, that is because there is no

way to predict what those costs will be from month to month, and

that the equestrian circuit is not her business but is part of

her overall plan to develop her interior design clientele.    At

trial, petitioner produced documentary evidence of a profit or

loss statement prepared by C.P.A. Borofsky that tracked expenses

for both her equestrian and interior design activities.
                              - 10 -

     Petitioner also invested in some horses with one of her

clients.   Petitioner and her client formed a partnership to make

these investments.   The choice of horses to invest in was based

on the recommendations of trainers, at least one of whom was a

world champion.   The horses petitioner invested in were sold at

an overall tax gain because of the depreciation, but the majority

resulted in a substantial economic loss on petitioner’s

investment.3

     Petitioner filed her Form 1040, U.S. Individual Income Tax

Returns, under a married filing separate status for the taxable

years 1998, 1999, and 2000, and single status for the taxable

years 2001, 2002, and 2004.   C.P.A. Borofsky prepared

petitioner’s Forms 1040 for the years 1998 through 2004.   For the

tax years 1999 through 2001, C.P.A. Borofsky filed separate

Schedules C, Profit or Loss From Business, for the horse and

design activities with petitioner’s tax returns.   Starting in

2002, C.P.A. Borofsky combined the activities on one Schedule C.

Petitioner reported net losses from her horse activities and net

income from Topping White as follows:




     3
      Petitioner took depreciation deductions for the horses
during the tax years at issue, but she did not sell most of them
until after the close of those years. Petitioner did sell one
horse named Sonic in 2002 and reported taxable gain on the sale
of $34,896. Petitioner did not realize an economic loss on the
sale--in fact, she broke even, selling the horse for exactly what
her purchase price was.
                                    - 11 -

                                 Net Loss of           Net Income of
     Tax Year                   Horse Activity         Topping White

        1998                       $47,123                $200,908
        1999                        80,735                 157,239
        2000                       206,080                 499,908
        2001                       275,169                 322,459

On a consolidated basis, however, petitioner’s overall business

enjoyed a net profit 6 of the first 7 years of the business:

     Year          Gross Income        Cash Expenses        Net Income

     1998            $253,965           $100,180            $153,785
     19991            276,453            199,949              76,504
     20001            707,521            413,693             293,828
     20011            542,183            494,893              47,290
     2002             523,038            485,279              37,759
     2003             841,564            495,422             346,142
     2004             498,826            506,887              (8,061)
             1
                 Years at issue.

     Petitioner is a beneficiary of the Daniel Topping Trust (the

trust) from which she received taxable income from 1998 through

2004.   For the years in question, that income consisted of

$14,060 for 1999, $12,053 for 2000, and $11,882 for 2001.              For

all of the other years, the amount received from the trust was

under $20,000.

     On August 26, 2004, respondent mailed to petitioner a notice

of deficiency asserting deficiencies for the taxable years 1999,

2000, and 2001.      The notice contained no determination regarding

the relationship between the horse circuit and the horse

barn/interior design activities.        The first two adjustments

shifted the gross income which petitioner reported from her horse
                             - 12 -

competition winnings and gain from the sale of one of her horses

from her Schedule C to “other income”.   Further, the notice

disallowed all of petitioner’s Schedule C horse-related expenses,

explaining:

          It has been determined that the amounts claimed as
     Schedule C horse racing expenses for the tax years
     ending 12/31/99, 12/31/2000 and 12/31/2001 are not
     allowable as such since said activity is deemed to be
     an activity not engaged into for profit. It has
     further been determined that said expenses are
     allowable as Schedule A expenses subject to the
     applicable Adjusted Gross Income limitations.
     Accordingly, your taxable income is increased by the
     disallowed expenses adjustment amounts.

     The notice also disallowed some of the expenses associated

with petitioner's horse barn/interior design activity,

explaining:

          It has been determined that adjustments are
     warranted to correct your claimed Schedule C expenses
     from your Interior Decorating Activity for the tax
     years ending 12/31/1999 and 12/31/2000. The
     adjustments are a result of a disallowance of expenses.
     The expenses have been disallowed because you have not
     established that these amounts were incurred, or, if
     incurred, paid by you during the taxable year for
     ordinary and necessary business purposes, or that these
     expenses were deductible under the provisions of the
     Internal Revenue Code. Accordingly, your taxable
     income is increased by the adjustment amounts.

     Petitioner timely filed her petition with this Court.     In

her petition, petitioner assigned error to respondent’s

segregation of the equestrian and interior design activities and
                                - 13 -

also for all other disallowed expenses related to her interior

design and equestrian activities.

                               OPINION

     Section 183 restricts taxpayers from deducting losses from

an activity that is not “engaged in for profit”.   Sec. 183(a).

An activity is engaged in for profit if the taxpayer entertained

an actual and honest profit objective in engaging in the

activity.   Dreicer v. Commissioner, 78 T.C. 642, 645 (1982),

affd. without opinion 702 F.2d 1205 (D.C. Cir. 1983); sec.

1.183-2(a), Income Tax Regs.    The taxpayer’s expectation of

profit must be in good faith.    Allen v. Commissioner, 72 T.C. 28,

33 (1979) (citing sec. 1.183-2(a), Income Tax Regs.).

I.   Burden of Proof

     Petitioner argues that under section 7491(a), the burden of

proof has shifted to respondent.    Conversely, respondent contends

the burden has not shifted because petitioner was not cooperative

within the meaning of section 7491(a), and because petitioner

failed to introduce credible evidence necessary for the burden to

shift.   It is unnecessary for us to address the parties’

disagreements and to determine whether the burden of proof has

shifted because the outcome of this case is determined on the

preponderance of the evidence after trial and is unaffected by

section 7491.   Estate of Bongard v. Commissioner, 124 T.C. 95

(2005) (citing Blodgett v. Commissioner, 394 F.3d 1030, 1035 (8th
                               - 14 -

Cir. 2005), affg. T.C. Memo. 2003-212; Estate of Stone v.

Commissioner, T.C. Memo. 2003-309).

II.   Application of Section 183

      Before we address whether petitioner had the requisite

profit motive based on the facts and circumstances, we first must

address the threshold issue of whether petitioner’s equestrian

and design undertakings constitute a single activity for purposes

of deciding whether petitioner had the requisite profit motive

under section 183.    We believe in this case that the resolution

of this issue skews all of the remaining issues in favor of the

party who prevails.   Petitioner’s arguments for profit motive all

revolve around the assumption that the undertakings constitute

one activity, while respondent’s arguments isolate the equestrian

undertaking and its losses to argue that petitioner did not have

the requisite profit motive.

      Whether Petitioner’s Undertakings May Be Treated as One
      Activity

      Multiple undertakings of a taxpayer may be treated as one

activity if the undertakings are sufficiently interconnected.

Sec. 1.183-1(d)(1), Income Tax Regs.    The most important factors

in making this determination are the degree of organizational and

economic interrelationship of the undertakings, the business

purpose served by carrying on the undertakings separately or

together, and the similarity of the undertakings.    Id.   The

Commissioner generally accepts the taxpayer’s characterization of
                              - 15 -

two or more undertakings as one activity unless the

characterization is artificial or unreasonable.    Id.

      We have considered these and other factors in determining

whether the taxpayer's characterization is unreasonable.    The

other factors so considered include:   (a) Whether the

undertakings are conducted at the same place; (b) whether the

undertakings were part of the taxpayer's efforts to find sources

of revenue from his or her land; (c) whether the undertakings

were formed as separate activities; (d) whether one undertaking

benefited from the other; (e) whether the taxpayer used one

undertaking to advertise the other; (f) the degree to which the

undertakings shared management; (g) the degree to which one

caretaker oversaw the assets of both undertakings; (h) whether

the taxpayer used the same accountant for the undertakings; and

(i) the degree to which the undertakings shared books and

records.   Mitchell v. Commissioner, T.C. Memo. 2006-145 (citing

Keanini v. Commissioner, 94 T.C. 41, 46, (1990); Tobin v.

Commissioner, T.C. Memo. 1999-328; Estate of Brockenbrough v.

Commissioner, T.C. Memo. 1998-454; Hoyle v. Commissioner, T.C.

Memo. 1994-592; De Mendoza v. Commissioner, T.C. Memo. 1994-314;

Scheidt v. Commissioner, T.C. Memo. 1992-9)).

     We find petitioner’s characterization of the equestrian and

design undertakings as a single activity for purposes of section

183 to be supported by the facts of this case.    A close
                              - 16 -

organizational and economic relationship exists between the

equestrian and design undertakings.    Petitioner’s success as an

equestrian competitor creates goodwill that benefits her design

business.   See Keanini v. Commissioner, supra.   Petitioner formed

the equestrian and design undertakings as a single integrated

business.   Petitioner had been a competitor for most of her adult

life, and she transformed this sport experience into an avenue to

establish goodwill as an interior designer of horse barns and

second homes.   She had a plan for an integrated equestrian-based

design business.   Petitioner and her assistant manage and oversee

both undertakings and their assets and also use the same books

and records to track both undertakings.

     Further, petitioner’s equestrian activities significantly

benefit her design business, and we find a significant business

purpose for the combination of these undertakings.   Her

prominence as a competitor has gained respect among her peers and

causes them to seek her out when they are in need of a designer

for their horse barns and recreational homes.

     Respondent faults petitioner for not advertising in a

conventional sense, such as putting up ads in equestrian

magazines or banners at horse shows.   Respondent argues that

petitioner’s failure to specifically advertise the name of

Topping White through conventional media is indicative of the

lack of an economic relationship between the two undertakings.
                              - 17 -

However, petitioner testified and had witnesses corroborate that

traditional advertising of a personal service business is not

welcomed by the clientele petitioner sought.   Thus, petitioner

made a business decision not to advertise conventionally.   The

question is not whether a particular mode of doing business is

wise, but whether the taxpayer honestly believed the method

employed would turn a profit for him.    In this case, petitioner’s

judgment has proven prophetic.   In Dreicer v. Commissioner, 78

T.C. 642 (1982), affd. without opinion 702 F.2d 1205 (D.C. Cir.

1983), we elucidated that the purpose of section 183 is “to allow

deductions where the evidence indicates that the activity is

actually engaged in for profit even though it might be argued

that there is not a reasonable expectation of profit. * * * This

is the proper legal standard under section 183.”    Id. at 645.

     Further, the evidence demonstrates that petitioner

demonstrated good business judgment.    Her equestrian contacts are

responsible for more than 90 percent of her client base, and her

overall business produced a sizable net profit for all of the

years at issue.   Therefore, petitioner has not only demonstrated

that she honestly believed that her mode of advertising would

turn a profit, but also has proven that it has been successful

and that adopting respondent’s suggestion would probably have

backfired.
                              - 18 -

     Respondent cites several cases where we held that the

taxpayer’s activities could not be aggregated and argues that

those cases are analogous to the facts in this situation.    In De

Mendoza v. Commissioner, supra, the Court refused to aggregate

the taxpayer’s farming/polo activity and his real estate law

practice, despite the taxpayer’s position that one reason he

began playing polo was to meet clients for his law firm.     Based

on the evidence, the Court concluded that the farm was formed and

operated as a separate business, and the Court was not convinced

that the taxpayer began the polo activity to generate legal

business or that the activity materially benefited the taxpayer’s

law practice.   In Wilkinson v. Commissioner, T.C. Memo. 1996-39,

we held that a plastic surgeon’s horse ranch activities and his

medical practice were not interrelated business activities,

despite the taxpayer’s claim that the publicity he derived from

playing polo and hosting social gatherings helped him get

patients for his cosmetic surgery practice.   Id.   In Zdun v.

Commissioner, T.C. Memo. 1998-296, affd. without published

opinion 229 F.3d 1161 (9th Cir. 2000), we held that a dentist’s

organic apple orchard was not part of the same activity as his

holistic dental practice even though the apples were sold to the

dental practice’s patients at the office.

     We do not find any of the cases respondent relies on to be

analogous to petitioner’s situation.   None of the activities in
                              - 19 -

those cases have the same level of integration and

interdependence that petitioner’s equestrian and design

activities did.   We are persuaded that petitioner’s equestrian

activities are necessary to the success of her design business.

In the equestrian-related cases that respondent cites, it is

apparent that the recreational activities were an afterthought to

the taxpayer’s primary business, and were more of a social

opportunity than an integrated part of a symbiotic business plan.

In both De Mendoza and Wilkinson, the Court found that the

benefit of the ranching activities was “incidental” to the

taxpayers’ law and medical practices, respectively.    Similarly,

in De Mendoza, we were not convinced that the taxpayer’s polo

activity materially benefited his business.    In Zdun v.

Commissioner, only 10 to 15 percent of the taxpayer dentist’s

patients actually took the apples he offered, even when he

provided the apples to them for no cost.

     Here, virtually all of petitioner’s clients are equestrian-

related contacts who depend on her knowledge and expertise of

horses in designing their barns and homes.    In addition, the

success of petitioner’s interior design business is far from

incidental to her equestrian contacts.   The evidence shows,

rather, that petitioner’s interior design business materially

benefits from her equestrian-related activities, which is

consistent with the distinctions made between incidental and

material benefit in De Mendoza and Wilkinson.    The evidence
                              - 20 -

demonstrates that petitioner’s involvement in the equestrian

world is the cornerstone of her cultivation of relationships with

her clientele.   Given the nature of petitioner’s clientele, we

find her testimony about the relationship between her equestrian-

related activities and her design business to be credible and

logical.

     Respondent argues that petitioner did not start riding

horses for the purpose of promoting her interior design business,

citing the fact that petitioner had competed for sport since a

young age.   We recognize that petitioner’s interest in horses and

participation in competition preceded the formation of her

equestrian-based design activity.   Petitioner’s business plan as

executed abruptly converted her preexisting hobby into part of an

integrated business venture after her divorce.

     Respondent also relies on the existence of the L.L.C.

entitled “Topping White Design” to argue that petitioner’s design

business was separate from her equestrian activities.   Respondent

argues that petitioner should be held to the form of her

structure, citing the fact that petitioner used the name of

Topping White in dealing with third parties.   However, there is

no basis to restrict petitioner’s overall activities to Topping

White.   Petitioner deals with clients and is known in the

equestrian world as “Tracy Topping”.   Petitioner conducts both

aspects of her business through Topping White, using the same
                                - 21 -

assets, computer program, and files.     The fact that petitioner is

known on the basis of her name to her clients in the equestrian

world does not somehow make her activities with her equestrian-

related contacts separate from her design business, which also

bears her name.

     We also are aware that for the years at issue, C.P.A.

Borofsky reported the activities on two separate Schedules C.

Positions taken by a taxpayer in a tax return are treated as

admissions and cannot be overcome without cogent proof that they

are erroneous.     Mendes v. Commissioner, 121 T.C. 308, 312 (2003);

Estate of Hall v. Commissioner, 92 T.C. 312, 337-338 (1989).

Based on the plethora of evidence that the two undertakings

constitute a single activity, we find that petitioner has

overcome that position.

     We find that a close organizational and economic

relationship exists between the equestrian and the design

undertakings.     Accordingly, we determine that for purposes of

section 183, the equestrian undertaking and the design operation

constitute a single activity.     We need not consider whether

petitioner engaged in the equestrian-based design business with

the objective of making a profit because the combined activities

were profitable in each of the years at issue.4


     4
      Petitioner argues that the presumption under sec. 183(d)
applies. Under sec. 183(d), in the case of an activity
consisting in major part of the breeding, training, showing, or
                                                   (continued...)
                              - 22 -

III. Petitioner’s Equestrian Expenses Are Ordinary and Necessary
     in Carrying On the Activities of Topping White

     Section 162(a) of the Internal Revenue Code allows the

deduction of “all the ordinary and necessary expenses paid or

incurred during the taxable year in carrying on any trade or

business.”   INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 83 (1992)

(citing sec. 162(a)).   Respondent argues that even if we

determine that the equestrian and design undertakings constitute

a single activity and that petitioner had a profit motive,

petitioner failed to establish all the equestrian expenses were

ordinary and necessary.   To be “necessary”, an expense must be

appropriate and helpful to the taxpayer’s business.   See Welch v.


     4
      (...continued)
racing of horses, if the gross income derived from the activity
exceeds the deductions for any 2 of 7 consecutive taxable years,
then the activity shall be presumed to be engaged in for profit
unless the Commissioner establishes to the contrary. See Bunney
v. Commissioner, T.C. Memo. 2003-233 (citing Golanty v.
Commissioner, 72 T.C. 411, 425 (1979), affd. without published
opinion 647 F.2d 170 (9th Cir. 1981)). We find that petitioner's
equestrian activities were secondary to her activities as a
designer. Therefore, this part of the presumption does not
apply. Sec. 183(d) presumes an activity is conducted for profit
if the gross income exceeds the attributable deductions for 3 out
of 5 consecutive years (the gross income test). The presumption
applies only after the third profit year. Mitchell v.
Commissioner, T.C. Memo. 2006-145 (citing sec. 183(d)). Since we
found that petitioner’s equestrian and design activities
constitute a single undertaking, the sec. 183(d) presumption
applies for the years 2001 and 2002. However, we do not analyze
the factors in terms of the presumption because we find that this
case turns on the fact that the equestrian and design
undertakings were an integrated business. Therefore, we find the
presumption to be unnecessary since the characterization of
petitioner’s design undertaking and equestrian undertaking as a
single activity carries the day.
                                  - 23 -

Helvering, 290 U.S. 111, 113 (1933); Carbine v. Commissioner, 83

T.C. 356, 363 (1984), affd. 777 F.2d 662 (11th Cir. 1985).      To be

“ordinary”, the transaction giving rise to the expense must be of

common or frequent occurrence in the type of business involved.

Deputy v. Dupont, 308 U.S. 488, 495 (1940).     Even if it is

determined that the expenses are ordinary and necessary, they are

deductible under section 162 only to the extent that they are

reasonable in amount.    United States v. Haskel Engg. & Supply

Co., 380 F.2d 786, 788-789 (9th Cir. 1967); Gill v. Commissioner,

T.C. Memo. 1994-92, affd. without published opinion 76 F.3d 378

(6th Cir. 1996).

       Respondent asserts that the expenses of petitioner’s

equestrian activities are unreasonable and are not ordinary and

necessary because they represent personal expenditures of

petitioner.    See sec. 262(a).    Respondent relies on Henry v.

Commissioner, 36 T.C. 879 (1961), to support his argument.        In

that case, the taxpayer, a C.P.A., sought to deduct the expenses

for his boat, upon which he flew a flag bearing the numerals

“1040”.    He asserted that the flag provoked inquiries to which he

would reply that he was a C.P.A. and a lawyer experienced in tax

law.    In disallowing the expenses of the boat, the Court held

that the taxpayer failed to prove that the flag made his yacht

expenditures “necessary” to his practice.     He failed to show

exactly how and under what circumstances his boating activities
                                  - 24 -

produced a single client.     Id. at 885.    Further, the taxpayer

failed to prove that it was ordinary for people in his profession

to incur such expenses.     Id.

     While we are mindful that expenses for personal pursuits do

not become deductible expenses simply because they afford

contacts with possible future clients, the situation in this case

is entirely different from the facts in Henry.       Petitioner has

proven that her equestrian activities are necessary to her

success as an interior designer.      The unique nature of

petitioner’s design business made it an ordinary expense to

partake in equestrian-related activities to achieve the peer

acceptance to attract clients.      We have found that petitioner’s

design and equestrian activity is part of an integrated business

plan and that petitioner’s clientele is almost exclusively

derived from her equestrian contacts.       Petitioner also offered

corroborating testimony that individuals in service businesses

who use conventional advertising evoke a negative reaction from

the people at the Jockey Club.      Respondent’s arguments focus on

petitioner’s means to an end, but neglect the most important fact

of all--petitioner’s plan worked.      Her startup business was a

success from the beginning and continues to be successful,

despite a slight loss in 2004.      Petitioner has credibly

demonstrated that the measures she takes to build her client base

are both ordinary and necessary.
                               - 25 -

     The evidence does not establish and respondent has not

argued convincingly that any particular expense was unnecessary

or excessive.    Obviously, keeping and maintaining horses is

expensive.    Petitioner demonstrated that she has done what she

can to keep costs down, from choosing less expensive travel to

sharing the cost of a table at the club.    Respondent offers

numerous ratios of the expenses associated with the equestrian

activities to the profit from Topping White.    Petitioner does

what is necessary to maintain her reputation in the equestrian

world, and we find that she does not do so in an extravagant

manner.    The fact remains that petitioner’s design business

depends heavily on her equestrian-related activities for its

success.    We therefore find and hold that not only are

petitioner’s equestrian expenses ordinary and necessary, but that

they are reasonable in amount.

Conclusion

     Petitioner’s equestrian and design activities constitute a

single undertaking.    In addition, the expenses associated with

the equestrian-related activities are ordinary, necessary, and

reasonable in amount.

     To reflect the foregoing and concessions by petitioner,



                                           Decision will be entered

                                     under Rule 155.
