                        T.C. Memo. 2000-309



                      UNITED STATES TAX COURT



   RODERICK P. STRICKLAND AND LINDA G. STRICKLAND, Petitioners
         v. COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 2241-99.                 Filed September 28, 2000.



     F. Pen Cosby, for petitioners.

     Timothy A. Lohrstorfer, for respondent.


             MEMORANDUM FINDINGS OF FACT AND OPINION


     COLVIN, Judge:   Respondent determined deficiencies in

petitioners’ Federal income tax of $13,398 for 1995 and $10,687

for 1996.

     Petitioners began to breed horses in 1993 and began to board

horses in 1995.   The sole issue for decision is whether

petitioners operated their horse breeding and boarding activity
                                - 2 -

(horse activity) for profit under section 183 in 1995 and 1996.

We hold that they did.

     Section references are to the Internal Revenue Code in

effect during the years in issue.    Rule references are to the Tax

Court Rules of Practice and Procedure.    References to petitioner

are to Linda Strickland.

                           FINDINGS OF FACT

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

A.   Petitioners

     Petitioners lived in Morgantown, Indiana, when they filed

their petition.

     1.   Linda Strickland

     Petitioner was raised on a farm in Morgan County, Indiana,

where her family bred and boarded horses.     Her father gave her a

horse when she was about 8 years old.    She cared for that horse

and showed it in the local 4-H club and saddle club shows.      She

trained registered Appaloosa horses for neighbors when she was a

teenager around the early 1960's.

     Petitioner bought a registered quarter horse mare in 1969

when she was about 23 years old.    Petitioner bred a few quarter

horse mares to a stallion she owned in the early 1970's.    She

raised, showed, and sold a few foals around that time.    She

competed at several horse shows in Indiana and nearby States.

     Petitioner is the mother of Scott Waltz and Amy Stenger.
                                  - 3 -

She retired from Eli Lilly & Co. (Eli Lilly) in 1993.

     2.     Amy Stenger

     Amy Stenger began to ride horses when she was 3 and show

horses when she was 5.    She won many awards at local, State, and

national shows, including the All American Quarter Horse

Congress.    She also won awards at the Indiana State Fair and

National Quarter Pony Association.

     Amy Stenger began to train horses when she was 13.     When she

was 16, she raised, trained, and sold a weanling filly that she

had been given.    She broke and trained the first mare that

petitioners bought in 1993.

     3.     Mr. Strickland

     Roderick Strickland (Mr. Strickland) grew up on a farm in

North Carolina, where he took tobacco from the field to the barn

with a mule and a sled.      He rode mules and ponies when he was a

young adult (in the early 1960's) and rode a horse owned by his

father-in-law.    He received a bachelor of science degree in crop

science business from North Carolina State University in 1960.

His first contact with quarter horses was in 1987 when he and

petitioner began dating.

     All of Mr. Strickland’s work experience relates to

agriculture.    His employers included North Carolina State

University, Ralston Purina, and Dow Elanco.     He was employed as a

research assistant, sales associate, marketing associate,
                                    - 4 -

district sales manager, worldwide manager, national accounts

manager, product manager, national sales manager, and key account

executive.   He developed business plans, annual budgets, annual

sales forecasts, and 5-year forecasts, and plans for introducing

and marketing new products.        Mr. Strickland retired from Dow

Elanco on December 31, 1998.

     4.     Petitioners’ Income From Sources Other Than Their Horse
            and Farm Activity

     Petitioner received wages or other compensation from Eli

Lilly and Mr. Strickland received wages from Dow Elanco and Eli

Lilly from 1992 to 1996 as follows:

     Year        Mr. Strickland        Petitioner              Total
     1992           $114,599             $42,378              $156,977
     1993            125,947              94,483               220,430
     1994            137,447               5,944               143,391
     1995            200,882               5,094               205,976
     1996            127,133                                   127,133

Petitioners had other income as follows in those years:

     Year        Dividends          Interest           Rent         Total
     1992          $6,659             $2,142           $250        $9,051
     1993           7,178              1,863            441         9,482
     1994           7,429              2,484                        9,913
     1995           8,372              3,205          1,396        12,973
     1996           7,626              1,836                        9,462

B.   Petitioners’ Farm

     Petitioner bought a farm in 1972 because she wanted to raise

and train horses.   Petitioner paid the following for land:

                                                                  Cost
  Land           Purchase   date              Cost              per acre
30 acres         July 20,   1972            $15,000                $500
20 acres         July 17,   1978             16,000                 800
20 acres         April 1,   1980             20,000               1,000
                                 - 5 -

     Petitioner’s home was on the land she bought in 1972.

Petitioner had horses on her farm while she raised her children.

She and her children enjoyed riding and caring for the horses.

Petitioner divorced in 1982 and became financially unable to show

or breed horses.

     Petitioners married on July 21, 1988.     At that time the land

contained one old barn.     There were also about 10 acres of

cropland.     Petitioner sold her home and about 1 acre of land in

1988.     Petitioners built their present home on about 10 acres on

the farm before 1990.     Petitioners bought about 21 acres

adjoining their property on March 20, 1995, for $2,000 per acre.

Petitioners cleared about 5 of the 21 acres to use as pasture.

In 1996, 50 of petitioners’ 88 acres were woodland, 21 acres were

cropland, 5 acres were pasture, and 10 acres were farmstead.

C.   Petitioners’ Horse Breeding and Boarding Activity

     1.      Petitioners’ Use of the Land and Business Plan

     Petitioners decided not to raise cattle because they neither

liked nor had any experience with cattle.     Since around 1992,

they have sharecropped the 21 acres of tillable land with a local

farmer who grows tobacco.

     Petitioners began in 1993 to breed, show, and sell quarter

horses.     Petitioner was very familiar with them; people were

moving into their area and the number of horses was growing

rapidly; and they had some facilities and enough acreage to
                                - 6 -

support the activity.

     Petitioners enlarged their old barn, built a new barn, and

added stalls, wash racks, an indoor arena, and an office.      Mr.

Strickland did much of the work.    Petitioners asked their

certified public accountant how to set up their records.      They

asked successful breeders about the type of horses to acquire for

their horse activity.    They considered acquiring a stallion, but

owning a stallion would require them to modify their facilities

to do so.    Petitioner ran the daily operations of their horse

activity.    They intended to promote their activity by being

successful at horse shows.    Petitioners did not have a written

business plan.

     2.     Horses That Petitioners Acquired, Bred, and Sold

     Petitioners owned 1 horse at the end of 1992, 4 at the end

of 1993, 5 at the end of 1994, 11 at the end of 1995, and 12 at

the end of 1996.    Petitioners bought, foaled, and sold horses as

follows:
                               - 7 -

                             Year
                            Foaled
                              or                Year    Sale
    Horse         Sex       bought     Cost     Sold    Price
Tequila Twist    gelding     1979      foal
Double A Son
  Dee Sox        gelding     1993      $1,000   1996    $3,800
Colorful
  Conclusion      mare       1993      2,000
Miss Magical
  Colors          mare       1993      3,500    1994        Died
GS Itsstormy      mare       1994      2,625
Alpine Flowers    mare       1994        500
  (daughter of Title Nine)
Double A Doc’s
  Anna            mare       1995       foal
  (daughter of GS Itsstormy)
Babes Little
  Luck            mare       1995      4,000
My T Prestigious mare        1995      5,000
Tenders Lopen    gelding     1995      7,000
Title Nine        mare       1995      1,500
Title Ten        gelding     1995        500    1996       2,500
O So Classical    mare       1996       foal
  (daughter of Colorful Conclusion)
Shelby
  Prestigious     mare       1996       foal
  (foal of Alpine Flowers)
Scotch Time Lady mare        1996      3,200

     Tequila Twist was a grand champion and won his color class

in 1980.   He also won the futurity, a major American Paint Horse

Association show in 1980.   He was grand champion at least 13

times.   Amy Stenger showed Tequila Twist in 1996.

     Petitioners campaigned Colorful Conclusion in 1995.

Colorful Conclusion received at least 32 awards, including

reserve national champion and grand champion.

     Amy Stenger showed Tenders Lopen 15 to 20 times in 1996.
                                 - 8 -

     3.     Operation of the Horse Activity

     Petitioner worked full time on the horse activity in 1995

and 1996.    Petitioners, their employees, or petitioner’s children

cleaned stalls every day in the summers of 1995 and 1996 and at

least every other day in the other months.    They fed and watered

each horse twice each day and turned horses out every day.      They

usually trained horses each day.    The work usually took two

people all day to do.    Petitioners paid Amy Stenger $5 an hour to

clean stalls in 1995 and 1996.    These payments totaled $840 in

1995.

     Petitioners maintained the barn, pastures, fences, arenas,

and equipment.    They made many of the improvements themselves to

save money.    Mr. Strickland did most of the fencing and

renovation of the barns.    He built stables and stalls and

installed rubber mats and automatic waterers in their barn.

     Petitioner administered antibiotics, pain killers,

tranquilizers, rhino shots, bandages, topical ointments, and hoof

medications.    She assisted her mares with foaling.   She first

taught horses to lead by halter, to stand tied, to be handled,

clipped, bathed, and loaded in a trailer.     She taught yearlings

to work with a bit, lunge (run in a circle), respond to voice

commands, walk, trot, canter, rove, and reverse.    She prepared

them for a saddle and rode them for the first time in the fall of

their yearling year.    Petitioner used a slow and very involved
                               - 9 -

training process because she believed it was it was better than

other methods, and it was cheaper than using a horse trainer.

Petitioner also sent horses to trainers for additional training.

     Petitioners advertised individual horses for sale in a local

newspaper.   They did not insure horses they foaled or any horse

worth less than $20,000.

     4.    Petitioners’ Boarding and Leasing Activity

     Petitioners decided to board horses beginning in December

1995 to help generate more income.     Based on the cost of feed,

hay, sawdust, labor to clean stalls, electricity, and insurance,

they concluded that it would cost about $95 per month to board a

horse for a customer.   They hired an attorney to write a form

contract and release of liability form to use for boarding

horses.   They had the forms printed.

     Petitioners boarded two horses in January and February 1996,

three in March, six in April, four in May, five from June to

August, six in September, five in October, seven in November, and

four in December.   They obtained customers through referrals.

     Petitioners retained an attorney to write a horse lease

agreement form which they had printed.     Petitioners leased

Tequila Twist and Babes Little Luck to local 4-H Clubs for $175

per month each from December 1, 1995, to October 31, 1996.      The

4-H Club members rode the leased horses on petitioners’ property.

As a favor to the lessees, petitioners sometimes hauled the
                               - 10 -

leased horses to shows to which petitioners were taking other

horses.    Petitioners discontinued leasing horses because they

believed the risk of liability offset the potential profit.

     Petitioner gave (and sometimes charged for) riding lessons.

     5.     Petitioners’ Records and Bank Accounts

     Petitioners kept income, expense, breeding, foaling, health,

and farrier (horse shoe) records for their horses on their

personal computer.    Petitioners could prepare reports on their

computer of their horse-related income and expenses for 1995 and

1996, including reports for each horse.

     Petitioners used one checking account for their personal,

farm, and horse-related activities from 1993 to 1995.     They

opened a separate checking account for their horse activity

(horse account) on February 2, 1996.    They deposited $16,952.60

in the horse account from February 2, 1996, to January 3, 1997.

In 1996, petitioners paid about $14,000 of their horse expenses

from their horse account and the rest from their personal

account.

     6.     Petitioners’ Training and Expertise

     Petitioners read magazines, reviewed sire lists, viewed

videotapes, attended seminars, and spoke with quarter horse

industry experts.    They sought horse breeding advice from Edward

M. Alderson (Alderson) and other horse breeders.     Alderson had

two stallions on his farm where he grows alfalfa and breeds
                                   - 11 -

quarter horses.   He sold some quarter horses to petitioners.

Steven Mobley (Mobley), a certified public accountant, prepared

petitioners’ income tax returns for 1993 through 1996.          Mobley

gave petitioners tax advice for their horse activity.           Alderson

and Mobley did not advise petitioners how to make their horse

activity profitable.

     7.   Petitioners’ Personal Pleasure From Their Horse
          Activity

     Petitioner gets personal pleasure from raising, training,

and showing horses.    She enjoys going to horse shows and seeing

her horses do well.    Mr. Strickland gets pleasure from

petitioner’s and Amy Stenger’s success with horses and likes to

work with the foals.

D.   Horse Income and Expenses

     Petitioners reported the following on their Schedules C

(Profit and Loss) for their horse activity:

Income

                        1993       1994       1995      1996    Total
Sale of foals                                $1,700              $1,700
Boarding                                        400   $10,995    11,395
Show winnings                      $250         276                 526
Riding lessons                      160          60                 220
Horse leasing                                   175    2,280      2,455
Gross income                   0    410       2,611   13,275     16,296

Expenses                                                       Total
Depreciation            1,883   7,190        12,790   14,036   35,899
Other                   7,180 12,887         20,819   29,189   70,075
Total expenses          9,063 20,077         33,609   43,225 105,974
Net loss               (9,063)(19,667)      (30,998) (29,950) (89,678)
                              - 12 -

                              OPINION

A.   Whether Petitioners Operated Their Horse Activity for Profit

     The parties dispute whether petitioners operated their horse

breeding and boarding activity for profit in 1995 and 1996.1    In

deciding whether petitioners operated their horse activity for

profit, we consider the following nine factors:    (1) The manner

in which the taxpayer carried on the activity; (2) the expertise

of the taxpayer or his or her 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 loss with respect to the activity; (7) the amount of

occasional profits, if any, which are earned; (8) the financial

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

pleasure or recreation are involved.     See sec. 1.183-2(b), Income

Tax Regs.   No single factor controls.   See Osteen v.

Commissioner, 62 F.3d 356, 358 (11th Cir. 1995), affg. in part

and revg. on other issues T.C. Memo. 1993-519; Brannen v.

Commissioner, 722 F.2d 695, 704 (11th Cir. 1984), affg. 78 T.C.

471 (1982); sec. 1.183-2(b), Income Tax Regs.



     1
        Respondent contends that petitioners’ farming and horse
breeding were separate activities. Petitioners do not respond to
respondent’s contention. Thus, we treat them as separate
activities.
                              - 13 -

     Each party cited events that occurred after 1996.   We do not

consider those events (other than those related to trial

preparation) because those events do not show whether petitioners

had a profit objective during the years in issue.   See Lundquist

v. Commissioner, T.C. Memo. 1999-83 n.1, affd. without published

opinion 211 F.3d 600 (11th Cir. 2000); Estate of Brockenbrough v.

Commissioner, T.C. Memo. 1998-454; Gustafson's Dairy, Inc. v.

Commissioner, T.C. Memo. 1997-519; Choate Constr. Co. v.

Commissioner, T.C. Memo. 1997-495; cf. Estate of Hutchinson v.

Commissioner, T.C. Memo. 1984-55 (events occurring after the date

in issue are relevant only if they shed light on the taxpayer's

state of mind on the date in issue), affd. 765 F.2d 665 (7th Cir.

1985).

B.   Applying the Factors

     1.   Manner in Which the Taxpayer Conducts the Activity

     Maintaining complete and accurate books and records,

conducting the activity in a manner substantially like comparable

businesses which are profitable, and making changes in operations

to improve profitability suggest that a taxpayer conducted an

activity for profit.   See Engdahl v. Commissioner, 72 T.C. 659,

666-667 (1979); sec. 1.183-2(b)(1), Income Tax Regs.

          a.    Books and Records, Bank Accounts, and Business
                Plan

     Respondent contends that petitioners’ books and records were

not adequate because they did not keep them for each horse.
                               - 14 -

Respondent points out that petitioners did not have a detailed

written budget or written business plan and that they paid most

of the expenses for their horse activity with personal funds.

     Petitioners kept complete and accurate records on their

personal computer.   They could obtain reports from their computer

including reports for each horse.   They could identify the amount

of their horse income and expenses in their personal checking

account.    See Engdahl v. Commissioner, supra at 667 (one checking

account for horse activity, a medical practice, and personal

matters).

     Respondent points out that petitioners’ horse activity books

and records were very different from those in the corporation

which employed Mr. Strickland.   We think those differences are

understandable, among other reasons, because the horse activity

was in the early stages during the years in issue.

     It is reasonable for a new activity, with very little cash

flow or income, to use personal funds.    Petitioners had a

business plan and pursued it consistently, even though it was not

written.    See Phillips v. Commissioner, T.C. Memo. 1997-128

(written financial plan not required for 32-horse farm where

business plan evidenced by action).     Petitioners conducted their

horse activity in a businesslike manner.    Mr. Strickland built as

much of the facilities as possible, and petitioner provided

medical and training services to reduce their expenses.    They
                                 - 15 -

increased their number of horses from one in 1993 to 11 in 1996,

and boarded other people’s horses.

          b.        Investigating How To Conduct the Activity

     Respondent contends that petitioners did not investigate the

profit potential of their horse activity before they started it.

We disagree.      Petitioner has been involved with horses all of her

life, and she knows the associated costs.      Petitioners knew that

interest in horses was rapidly growing in their area.      Mr.

Strickland had an extensive business background and was familiar

with horses.      We believe that petitioners understood the profit

potential.    A taxpayer need not conduct a formal marketing study

to have a profit objective.      See Burger v. Commissioner, 809 F.2d

355, 359 n.6 (7th Cir. 1987), affg. T.C. Memo. 1985-523; Engdahl

v. Commissioner, supra at 668.

             c.     Amy Stenger’s Success at Showing Horses

     Respondent contends that petitioners owned ponies when Amy

Stenger was young and horses when she was older.      Thus,

respondent contends that petitioners were more interested in

providing horses for Amy than in making a profit.      We disagree.

Petitioners started their horse activity in 1993 with Tequila

Twist and Double A Son Dee Sox, neither of which is a pony.      They

bought two mares in 1993, one of which was a quarter pony.

     Respondent contends that this case is like Budin v.

Commissioner, T.C. Memo. 1994-185 (taxpayers were more interested
                              - 16 -

in their child’s horse show activity than in making a profit).

We disagree.   The taxpayers in that case had no experience with

horses before they began their horse activity.    The taxpayers’

son began competing 3 years before they began their horse

activity.   He showed great potential as a rider the year before

they started the activity.

     Respondent contends that petitioners’ failure to own a

stallion was inconsistent with their business plan and restricted

their ability to make a profit.   We disagree.   Petitioners did

not own a stallion because that would require them to pay to

acquire and maintain the stallion and to modify their facilities.

     Respondent contends that petitioners’ mares were not good

enough to support a profitable breeding program.    It was too

early to tell whether respondent’s speculation is correct in 1995

and 1996, the third and fourth years of petitioners’ horse

breeding activity.

     Respondent contends that petitioners did not advertise their

horse activity in a businesslike manner.   We disagree.

Petitioners advertised horses for sale in a local newspaper.

They also showed their horses.    See Engdahl v. Commissioner, 72

T.C. at 662-663, 667 (“Horse shows are the best form of

advertising for American saddle-bred horses.”); Golanty v.

Commissioner, 72 T.C. 411, 430-431 (1979) (taxpayers’ failure to

show horses indicated that taxpayers were not engaged in activity
                               - 17 -

for profit), affd. 647 F.2d 170 (9th Cir. 1981).

     Respondent contends that petitioners’ failure to insure

horses they had foaled and horses worth less than $20,000 shows

that they lacked a profit objective.    Respondent also contends

that petitioners’ failure to charge fees for all riding lessons

and hauling leased horses shows they lacked a profit objective.

We decline to second-guess petitioners on these points.

          d.      Changing Their Operations

     Boarding horses allowed petitioners to derive income from

their facilities before they filled them with their own horses.

Respondent concedes that petitioners’ boarding operation is a

change contemplated by section 1.183-2(b)(1), Income Tax Regs.,

but points out that petitioners’ decision to board horses did not

prevent losses.   However, petitioners’ losses would have been

larger if they had not boarded horses.    Petitioners also leased

horses in 1995 and 1996.

          e.      Conclusion

     Petitioners operated their horse activity in a serious and

organized manner.   They considered how best to use their land,

the growing interest in horses in their area, and their personal

expertise with horses in deciding to start the horse activity.

They kept accurate records of their horse activity’s finances and

the status of their horses.    They improved and expanded their

facilities and boarded horses while beginning to acquire quality
                               - 18 -

broodmares.   They tried to keep costs as low as possible.   This

factor favors petitioners.

     2.   The Expertise of the Taxpayers or Their Advisers

     Efforts to gain experience, a willingness to follow expert

advice, and preparation for an activity by extensive study of its

practices may indicate that a taxpayer has a profit motive.      See

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

     Respondent contends that petitioners did not seek or have

the economic expertise necessary to operate the horse activity

profitably.    Respondent points out that petitioners did not show

a profit from 1993 to 1996, and that none of the material that

petitioners reviewed or experts with whom they talked addressed

how to make a profit or minimize losses.    Petitioner knew a lot

about breeding, raising, training, boarding, buying, and selling

of horses and the costs associated with those actions.    Mr.

Strickland had extensive business experience.    Petitioners read

books and periodicals, viewed videotapes, attended seminars, and

consulted with experts.    We believe that petitioners had the

expertise to conduct a profitable horse activity.    This factor

favors petitioners.

     3.   Taxpayer's Time and Effort

     The fact that a taxpayer devotes much time and effort to

conducting an activity may indicate that he or she has a profit

objective.    See sec. 1.183-2(b)(3), Income Tax Regs.
                                - 19 -

     Respondent contends that petitioner’s time log for 1996

shows that she did not spend much time on the horse activity.       We

disagree.     The time log for 1996 corroborates petitioners’ and

Amy Stenger’s testimony about the time and effort they spent on

the horse activity.     This factor favors petitioners.

     4.      Expectation That Property Used in the Activity Would
             Appreciate in Value

        A taxpayer may intend to make an overall profit when he or

she expects appreciation in the value of assets used in the

activity to exceed losses.     See sec. 1.183-2(b)(4), Income Tax

Regs.     There is an overall profit if net earnings and

appreciation exceed losses from earlier years.     See Bessenyey v.

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

Cir. 1967).

        Respondent contends that petitioners have not shown that the

appreciation in assets by 1996 exceed their losses.       Respondent’s

contention improperly focuses on actual rather than expected

appreciation.     See sec. 1.183-2(b)(4), Income Tax Regs.

Petitioners contend that they expected appreciation in the value

of their horses to more than offset their net losses.      The

evidence upon which petitioners rely is inconclusive.      This

factor is neutral.

        5.   Taxpayer's Success in Other Activities

        The fact that a taxpayer has previously and profitably

engaged in similar activities may show that the taxpayer has a
                                - 20 -

profit objective.    See sec. 1.183-2(b)(5), Income Tax Regs.

     Petitioners have been successful in other activities, but

none that are similar to their horse activity.      This factor is

neutral.

     6.     Taxpayer's History of Income or Losses

     A history of substantial losses may indicate that the

taxpayer did not conduct the activity for profit.      See Golanty v.

Commissioner, 72 T.C. at 427; sec. 1.183-2(b)(6), Income Tax

Regs.     Losses during the initial stage of an activity do not

necessarily indicate that it is not conducted for profit.      See

Engdahl v. Commissioner, 72 T.C. at 669; sec. 1.183-2(b)(6),

Income Tax Regs.     The startup phase of a horse-breeding activity

may be 5 to 10 years for standardbred horses.       See Engdahl v.

Commissioner, supra.     This factor is neutral because petitioners

were in the third and fourth year of their activity in 1995 and

1996.

     7.      Amount of Occasional Profits, If Any

     The amount of any occasional profits the taxpayer earned

from the activity may show that the taxpayer had a profit motive.

See sec. 1.183-2(b)(7), Income Tax Regs.     Petitioners did not

have a profit from 1993 to 1996.     However, this is not

unreasonable during the startup years of petitioners’ activity.

     Losses sustained because of unforeseen or fortuitous

circumstances beyond the control of the taxpayer do not indicate
                                - 21 -

that the activity was not engaged in for profit.       See sec. 1.183-

2(b)(6), Income Tax Regs.     Petitioners’ mare, Miss Magical

Colors, and her foal died in 1994.       Respondent contends that

their deaths were insignificant.     We disagree.    Miss Magical

Colors’ death represented a loss of 25 percent of petitioners’

breeding capability.     This factor is neutral.

     8.    Financial Status of the Taxpayer

     The receipt of a substantial amount of income from sources

other than the activity may indicate that the taxpayer does not

intend to conduct the activity for profit.       See sec. 1.183-

2(b)(8), Income Tax Regs.     Respondent contends that this factor

favors respondent because petitioners had a substantial amount of

income from sources other than the horse activity in the years in

issue.    We disagree.

     Petitioners’ nonfarm income decreased from $218,949 in 1995

to $135,594 in 1996.     Petitioner retired in 1993, and Mr.

Strickland was scheduled to retire in 1998.       Petitioners believed

that their annual income from sources other than their horse

activity would decrease.     This suggests they had no long-term

need to shelter income after the startup phase.       This factor is

neutral.

     9.     Elements of Personal Pleasure

     The presence of recreational or personal motives in

conducting an activity may indicate that the taxpayer is not
                              - 22 -

conducting the activity for profit.    See sec. 1.183-2(b)(9),

Income Tax Regs.   However, a taxpayer's enjoyment of an activity

does not show that the taxpayer lacks a profit objective if the

activity is conducted for profit as shown by other factors.      See

Jackson v. Commissioner, 59 T.C. 312, 317 (1972); sec. 1.183-

2(b)(9), Income Tax Regs.   Petitioners enjoyed breeding and

showing horses, but we doubt that petitioners’ motive for

boarding and leasing their horses to others was to derive

personal pleasure.   This factor is neutral.

C.   Conclusion

     Petitioners operated their horse activity in a business-like

manner.   They had the expertise to conduct a profitable horse

activity.   They spent a substantial amount time on their horse

activity, including taking care of other people’s horses.    We

conclude that petitioners engaged in their horse activity for

profit in 1995 and 1996.

     To reflect the foregoing,


                                           Decision will be entered

                                      for petitioners.
