                         T.C. Memo. 1998-205



                       UNITED STATES TAX COURT



               DALE ALLAN RINEHART, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 26402-96.             Filed June 11, 1998.



     Dale Allan Rinehart, pro se.

     Brigham J.L. Sanders, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     VASQUEZ, Judge:    Respondent determined deficiencies in

petitioner's 1992 and 1993 Federal income taxes in the amounts of

$43,959 and $44,656, respectively.

     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. After concessions,1

     1
        Petitioner concedes that he is not entitled to deduct
alimony in the amount of $9,288 for both 1992 and 1993 and
                                                   (continued...)
                                - 2 -


the sole issue for decision is whether petitioner's horse

breeding activity was an activity not engaged in for profit.

                          FINDINGS OF FACT

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.   Petitioner resided in

Campbell, Texas, at the time he filed his petition.

     Petitioner has been an airline pilot with American Airlines

for more than 32 years.   During 1992 and 1993, petitioner was on

reserve status.   During this time, he worked an average of 5 days

a month, but he was available to work 20 days a month.   In 1992

and 1993, petitioner earned wages of $169,858 and $166,040,

respectivelyPetitioner has been involved with horses since

childhood.   He owned his first cutting horse2 when he was 7 years

old and first trained a cutting horse when he was a teenager.

     Starting in 1979, petitioner decided to breed, train, and

sell quarter horses for cutting horse competitions (the horse



     1
      (...continued)
charitable contributions in the amounts of $5,200 and $4,800 for
1992 and 1993, respectively. Respondent concedes that petitioner
is entitled to deduct home mortgage interest expenses in the
amounts of $20,376 and $19,882 for 1992 and 1993, respectively,
and an unreimbursed employee expense in the amount of $1,216 for
1993.
     2
        Horses (generally quarter horses) are bred and trained as
cutting horses for competitions in which the horse must separate
one cow from the herd. Horses are bred with "cutting" bloodlines
which give them the natural ability to be competitive. The
raising and training of a foal for cutting horse competition
takes approximately 4 years.
                                - 3 -


breeding activity).    Prior to this, petitioner was not involved

in horse breeding.    Petitioner derived personal pleasure and

enjoyment from the horse breeding activity.

     Before starting the horse breeding activity, petitioner

studied breeding operations and the effect of bloodlines on

performance, read books and journals on the subject matter, and

attended a short course on equine reproduction at a local

university.   Petitioner also had knowledge of equine artificial

insemination techniques.    Petitioner, however, did not consult

with any horse breeders about the best way to minimize expenses

or to operate a profitable business.

     Petitioner operated the horse breeding activity by himself.

He started by purchasing a stallion from which to breed cutting

horses.   In 1985, petitioner owned between 65 and 70 horses;

however, only one was a stallion, and the remaining horses were

mares or foals.   Pursuant to a divorce decree in 1986, petitioner

transferred about half of the horses to his former spouse, but he

retained the stallion.

     In 1990, hoping to establish a name in the cutting horse

industry, petitioner began rebuilding his herd and rented an

indoor arena in Royce City, Texas.      In March 1991, petitioner

purchased a 40-acre horse farm in Campbell, Texas, for $350,000

called "Compass R Ranch" and leased an additional 40 acres

adjacent to the farm (together referred to as the ranch).      The

farm had an arena, a blacksmith shop, a stallion and breeding
                               - 4 -


barn, and several pastures for raising and training the horses.

     Petitioner performed most of the work on the ranch.    In 1992

and 1993, petitioner spent a considerable amount of time

renovating the ranch.   Daily activities on the ranch included

weed control of the pasture, hauling hay, repairs of the stalls

or fences, and other general maintenance work.    In addition to

the daily chores, petitioner spent time breaking and training

young horses on the ranch.   During the breeding season,

petitioner's main activity was encouraging "live cover" of the

horses by leading the stallion to the mare.   When petitioner was

away on flights for American Airlines, a laborer would come in to

feed the horses and clean the stalls.

     Petitioner sold one horse in 1992 and none in 1993.

Petitioner showed his horses in cutting horse competitions;

however, he never received any monetary awards from these

competitions.

     Petitioner maintained inadequate records of the horse

breeding activity.   Petitioner did not record information about

the purchases or sales of his horses.   Petitioner did not make

written forecasts or projections of future income.    Additionally,

petitioner has never kept a separate checking account or other

bank account for the horse breeding activity.    Prior to 1995,

petitioner did not advertise the horse breeding activity.

     The horse breeding activity never showed a profit.

Petitioner reported gross sales from this activity in the amounts
                                 - 5 -


of $2,150 and $3,500 for 1992 and 1993, respectively.   From 1986

through 1996, petitioner reported the following Schedule F gross

income and net losses from the horse breeding activity:

     Year           Gross Income         (Net Losses)

     1986              Unknown             ($92,210)
     1987              Unknown              (92,560)
     1988              Unknown              (99,725)
     1989              Unknown             (122,948)
     1990                $-0-              (101,889)
     1991                 388              (119,872)
     1992               2,085              (117,904)
     1993                 -0-              (115,729)
     1994                 300              (154,365)
     1995              19,136              (130,660)
     1996              32,137              (104,137)

     In the notice of deficiency, respondent determined that

petitioner did not engage in the horse breeding activity for

profit and therefore disallowed the losses claimed for 1992 and

1993.

                         OPINION

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

not engaged in for profit, no deduction attributable to such

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

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."

     For a deduction to be allowed under sections 162 or 212(1)

or (2), a taxpayer must establish that he or she engaged in the

activity with an actual and honest objective of making an
                                  - 6 -


economic profit independent of tax savings.     Antonides v.

Commissioner, 91 T.C. 686, 693-694 (1988), affd. 893 F.2d 656

(4th Cir. 1990); Dreicer v. Commissioner, 78 T.C. 642, 644-645

(1982), affd. without opinion 702 F.2d 1205 (D.C. Cir. 1983).

The expectation of profit need not have been reasonable; however,

the taxpayer must have entered into the activity, or continued

it, with the objective of making a profit.     Hulter v.

Commissioner, 91 T.C. 371, 393 (1988); sec. 1.183-2(a), Income

Tax Regs.

     Whether the requisite profit objective exists is determined

by looking at all the surrounding facts and circumstances.

Keanini v. Commissioner, 94 T.C. 41, 46 (1990); sec. 1.183-2(b),

Income Tax Regs.   Greater weight is given to objective facts than

to a taxpayer's mere statement of intent.     Thomas v.

Commissioner, 84 T.C. 1244, 1269 (1985), affd. 792 F.2d 1256 (4th

Cir. 1986); sec. 1.183-2(a), Income Tax Regs.    Petitioner has the

burden of proof.   Rule 142(a).

     Section 1.183-2(b), Income Tax Regs., provides a list of

factors to be considered in the evaluation of a taxpayer's profit

objective:   (1) The manner in which the taxpayer carries on the

activity; (2) the expertise of the taxpayer or his advisers; (3)

the time and effort expended by the taxpayer in carrying on the

activity; (4) the expectation that assets used in the activity

may appreciate in value; (5) the success of the taxpayer in

carrying on other similar or dissimilar activities; (6) the
                               - 7 -


taxpayer's history of income or losses with respect to the

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

activity; (8) the financial status of the taxpayer; and (9)

elements of personal pleasure or recreation.     This list is

nonexclusive, and the number of factors for or against the

taxpayer is not necessarily determinative, but rather all facts

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

be given to some factors than to others.     See sec. 1.183-2(b),

Income Tax Regs.; cf. Dunn v. Commissioner, 70 T.C. 715, 720

(1978), affd. 615 F.2d 578 (2d Cir. 1980).

     Petitioner contends that the losses from the horse breeding

activity are properly deductible because the activity was

motivated by an actual and honest objective of making a profit.

Conversely, respondent asserts that the activity was not engaged

in for profit.   We agree with respondent.

Manner in Which the Activity Is Conducted

     The fact that a taxpayer carries on the activity in a

businesslike manner and maintains complete and accurate books and

records may indicate a profit objective.     Sec. 1.183-2(b)(1),

Income Tax Regs.   The parties have stipulated that petitioner did

not keep adequate records of the horse breeding activity.

Petitioner did not make any written forecasts or projections of

future income.   Additionally, petitioner's failure to formulate a

credible business or profit plan indicates that his actions were

not businesslike and that he lacked a profit motive.
                               - 8 -


     Petitioner started the horse breeding activity with no

concept of what his ultimate costs might be or how he might

achieve any degree of cost efficiency.   Additionally, petitioner

conducted his activity unaware of the amount of revenue he could

expect or what risks might impair the production of such

revenues.

     Petitioner commingled the financial affairs of the horse

breeding activity with his personal finances.   He paid all the

expenses of the horse breeding activity from his personal

account, and the horse breeding activity maintained no financial

accounts of its own.   This commingling of funds is an indication

that the activity is a hobby rather than a business for profit.

See Ballich v. Commissioner, T.C. Memo. 1978-497.

     Based on these facts, we conclude that petitioner did not

conduct the horse breeding activity in a businesslike manner.

Expertise of Petitioner

     A taxpayer's expertise, research, and study of an activity,

as well as his consultation with experts, may be indicative of a

profit intent.   Sec. 1.183-2(b)(2), Income Tax Regs.   Since

childhood, petitioner has had an interest in cutting horses.

Petitioner studied breeding operations, read materials on

breeding methods, and attended a short course on equine

reproduction at a local university.    Although petitioner became

knowledgeable about horses and breeding techniques, he was not

knowledgeable about the economics of the activity.
                                - 9 -


Significantly, petitioner did not seek professional advice on the

economic aspects of horse breeding.     Taken as a whole, these

facts do not persuade us that the activity had a profit motive.




Elements of Personal Pleasure

     The absence of personal pleasure or recreation relating to

the activity in question may indicate the presence of a profit

objective.   Sec. 1.183-2(b)(9), Income Tax Regs.    The mere fact

that a taxpayer derives personal pleasure from a particular

activity does not, per se, demonstrate a lack of profit motive.

Petitioner stipulated that he derived personal pleasure and

enjoyment from the horse breeding activity.     Based on the facts

of this case, we find that this factor weighs against petitioner.

Time and Effort Expended by Petitioner

     Petitioner spent a significant amount of time on the horse

breeding activity; however, he also stipulated that he received

pleasure from the horse breeding activity.     Where an activity has

substantial personal or recreational aspects, the time and effort

spent may be due to a taxpayer's enjoyment of the activity rather

than an intent to derive a profit.      White v. Commissioner, 23

T.C. 90, 94 (1954), affd. per curiam 227 F.2d 779 (6th Cir.

1955).   Although enjoying an activity does not preclude a profit

objective, the facts of this case suggest that petitioner spent

time on the activity due to his fondness for horses rather than
                                - 10 -


an expectation of profit.    Cf. Harrison v. Commissioner, T.C.

Memo. 1996-509.

The Expectation That Assets May Appreciate in Value

     An expectation that assets may appreciate in value may also

be an indication of the taxpayer's motive with respect to such

activity.   Sec. 1.183-2(b)(4), Income Tax Regs.    Petitioner

believed that the horse breeding activity would eventually become

profitable due to appreciation in the value of the ranch and the

horses.   Petitioner's unsupported belief, however, is

insufficient.   It is necessary that petitioner's objective be to

realize a profit on the entire operation.     Bessenyey v.

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

Cir. 1967).    This requires future net earnings and appreciation

sufficient to recoup the losses which petitioner sustained in

prior years.    Id.   Petitioner's contention that he expected to

experience a profit eventually is unsupported by the record.      He

failed to produce credible evidence that the horse breeding

activity had any realistic chance of recovering the excessive

losses previously incurred.    Accordingly, this factor weighs

against petitioner.

The Activity's History of Income or Losses

     A record of substantial losses over several years may be

indicative of the absence of a profit motive.      Golanty v.

Commissioner, 72 T.C. 411, 426 (1979), affd. without opinion 647

F.2d 170 (9th Cir. 1981).    This Court has recognized that the
                                - 11 -


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

Engdahl v. Commissioner, 72 T.C. 659, 669 (1979).    Petitioner

sustained an uninterrupted series of losses beyond the period

which is customarily necessary to bring a similar operation to

profitable status.   See id.; see also sec. 1.183-2(b)(6), Income

Tax Regs.

     Petitioner also argues that the losses can be explained by a

series of unfortunate events beyond his control.    We are

unpersuaded.   Petitioner did not show that had events beyond his

control not occurred the horse breeding activity would have been

profitable.    See Burger v. Commissioner, 809 F.2d 355 (7th Cir.

1987), affg. T.C. Memo. 1985-523.    In light of these facts, we

find that petitioner's history of losses indicates a lack of a

profit motive.

Petitioner's Financial Status

     Substantial income from sources other than the activity in

question, particularly if the activity's losses generated

substantial tax benefits, may indicate that the activity is not

engaged in for profit.   Sec. 1.183-2(b)(8), Income Tax Regs.     In

1992 and 1993, petitioner earned wages in the amounts of $169,858

and $166,040, respectively, as an airline pilot.    Petitioner

could afford to operate the horse breeding activity as a hobby,

and it is likely that he sought to reduce or eliminate his tax

liability by using the losses from the horse breeding activity to

offset income from other sources.    These facts, coupled with the
                              - 12 -


fact that the taxpayer failed to pay any Federal withholding tax

for his income from American Airlines, indicate a lack of profit

objective.   See Whalley v. Commissioner, T.C. Memo. 1996-533.

Conclusion

     After reviewing the entire record, we conclude that

petitioner did not engage in the horse breeding activity with an

actual and honest objective of making a profit within the meaning

of section 183.

     To reflect the foregoing,

                                               Decision will be

                                         entered under Rule 155.
