                  T.C. Summary Opinion 2009-32



                     UNITED STATES TAX COURT



              DOUGLAS A. SCHMUECKER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 20483-05S.             Filed March 9, 2009.



     Douglas A. Schmuecker, pro se.

     J. Anthony Hoefer, for respondent.



     THORNTON, Judge:   This case was heard pursuant to the

provisions of section 7463 of the Internal Revenue Code in effect

at the time the petition was filed.1   Pursuant to section

7463(b), the decision to be entered is not reviewable by any



     1
       Unless otherwise indicated, all subsequent 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.
                               - 2 -

other court, and this opinion shall not be treated as precedent

for any other case.

     Respondent determined the following deficiencies in

petitioner’s Federal income taxes:

                      Year     Deficiency

                      2001       $2,580
                      2002        5,738
                      2003        9,458

The issue for decision is whether petitioner’s horse-racing

business constituted a passive activity under section 469(c).

                             Background

     The parties have stipulated some facts, which are so found.

When he petitioned the Court, petitioner resided in Nebraska.

     During the years at issue petitioner worked about 30 hours

a week as a commissioned salesman for a trailer dealership.

From this employment he earned these commissions:

                      Year     Commission

                      2001      $37,321
                      2002       71,071
                      2003      156,724

     In 1993 petitioner got involved in horse racing.     During

the years at issue, he owned or co-owned five or six racehorses.

They were not always the same horses.     Sometimes he would

acquire a horse by winning a “claiming race”; sometimes one of

his horses would be claimed by someone else and he would

reinvest in another horse.   Because of the expense involved,
                              - 3 -

petitioner generally owned no more than three horses outright at

any time.   The other horses he co-owned, typically 50-50,

usually with his primary horse trainer, Marv Johnson.

     Marv Johnson kept all or most of these horses, along with

40 or 50 others, at his ranch, which was distant from

petitioner’s residence.   Marv Johnson and his staff provided all

necessary services for taking care of the horses, such as

feeding, grooming, and training them.   They decided when the

horses were ready to race, decided on the races to enter (either

on their own or in consultation with petitioner), and hauled the

horses from meet to meet.   Petitioner paid a fee for these

services.

     According to petitioner’s statement, he was “not required

to do anything as far as services” in his horse-racing business.

In fact, he had no firsthand experience in training horses and

did not even ride horses.   Before acquiring racehorses his only

previous experience in horse racing consisted of going to races

with his father.   Petitioner did not contemporaneously maintain

logs of time spent on his horse-racing business.

     On Schedules C, Profit or Loss From Business, of his

Federal income tax returns as originally filed, petitioner

claimed these losses from his horse-racing business:
                                  - 4 -

                               2001         2002      2003

      Gross income            $7,507      $15,132   $10,042
      Less: Expenses          21,500       35,953    39,740
      Net loss                13,993       20,821    29,698

Petitioner used these claimed losses to offset other income,

principally his commissions from the trailer distributorship.

      In the notice of deficiency respondent disallowed

petitioner’s claimed horse-racing losses as being attributable

to a passive activity.2

                               Discussion

      Section 469(a)(1) limits the deductibility of losses from

certain passive activities of individual taxpayers.           Disallowed

passive losses generally may be carried over to the next year.

Sec. 469(b).    Generally, a passive activity is a trade or

business in which the taxpayer does not materially participate.

Sec. 469(c)(1).    Material participation is defined generally as

regular, continuous, and substantial involvement in the business

operations.    Sec. 469(h).

      Respondent concedes that petitioner was in the business of

horse racing and that the claimed expenses were ordinary and

necessary business expenses.      Respondent contends, however, that


     2
       Although petitioner’s 2001 return, which is in evidence,
reported a horse-racing loss of only $13,993, the notice of
deficiency disallowed a horse-racing loss of $16,870 for 2001.
Respondent asserts and petitioner does not dispute that the
additional amount resulted from additional horse-racing expenses
that petitioner claimed on an amended 2001 return, which is not
in evidence.
                              - 5 -

petitioner did not materially participate in his horse-racing

business.   Petitioner claims that he did.   The burden of proof

is upon petitioner.   See Rule 142(a).3

     The regulations identify these seven situations in which an

individual will be treated as materially participating in an

activity:

          (1) The individual participates in the activity
     for more than 500 hours during such year;

          (2) The individual’s participation in the activity
     for the taxable year constitutes substantially all of
     the participation in such activity of all individuals
     (including individuals who are not owners of interests
     in the activity) for such year;

          (3) The individual participates in the activity for
     more than 100 hours during the taxable year, and such
     individual’s participation in the activity for the taxable
     year is not less than the participation in the activity of
     any other individual (including individuals who are not
     owners of interests in the activity) for such year;

          (4) The activity is a significant participation
     activity (within the meaning of paragraph (c) of this
     section) for the taxable year, and the individual’s
     aggregate participation in all significant participation
     activities during such year exceeds 500 hours;

          (5) The individual materially participated in the
     activity (determined without regard to this paragraph
     (a)(5)) for any five taxable years (whether or not
     consecutive) during the ten taxable years that immediately
     precede the taxable year;



     3
       Petitioner has not claimed or shown that he meets the
requirements under sec. 7491(a) to shift the burden of proof to
respondent as to any factual issue relating to his tax liability.
In particular, as discussed in more detail infra, petitioner has
not introduced credible evidence to show the time he spent in his
horse-racing business, as required by sec. 7491(a).
                              - 6 -

          (6) The activity is a personal service activity
     (within the meaning of paragraph (d) of this section), and
     the individual materially participated in the activity for
     any three taxable years (whether or not consecutive)
     preceding the taxable year; or

          (7) Based on all of the facts and circumstances
     (taking into account the rules in paragraph (b) of this
     section), the individual participates in the activity on a
     regular, continuous, and substantial basis during such
     year. [Sec. 1.469-5T(a), Temporary Income Tax Regs., 53
     Fed. Reg. 5725-5726 (Feb. 25, 1988).]

     The regulations also provide that the last-described “facts

and circumstances” test requires that the individual’s

participation in the activity exceed 100 hours during the

taxable year.   Sec. 1.469-5T(b)(2)(iii), Temporary Income Tax

Regs., 53 Fed. Reg. 5726 (Feb. 25, 1988).

     Petitioner does not contend, and the record does not

suggest, that he meets the second, third, fourth, or sixth test

described above.   Apparently trying to meet the quantitative

requirements of the first or seventh test, petitioner testified

vaguely that he “would say” he spent 500 hours a year in his

horse-racing business.   He testified that about half those hours

he spent on the Internet researching horses to purchase.    The

other 250 hours, he testified, were spent “Going to the races,

reading the racing form, visiting with people, going to horse

sales, watching live races.   Going to the farm in the spring and

fall to check on horses.”   On brief petitioner has increased his

estimates to include “2 to 3 hours per day online” and “700

hours per year plus in travel time”.
                               - 7 -

     Petitioner has failed to substantiate his vague and

inconstant time estimates.    Although the regulations permit a

taxpayer to establish the extent of his participation by “any

reasonable means”, sec. 1.469-5T(f)(4), Temporary Income Tax

Regs., 53 Fed. Reg. 5727 (Feb. 25, 1988), a postevent “ballpark

guesstimate” does not suffice, see Lee v. Commissioner, T.C.

Memo. 2006-193; Bailey v. Commissioner, T.C. Memo. 2001-296;

Carlstedt v. Commissioner, T.C. Memo. 1997-331; Speer v.

Commissioner, T.C. Memo. 1996-323; Goshorn v. Commissioner, T.C.

Memo. 1993-578.    Petitioner has provided us nothing more.

     Because petitioner has failed to substantiate the time

spent in his horse-racing business, he cannot qualify under

either the first or seventh test.      There are also other

obstacles to petitioner’s reliance on the seventh “facts and

circumstances” test.    Since petitioner admits that he had no

hands-on participation with the horses, any participation he had

is best characterized, we believe, as a management function.

Under the “facts and circumstances” test, however, services that

a taxpayer performs in managing an activity are not taken into

account if another person is compensated to perform management

services or another person performs management services that

exceed in hours those performed by the taxpayer.      Sec. 1.469-

5T(b)(2)(ii), Temporary Income Tax Regs., 53 Fed. Reg. 5726

(Feb. 25, 1988).    Petitioner compensated his trainers to perform
                              - 8 -

management services.   Especially taking into account that Marv

Johnson co-owned some of the horses with petitioner and took

care of most, if not all, of the horses at his ranch and that

petitioner had no meaningful background experience with horses

or horse training, we believe that Marv Johnson’s hours of

management services exceeded petitioner’s.   Consequently, even

apart from his failure to substantiate his hours, petitioner

cannot rely on the “facts and circumstances” test of section

1.469-5T(a)(7), Temporary Income Tax Regs., supra.

     Petitioner seeks to qualify under the fifth test described

above, asserting that from 1993 to 1999 he materially

participated in his horse-racing business.   He contends that

respondent has never challenged his material participation for

these earlier years.   There is no evidence in the record to

support this contention.   But even if we were to assume for the

sake of argument that respondent raised no objection to

petitioner’s claims of material participation for the earlier

years, this circumstance would not preclude respondent from

raising such an objection for later years.   See Hawkins v.

Commissioner, 713 F.2d 347, 351-352 (8th Cir. 1983), affg. T.C.

Memo. 1982-451; Yeaman v. United States, 584 F.2d 322, 326 (9th

Cir. 1978).   In any event, there is no evidence to establish

exactly what petitioner’s significant activities in his horse-

racing business might have been in the preceding years or to
                             - 9 -

establish that they were substantially the same as those for the

years at issue, as the regulations require.   See sec. 1.469-

5(j), Income Tax Regs.

     In sum, on the basis of the record before us, we conclude

and hold that petitioner has failed to establish that he

materially participated in his horse-racing business.

     To reflect the foregoing,


                                          Decision will be entered

                                     for respondent.
