                           T.C. Memo. 2000-234



                       UNITED STATES TAX COURT



                  LOUIS J. NOVAK, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 6457-98.                         Filed August 2, 2000.



     Michael D. McPhillips and Terry W. Vincent, for petitioner.

     Anita A. Gill, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     RUWE, Judge:    Respondent determined deficiencies in

petitioner’s Federal income taxes as follows:

                    Year          Deficiency
                    1993            $17,654
                    1994             19,723
                    1995             39,061
                                   - 2 -

        The sole issue for decision1 is whether petitioner’s

breeding, training, and showing of Arabian horses was an activity

engaged in for profit within the meaning of section 183.2

                             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

Newbury, Ohio, at the time he filed his petition.

     Petitioner has been a practicing radiation oncologist since

1975.       As a radiation oncologist, petitioner regularly works

between the hours of 7 or 8 o’clock in the morning to 5 or 6

o’clock in the evening, 5 days a week.       He is also on the faculty

of University Hospital and is on call from the hospital

approximately 1 out of 4 to 5 weeks.       In addition, petitioner is

on call 24 hours a day, 7 days a week for his own practice.

Petitioner practiced radiation oncology as an employee of

University Radiologists of Cleveland.       During the 22 years that

petitioner was employed by University Radiologists, petitioner

served on its board of directors.       During the years 1986 through



        1
      The notice of deficiency contains adjustments to
petitioner’s itemized deductions and claimed exemption allowances
for the years in issue. These are computational adjustments
which will be affected by the outcome of the issue to be decided,
and we do not separately address them.
        2
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue.
                                - 3 -

1997, petitioner received the following wage income from

University Radiologists:

                 Year                  Wages
                 1986                $156,461
                 1987                 278,749
                 1988                 218,365
                 1989                 232,952
                 1990                 232,715
                 1991                 207,880
                 1992                 183,496
                 1993                 188,496
                 1994                 217,925
                 1995                 223,957
                 1996                 230,209
                 1997                 219,400
                   Total            2,590,605

     Petitioner owned University Imaging, Inc., an S corporation,

from 1988 through 1997.    During the years in issue, he reported

the following income from University Imaging:


                 Year                    Income
                 1993                   $17,252
                 1994                    18,850
                 1995                    23,795
                   Total                 59,897

     Petitioner first worked on a horse farm and learned how to

ride horses while in high school.    Petitioner developed a

fondness for horses but was unable to engage in horse-related

activities while he was in college.3      After college, petitioner




     3
      Petitioner testified that while he was in college, his
friends sent him little bags of horse manure so that he could
“smell the horses”.
                               - 4 -

attended medical school so that he could earn sufficient income

to “do something with horses”.4

      Petitioner began his breeding activity in 1970 by breeding

an Arabian stallion and then changed his breeding activity in

1976 to the breeding of Arabian mares.    Also in 1976, petitioner

bought his first parcel of real estate and built a small barn on

it.

      In 1986, petitioner purchased a 78.5-acre parcel of real

estate in Newbury, Ohio, for $222,899.    After acquiring the

property, petitioner paid between $25,000 and $30,000 to

refurbish the existing house, $30,000 to build a three-car

garage, $40,000 to create a lake, $20,000 to build an exercise

pen, approximately $20,000 to build run-in sheds, and between

$8,000 and $10,000 to build stalls.    Petitioner resided on the

Newbury, Ohio, property during the years in issue.

      Petitioner’s 1986 Federal income tax return reported income

and deductions relating to the breeding, training, and showing of


      4
       Petitioner testified:

      My father was a banker and had raised four kids, helped
      and supported my brother and I to do the horse
      activities that we were interested in as high school
      students, and I initially thought I was going to become
      a school teacher, and my father said, if you ever want
      to have horses, you can’t be a school teacher, you’ve
      got to find a job where you can make some money, be a
      doctor or a dentist, and so, I decided I would go to
      medical school so that I could make a decent living and
      continue to do something with horses, that I realized
      required a considerable amount of money.
                                             - 5 -

Arabian horses on Schedule C, Profit or Loss From Business, under

the business name “Louis J. Novak”.                  For the years 1987 through

1997, petitioner reported income and deductions relating to his

Arabian horse activity on Schedule C under the business name

“Arabian Crossings Farm” or “Arabian Crossings”.

       During the years 1986 through 1997, petitioner’s horse

activity was reported on Schedule C as having incurred losses as

follows:
                                              Schedule C
                                               Expenses
            Gross      Cost of      Gross     Other Than                      Schedule C
Year      Receipts   Goods Sold    Income      Depreciation   Depreciation        Loss

1986      $32,200       -0-       $32,200       $78,976        $39,931          ($86,707)
1987       16,870       -0-        16,870         78,478        42,723         (104,331)
1988       13,644       -0-        13,644         66,657        44,875           (97,888)
1989        8,833     $4,320        4,513         76,485        24,338           (96,310)
1990       12,176      7,390        4,786         90,917        28,379          (114,510)
1991       12,695      6,100        6,595         94,383        29,279          (117,067)
1992        4,309      6,018       (1,709)        52,774        31,760           (86,243)
1993        3,452      5,825       (2,373)        55,588        27,711           (85,672)
1994        3,250      6,566       (3,316)        49,265        28,039           (80,620)
1995        3,625     13,629      (10,004)        60,003        27,580           (97,587)
1996        3,105     18,877      (15,772)        65,138        24,786          (105,696)
                                               1
1997        1,688      6,290       (4,602)       106,068        21,080          (131,750)
  Total   115,847     75,015       40,832        874,732       370,481        (1,204,381)

       1
         Petitioner also owed Stachowski Farms approximately $20,000 in unpaid
boarding/training bills as of Dec. 31, 1997.

       No sales of horses were included in Schedule C gross

receipts for the years in issue.                 Reported gross receipts for the

years in issue consisted entirely of prize winnings.                         It does not

appear that any of the “gross receipts” that petitioner reported

from 1986 through 1992 and 1996 through 1997 included the sale of

horses that he bred.           For each of those years, petitioner

reported the sale of horses on Form 4797, Gains and Losses From

Sales or Exchanges of Assets Used in a Trade or Business and

Involuntary Conversions.
                                 - 6 -

     For the years 1989 through 1997, “cost of goods sold” shown

on petitioner’s Schedule C consisted entirely of labor.    Since

petitioner’s gross receipts reported on Schedule C for the years

in issue consisted entirely of prize money, the characterization

of labor as cost of goods sold is questionable.

     In 1996, petitioner reported $3,105 in gross receipts and

cost of goods sold of $18,877.    The entire $18,877 in reported

cost of goods sold consisted of reported labor cost.    The $18,877

in reported labor cost represented a 38.5-percent increase over

reported labor cost in 1995, while reported gross receipts

dropped 14.34 percent.   Of the $18,877 in reported labor cost,

$12,980   consisted of wages paid to Alan Dahart.   Mr. Dahart is a

personal friend who lives with petitioner.
                                      - 7 -

        From 1986 through 1997, petitioner reported the following

income from the sale of horses on Form 4797:5

                                      Previously
                     Gross Sales       Allowed
Year                    Price        Depreciation      Cost1   Gain/Loss2
1986                  $10,000           $3,150       ($10,500)  $2,650
1986                    3,000             -0-          (3,000)      -0-
1988                   25,000           11,000        (25,000)  11,000
1988                   42,000             -0-         (26,500)  15,500
1989                    2,500             -0-            -0-      2,500
1989                    5,000            2,898         (3,216)    4,682
1989                   36,986           70,399       (118,710) (11,325)
19894                  15,000           42,250        (50,000)    7,250
1990                    1,500            6,375         (8,500)      (625)
                                                                 3
1990-1991               3,000             -0-            -0-       3,000
1991                    3,480            6,300         (7,000)    2,780
1992                   54,500            1,250        (32,125)   23,625
1993                   15,000           11,900        (17,000)    9,900
1994                    2,500             -0-            -0-      2,500
1997                   50,000            1,275         (5,025)  46,250
  Total               269,466          156,797       (306,576) 119,687
        1
            Includes petitioner’s cost or other basis, plus expense of
sale.
        2
       Petitioner’s gains and losses were determined by adding the
gross sales price and depreciation and then subtracting petitioner’s
cost or other basis and selling cost.
     3
       The sale was reported on the installment method. Accordingly,
$800 was recognized in 1990 and $2,200 was recognized in 1991.
     4
       The horses that petitioner sold after 1989 were bred by him.

        For 1992, $29,625 of the $32,125 in cost reported by

petitioner is commission paid on the sale of three horses.               Mr.

Dahart was paid $22,500 in commission on those three sales.




        5
      For the years in issue, petitioner reported the sale of
horses on part I of Form 4797, Gains and Losses From Sales or
Exchanges of Assets in a Trade or Business and Involuntary
Conversion. The instructions for Form 4797 for those years
provide the following: Sec. 1231 transactions include “Sales or
exchanges of cattle and horses, regardless of age, used in a
trade or business by the taxpayer for draft, breeding, dairy, or
sporting purposes and held for 24 months or more from acquisition
date.”
                                        - 8 -

      The average commission a seller pays on the sale of a horse

is 10 to 15 percent of the sales price.               Petitioner paid

commissions of 10 to 15 percent to persons other than Mr. Dahart.

Nevertheless, petitioner paid commissions to Mr. Dahart that were

as high as 50 percent.          Petitioner provided no explanation for

the above-average commissions paid to Mr. Dahart.                   Petitioner

paid Mr. Dahart commissions6 on the following sales:
Year of                            Sales                          Percentage of
 Sale         Horse                Price         Commission         Sales Price
 1990     Dance with Fire         $3,000             $1,275           42.5%
                                                    1
 1992     Pro Gato                47,500              19,000          40.0%
 1992     La Quintina              2,000               1,000          50.0%
 1992     Lucy in Disguise         5,000               2,500           50.0%
                                  57,500            23,775            41.35%

       1
         Petitioner also paid Stachowski Farms a $7,125 (15-percent) commission on
this sale. Combining the commission paid to Mr. Dahart and to Stachowski Farms,
petitioner paid a 55-percent commission on the sale of Pro Gato.

      During the years in issue, petitioner owned the following

horses:

                                Horse
                           Staleys Mahgelo
                              Labamba1
                            Crystal Aere
                              Marranda
                            Bint Quintina
                           New Foundation
                             Louisville
                           Morocco Grande
                          PF Private Reserv2
                               Apaladin3
      1
        Sold in 1994.
      2
        Sold in 1993.
      3
        Born in 1994.

      During the years in issue, petitioner maintained a separate

checking account for his horse activity under the name “Arabian

      6
      Petitioner also began paying Mr. Dahart a salary starting
in 1996.
                               - 9 -

Crossings”.   Petitioner used separate letterhead and business

cards for the horse activity that bore the name “Arabian

Crossings”.   Mr. Dahart’s name appears on both the letterhead and

business cards along with petitioner’s name.    Mr. Dahart did not

own any interest in petitioner’s horses.

     Petitioner has not prepared a written business plan for his

horse activity, nor has he prepared a written analysis to

determine how he could make a profit or what he would have to do

to break even.   Petitioner has not consulted with persons with

expertise regarding the financial aspects of his horse activity.


                              OPINION

     The sole issue for decision is whether petitioner’s

breeding, training, and showing of Arabian horses activity is an

activity not engaged in for profit.     Section 183(a) provides that

if a taxpayer’s activity constitutes an activity not engaged in

for profit, expenses arising out of the activity are allowed as

deductions only as provided in section 183(b).    An “activity not

engaged in for profit” is defined in section 183(c) 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.”    Section 162 generally

permits the deduction of expenses incurred in a trade or

business, and paragraphs (1) and (2) of section 212 generally

permit a similar deduction for expenses incurred “for the
                              - 10 -

production or collection of income” or “for the management,

conservation, or maintenance of property held for the production

of income”.

     For a deduction to be allowed under section 162 or section

212(1) or (2), a taxpayer must establish that he engaged in the

activity with the primary purpose and dominant intent of

realizing a profit.   See Commissioner v. Groetzinger, 480 U.S.

23, 35 (1987);7 Hayden v. Commissioner, 889 F.2d 1548, 1552 (6th

Cir. 1989), affg. T.C. Memo. 1988-310; Godfrey v. Commissioner,

335 F.2d 82, 84 (6th Cir. 1964), affg. T.C. Memo. 1963-1; see

also Warden v. Commissioner, T.C. Memo. 1995-176, affd. without

published opinion 111 F.3d 139 (9th Cir. 1997).   In determining

whether an activity is engaged in for profit, greater weight is

given to objective facts than to the taxpayer’s mere statement of

his intent.   See sec. 1.183-2(a), Income Tax Regs.

     Section 183(d) provides a rebuttable presumption that an

activity will be an activity engaged in for profit if the gross

income from the activity exceeds the deductions attributable to

the activity for 3 or more of the taxable years in a 5-year

period.   In the case of an activity which consists in major part

of the breeding, training, showing, or racing of horses, “2” is



     7
      “We accept the fact that to be engaged in a trade or
business, the taxpayer must be involved in the activity with
continuity and regularity and that the taxpayer’s primary purpose
for engaging in the activity must be for income or profit.”
Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987).
                                - 11 -

substituted for “3” and “7” for “5”.     Petitioner has never

reported a profit from his horse activity.

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

relevant factors for determining whether an activity is engaged

in for profit.    The relevant factors are:   (1) The manner in

which the taxpayer carries on the activity; (2) the expertise of

the taxpayer or his advisers; (3) the time and effort expended by

the taxpayer in carrying on the activity; (4) the expectation

that assets used in the activity may appreciate in value; (5) the

success of the taxpayer in carrying on other similar or

dissimilar activities; (6) the taxpayer’s history of income or

losses with respect to the activity; (7) the amount of occasional

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

the taxpayer; and (9) the presence of elements of personal

pleasure or recreation.    Not all of these factors are applicable

in every case, and no one factor is controlling.     See sec. 1.183-

2(b), Income Tax Regs.

      We now apply each of these factors to the facts in this

case.

(1)   Manner in Which the Taxpayer Carries on the Activity

        Petitioner argues that his actions evidenced a business plan

and cites Phillips v. Commissioner, T.C. Memo. 1997-128.        In

Phillips, the taxpayers had a business plan.     They calculated the

costs per horse, per month.    They estimated when their horse
                               - 12 -

activity would become profitable.    They performed a detailed

analysis of their horse activity.    Petitioner did not have such

plans.    He has not prepared a profit plan for his horse activity.

He did not prepare any written analysis in order to determine how

he could make a profit or what he would have to do to break even.

Petitioner has not consulted with persons with expertise

regarding the financial aspects of his horse activity.

Petitioner testified that his current goal is to continue his

horse activity but to do so more efficiently.    Petitioner

admitted at trial that he will never be able to recoup what he

has spent on his activity thus far.

     Some of petitioner’s actions seem to run contrary to a

profit objective.    Petitioner testified that the average

commission paid on the sale of a horse is 10 to 15 percent, and

that is what he would pay to persons other than Mr. Dahart.

Petitioner testified that he would pay Mr. Dahart commissions as

high as 50 percent.    When petitioner sold La Quintina and Lucy in

Disguise, he paid Mr. Dahart a 50-percent commission on each

sale.    When petitioner sold Pro Gato8 for $47,500, he paid Mr.

Dahart a $19,000 or 40-percent commission, and he also paid




     8
      The contract was prepared on Arabian Crossings’ letterhead
that included both the names of petitioner and Alan Dahart.
However, petitioner testified that he and Mr. Dahart did not
jointly own any horses.
                                 - 13 -

Stachowski Farms a $7,125 or 15-percent commission.      Petitioner

paid commissions totaling 55 percent on the sale of Pro Gato.

     Petitioner maintained a separate checking account for

Arabian Crossings, and he initially testified that the account

was not used for personal expenses.       However, checks were written

for personal expenses.     For instance, petitioner used the Arabian

Crossings’ checking account on several occasions to send checks

totaling $250 to his niece on her birthday, to pay for a personal

trip to Las Vegas, and to pay veterinarian bills for a swan that

he kept on his farm.     On the other hand, petitioner would pay

Stachowski Farms9 with his Visa credit card and then pay his Visa

bills from his personal checking account.

     Petitioner asserts that he promoted his Arabians by

exhibiting them at shows and competitive events.      An examination

of petitioner’s Federal income tax returns for the years in issue

indicates that petitioner deducted $31,42910 in show costs and

expenses11 and reported $10,32712 in gross receipts from prize


     9
      Petitioner paid Stachowski Farms to board and breed some of
his horses, and occasionally Stachowski Farms acted as agent for
petitioner on the sale of some horses.
     10
      During 1993, 1994, and 1995, petitioner deducted $10,609,
$6,355, and $14,465, respectively, as show costs and expenses.
     11
      Petitioner testified that show costs consist of entry
fees, transporting horses to shows, and maintenance of the horses
at the shows.
     12
          Petitioner reported gross receipts for each year of
                                                       (continued...)
                               - 14 -

winnings.    Petitioner’s participation in shows and equestrian

events is as consistent with a hobby as it is a business.      See

Golanty v. Commissioner, 72 T.C. 411, 430 (1979), affd. without

published opinion 647 F.2d 170 (9th Cir. 1981).

(2)   The Expertise of the Taxpayer or His Advisers.

      Petitioner argues that he became an expert in the Arabian

horse-breeding business, read numerous periodicals pertaining to

Arabian horses, participated in various Arabian horse-related

organizations, and consulted with individuals whom petitioner

considered to be experts in the field.    The mere fact that

petitioner has skill in the breeding of horses and hired various

experts does not prove that petitioner was engaged in his horse

activity primarily for profit.    See Glenn v. Commissioner, T.C.

Memo. 1995-399, affd. without published opinion 103 F.3d 129 (6th

Cir. 1996).    Expertise with respect to the breeding of horses is

to be distinguished from expertise in the economics of these

undertakings.    See id.; see also Golanty v. Commissioner, supra

at 432.    A taxpayer's failure to obtain expertise in the

economics of horse-related activities indicates a lack of profit

motive.    See Burger v. Commissioner, 809 F.2d 355, 359 (7th Cir.

1987), affg. T.C. Memo. 1985-523.    In this case, petitioner




      12
      (...continued)
$3,452, $3,250, and $3,625, respectively.
                              - 15 -

sought no professional advice on the economic aspects of the

breeding, training, and showing of Arabian horses.

      Petitioner is an intelligent person, and he has acquired a

good deal of knowledge about Arabian horses and their breeding.

However, such activity and knowledge are altogether consistent

with his interest in a hobby, and he has failed to show that he

sought or acquired the expertise that would enable him to turn

the activity into a profitable business.

(3)   The Time and Effort Expended by the Taxpayer in Carrying on
      the Activity.

      Petitioner argues that he has organized his medical practice

and his farm so that he can spend enough time to develop his

Arabian horse activity.   Petitioner devoted substantial time to

his medical practice.   The time and effort spent breeding horses

was substantially less and was not inconsistent with the time one

might expect to be devoted to a hobby from which the participant

receives enjoyment and satisfaction.

(4)   Expectation That Assets Used in Activity May Appreciate in
      Value.

      Petitioner argues that he expects the assets used in his

activity will appreciate in value.     Petitioner did not estimate

the value of his horses, and no expert testimony or other

reliable evidence of value was introduced.    Based on petitioner’s

reported sales of Arabian horses to date, he does not come close

to covering his losses.
                                  - 16 -

      Petitioner did not establish that he purchased the real

estate in Newbury, Ohio, with appreciation in mind, nor did he

hold the property primarily with appreciation in mind.

Petitioner testified that he intended to live and retire on the

property.      It was something that he wanted to keep.   He did not

express any desire to sell or profit from the property in order

to offset or recoup his losses.

      Petitioner lived on the Newbury, Ohio, property.      To the

extent there was any appreciation, much of it could have been

attributable to the house that petitioner lived in.       Based on

this record, we are unable to separate the property used for the

breeding, training, and showing of Arabian horses from

petitioner’s residential property.

(5)   The Success of the Taxpayer in Carrying on Other Similar or
      Dissimilar Activities.

      Petitioner has been quite successful as a doctor and was a

shareholder in a profitable S corporation.      Petitioner reported

income totaling $59,897 from University Imaging during the years

in issue.      On the other hand, petitioner was not successful in

his horse partnership Amanda Associates.      Petitioner reported

$16,900 in losses relating to the partnership on his Federal

income tax returns from 1986 through 1990.13




      13
           Petitioner had an interest in the partnership until 1990.
                                 - 17 -

      Petitioner argues that many years before he formed Arabian

Crossings, he purchased a horse for $4,000 and sold it for

between $20,000 and $25,000.14    Even if we accept this as true,

petitioner has not proven that he did in fact make a profit on

the sale of a horse prior to forming Arabian Crossings.    As the

record shows, many expenses in addition to purchase price have to

be factored into whether a transaction produced an overall

profit.

(6)   The Taxpayer’s History of Income or Losses With Respect to
      the Activity

      Petitioner argues that the losses are due to expenses

incurred in the startup phase of his activity.    As this Court

stated in Bessenyey v. Commissioner, 45 T.C. 261, 274 (1965),

affd. 379 F.2d 252 (2d Cir. 1967):

      the presence of losses in the formative years of a
      business, particularly one involving the breeding of
      horses, is not inconsistent with an intention to
      achieve a later profitable level of operation, bearing
      in mind, however, that the goal must be to realize a
      profit on the entire operation, which presupposes not
      only future net earnings but also sufficient net
      earnings to recoup the losses which have meanwhile been
      sustained in the intervening years.


      We are not convinced that the years in issue fall within

what petitioner asserts is the startup phase of his breeding,

training, and showing of Arabian horses activity.    We have said



      14
      We have only petitioner’s uncorroborated testimony
regarding the sale.
                               - 18 -

that the startup phase of a horse-breeding activity may be 5 to

10 years.   See Engdahl v. Commissioner, 72 T.C. 659, 669 (1979).

In 1976, petitioner bought his first parcel of real estate and

built a small barn on it.   Petitioner has been breeding Arabian

horses since 1976.15   One of petitioner’s witnesses wrote a

letter dated March 25, 1999, stating that he has known petitioner

“through his reputation as a quality breeder for more than twenty

years.”

     Petitioner argues that he lost money due to a depressed

market during certain years.   However, petitioner incurred

consistent losses during the years 1986 through 1997.   Those

yearly losses ranged from $80,620 to $131,750 per year.   Even

when we consider the fact that petitioner reported gains from the

sale of horses separately on Form 4797, petitioner’s overall

horse activities produced large consistent losses during each of

the years 1986 through 1997.

     According to testimony provided by one of petitioner’s

witnesses, the market for Arabian horses began to decline

dramatically around 1985.   Petitioner purchased his 78.5-acre

farm in 1986.   Petitioner spent substantial amounts of money

refurbishing the house in which he lives and improving the



     15
      Petitioner argues that he only “dabbled” in the industry
prior to 1986. However, at trial, he could not recall whether a
Schedule C, Profit or Loss From Business, relating to horse
breeding was prepared with the earlier income tax returns.
                                - 19 -

property by building a lake, a three-car garage, exercise

facility, barn stalls, and run-in sheds.     These expenditures

during a market decline are inconsistent with petitioner’s

assertion that circumstances beyond his control contributed to

his losses.

     The market for Arabian horses began to rebound in 1991 and

1992.     Nevertheless, petitioner continued to sustain losses.

During the market upswing, petitioner sold La Quintina for

$2,000, Lucy in Disguise for $5,000, and Pro Gato for $47,500.

Petitioner received $54,500 from the sale of these three horses,

but he paid Mr. Dahart $22,500 in commissions.16    Selling horses

during a market upswing and paying 41.28 percent17 in cumulative

commissions when the standard commission was between 10 and 15

percent indicate that petitioner’s activity was not engaged in

primarily for profit.

     Petitioner also argues that he lost several Arabian horses

and that some of his horses experienced infertility problems.

However, according to petitioner’s own testimony, he has been

very fortunate with regard to unexpected problems with his


     16
      Petitioner also paid Stachowski Farms a $7,125 commission
on the sale of Pro Gato. In combining the commission paid to Mr.
Dahart and Stachowski Farms, petitioner paid a 55-percent
commission on the sale of Pro Gato.
     17
      The 41.28 percent does not include the $7,125 commission
that petitioner paid Stachowski Farms in addition to the $19,000
commission paid to Mr. Dahart for the sale of Pro Gato.
                                - 20 -

horses.     Indeed, from 1986 until May 1999, petitioner has lost

only two foals.     During the same period of time, petitioner lost

only two mares, both from natural causes, with one dying of old

age.

       We are not convinced that petitioner incurred losses during

the years in issue due to a depressed market or unforeseen

problems.     The losses petitioner incurred during the years in

issue were consistent with his losses for all the years from 1986

through 1997.

(7)    The Amount of Occasional Profits, if Any, Which Are Earned

       Petitioner’s activity has never been profitable.   Petitioner

admitted at trial that he will never be able to recoup what he

has spent thus far.18

       Petitioner asserts that he has sold several Arabians for

substantial sums over the past several years.     However, the

occasional gain petitioner received from the sale of horses from

1986 through 1997 was de minimis compared to the expenses

incurred, and as previously observed, petitioner’s occasional

opportunity to earn profits from the sale of horses was

diminished by the extraordinary commissions paid to Mr. Dahart.


       18
      Petitioner attempted to mitigate the significance of this
statement by asserting that he could more than recoup all his
losses if he sold all the livestock, equipment, and the farm.
But the farm includes petitioner’s personal residence, and
petitioner has never intended to sell the farm. He testified
that his goal is to spend less time in medicine and more time on
his farm and that he intended to retire on the property.
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(8)   The Financial Status of the Taxpayer

      At the time petitioner purchased the property in 1986, he

had wage income of $156,461.   His income remained above the six-

figure mark through 1997.   Petitioner’s average wage income from

1986 through 1997 was $215,884.   During the years in issue,

petitioner also earned $59,897 from University Imaging.

Petitioner was single, had a substantial income, and could afford

to spend money on an activity that gave him enjoyment.

(9)   Elements of Personal Pleasure or Recreation

      If the possibility for profit is small compared to the

possibility for gratification, the latter possibility may be the

primary motivation for the activity.    See White v. Commissioner,

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

1955).

      Petitioner’s recreational objectives were a significant

component of his horse-related activities.   Petitioner testified

that when he was in college and trying to decide on a vocation,

he told his father that he was considering becoming a school

teacher.   According to petitioner, his father gave him the

following advice:   “[I]f you ever want to have horses, you can’t

be a school teacher, you’ve got to find a job where you can make

some money, be a doctor or a dentist”.   Based on his father’s

advice, petitioner decided to go to medical school so that he

could make a decent living and continue to do something with
                               - 22 -

horses, which he realized required a considerable amount of

money.

     Petitioner testified that his long-term goal was to produce

English competition horses19 that were capable of competing and

winning at the national level in the English division and that

could produce the same type of offspring.    According to

petitioner, he has been very successful in reaching his goal of

producing horses that could successfully compete at the national

level.    He testified that his horses have won nine national

championship honors.   Petitioner testified that his ultimate goal

is to retire from medicine young enough so that he is still able

to work and participate in the management of his horses, ride

them, compete with them, and eventually sell them.

     Petitioner argues that his substantial time commitment and

hard work eliminate any elements of pleasure or recreation.     We

recognize that the level of work or effort may indicate a profit

objective and that caring for horses and maintaining a horse farm

are hard work.   However, the fact that an activity involves hard

work does not, standing alone, establish that an activity was

engaged in primarily for profit.    Petitioner’s introduction into

horse breeding was precipitated by his love of horses, and he

enjoyed his horse-related activity.     Of course, the enjoyment of



     19
      Arabian horses compete in English competition, which is a
division of the competitions within the Arabian horse shows.
                               - 23 -

one’s activity does not preclude a finding that the activity was

engaged in primarily for profit, but it must be considered along

with all the other facts.

Conclusion

     Petitioner may have hoped to make a profit from his horse

activity.    However, in order to prevail, petitioner must show

that his activity was engaged in primarily for the purpose of

making a profit.    See Commissioner v. Groetzinger, 480 U.S. 23,

35 (1987); Hayden v. Commissioner, 889 F.2d 1548, 1552 (6th Cir.

1989); Godfrey v. Commissioner, 335 F.2d 82, 84 (6th Cir. 1964);

Warden v. Commissioner, T.C. Memo. 1995-176.      Based on

petitioner’s testimony, his long and consistent history of

reporting losses without ever developing a business plan or

detailed break-even analysis, and the manner in which he

conducted his activity, we find that petitioner has not

established that making a profit was his primary objective.

     We hold that petitioner’s activity was not engaged in for

profit within the meaning of section 183(c).      Petitioner’s

deductions of the losses associated with these activities are,

therefore, subject to the limitations set forth in section

183(b).



                                     Decision will be entered

                                for respondent.
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