                          T.C. Memo. 1999-25



                        UNITED STATES TAX COURT



                    DANA L. MCNAUGHT, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



        Docket No. 24434-97.                   Filed January 29, 1999.



        John A. Cohan, for petitioner.

        Ann M. Murphy, for respondent.



                          MEMORANDUM OPINION


        DINAN, Special Trial Judge:   This case was heard pursuant to

the provisions of section 7443A(b)(3) and Rules 180, 181, and

182.1


        1
          Unless otherwise indicated, all section references are
to the Internal Revenue Code in effect for the taxable years in
issue. All Rule references are to the Tax Court Rules of
Practice and Procedure.
                               - 2 -

     Respondent determined deficiencies in petitioner's Federal

income taxes for 1994, 1995, and 1996 in the amounts of $8,528,

$8,671, and $8,479, respectively.

     The issue for decision is whether petitioner's Appaloosa

horse breeding and selling activity was an activity "not engaged

in for profit" within the meaning of section 183.

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

The stipulations of fact and attached exhibits are incorporated

herein by this reference.   Petitioner resided in Portland,

Oregon, on the date the petition was filed in this case.

     Petitioner was graduated from Oregon State University with a

degree in psychology.   She took courses in accounting, marketing,

finance, advertising, and public speaking.    She later earned a

degree in nursing.

     Petitioner worked no less than 40 hours per week as a

registered nurse for Oregon Health Sciences University (OHSU)

during the taxable years in issue.     She received employee wages

from OHSU during 1994, 1995, and 1996 in the amounts of

$44,123.80, $44,700.50, and $47,904.24, respectively.    OHSU is

located five blocks from petitioner's home.

     Petitioner devoted around 15 hours per week to a billing

service that she operated for oncology surgeons until the mid-

1990's.   Her net income from the billing service for her 1990

through 1995 taxable years was $18,360, $14,553, $13,763,

$10,950, $1,829, and $124, respectively.    She completely ceased

this activity during 1995 because the surgeons for whom she
                                - 3 -

provided her billing service either retired or moved out of the

area.

     Petitioner is the manager of the apartment complex in which

she lives.    She receives a rent-free apartment in return for

collecting rents, coordinating repairs, and showing vacant units.

In addition, she has received as much as $3,000 in 1 year for

performing certain tasks around the apartment complex, such as

painting and making minor repairs.      She devotes approximately 5

hours per week to this activity.

     Petitioner first became involved with Appaloosa2 horses

(Appaloosas) as a teenager in the early 1960's while working as

an apprentice to trainer Phil Hansen.     Petitioner helped Mr.

Hansen prepare the Appaloosas for shows.     Her tasks included

feeding them, saddling them for training, and cooling them down

after workouts.    Petitioner did not personally ride the

Appaloosas.

     Petitioner has owned and bred only registered Appaloosas

since the age of 15, when she purchased her first registered

Appaloosa.    This horse was an older broodmare which had

previously delivered several foals, one of which had been sold to

a person from England.    This broodmare delivered several more

foals which were trained by Mr. Hansen.     Petitioner paid Mr.

Hansen in part with her earnings from her summer employment.      She



     2
          An Appaloosa is a rugged saddle horse developed in
Western North America from stock of Spanish origin and is
distinguished by its mottled skin and patches of white hair.
                                - 4 -

was able to sell several of the foals, one to a person from New

York.

     In 1981, petitioner decided to expand her horse breeding

activity from a hobby to a business and began claiming tax

deductions for her expenses.    This decision was a result of

conversations that she had with prominent members of the National

Appaloosa Horse Club, which acts as the official registry for

Appaloosas.   Petitioner thereafter began breeding more than one

broodmare simultaneously.   She also became very active in the

Appaloosa Horse Club of Oregon.    She has served as its secretary

and has organized and served as a judge at Appaloosa shows.

     Petitioner has become knowledgeable in the different

pedigrees and breeding lines of Appaloosas by consulting with

other individuals in the business of breeding and training

Appaloosas.   Her business plan focuses on breeding Appaloosas in

the $5,000 to $15,000 price range for sale to young riders and

nonprofessional adult riders.    Petitioner believes that her

target market is broader than the market for horses in the

$30,000 to $50,000 price range and will allow her to make a

profit by reason of a greater number of sales.    At the same time,

she believes that her target market is more profitable than the

market for less expensive horses because the profit margin for

lower quality horses is minimal.    She therefore seeks to breed

Appaloosas with quiet dispositions that are easily trained and

are suitable for the amateur riders in her target market.
                                 - 5 -

     Petitioner has never owned a farm or other real estate.      She

boards her broodmares and foals at several locations in Oregon

and one location in Arizona.3    Petitioner decides which stallions

will breed with her broodmares.    She chooses trainers for her

foals by matching each foal's heritage and aptitude to the

trainers' expertise.

     Petitioner budgets 30 hours per week for her Appaloosa

breeding and selling activity and admits that it consumes nearly

all of her personal time.   She maintains complete records of her

expenses in a single entry ledger and places all of her receipts

in envelopes categorized by type of expense.    The amounts claimed

on her returns were derived directly from these records.

     Petitioner has a separate bank account for her horse

breeding and selling activity.    The account is in petitioner's

name at a bank other than the bank at which she maintains her

personal account.   Petitioner's broodmares are insured.

     Although she has enjoyed some success in breeding and

selling Appaloosas, petitioner has never realized a profit during

any taxable year.   She attributes this lack of any profits to

problems of the National Appaloosa Horse Club during the 1980's

and more recent setbacks with her own broodmares.    Petitioner

does not ride Appaloosas for recreational purposes.

     On Schedules C attached to her 1994, 1995, and 1996 Federal

income tax returns, petitioner reported the following amounts:


     3
          One of petitioner's trainers, Rusty Hadden, testified
that one of the benefits of training horses in Arizona is the
opportunity to show the horses throughout the year.
                               - 6 -

                            1994           1995        1996

     Gross receipts        $1,140         $3,895        $336
     Cost of goods sold         0         (3,500)          0
     Gross profit           1,140            395         336
     Show winnings            806              0           0
     Gross income           1,946            395         336
     Expenses             (36,538)       (36,628)    (38,998)
     Net profit (Loss)    (34,592)       (36,233)    (38,662)

     In the statutory notices of deficiency, respondent increased

petitioner's taxable income for 1994, 1995, and 1996 by $36,538,

$40,128, and $38,998, respectively.     Respondent determined that

petitioner would be allowed Schedule A miscellaneous itemized

deductions for the expenses of her Appaloosa breeding and selling

activity to the extent of her gross income, but respondent did

not allow any such deductions on the ground that such allowable

deductions combined with her other itemized deductions are less

than her standard deductions for her respective taxable years.

     Section 183(a) disallows any deduction attributable to an

activity not engaged in for profit, except as provided in section

183(b).   Section 183(b)(1) provides that deductions which would

be allowable without regard to whether such activity is engaged

in for profit are to be allowed.     Section 183(b)(2) further

provides that deductions which would be allowable only if such

activity were engaged in for profit are to be allowed, but only

to the extent that the gross income derived from such activity

for the taxable year exceeds the deductions allowable under

section 183(b)(1).   For purposes of section 183, the term

"activity not engaged in for profit" means any activity other

than one with respect to which deductions are allowable for the
                                 - 7 -

taxable year under section 162 or under paragraph (1) or (2) of

section 212.   Sec. 183(c).

     Section 162(a) allows as a deduction all the ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on any trade or business.       Where an activity does not

constitute a trade or business, section 212 allows as a deduction

all the ordinary and necessary expenses paid or incurred during

the taxable year for the production or collection of income, or

the management, conservation, or maintenance of property held for

the production of income.     Sec. 212(1) and (2).

     In order to establish that an activity was engaged in for

profit, the Court of Appeals for the Ninth Circuit, to which this

case is appealable, has stated that the taxpayer must show that

she engaged in the activity with the primary purpose of making a

profit.    Wolf v. Commissioner, 4 F.3d 709, 713 (9th Cir. 1993),

affg. T.C. Memo. 1991-212.     The taxpayer must enter into the

activity "with the dominant hope and intent of realizing a

profit".   Independent Elec. Supply, Inc. v. Commissioner, 781

F.2d 724, 726 (9th Cir. 1986), affg. Lahr v. Commissioner, T.C.

Memo. 1984-472.

     Petitioner bears the burden of proving the requisite intent.

Golanty v. Commissioner, 72 T.C. 411, 426 (1979), affd. without

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

Commissioner, 59 T.C. 791, 813 (1973), affd. 495 F.2d 1079 (6th

Cir. 1974).    Whether a taxpayer is engaged in an activity with

the requisite profit objective is determined from all the facts
                                - 8 -

and circumstances.   Hulter v. Commissioner, 91 T.C. 371, 393

(1988); Golanty v. Commissioner, supra at 426; sec. 1.183-2(a)

and (b), Income Tax Regs.    The proper focus of the test is the

taxpayer's subjective intention, but objective indicia may be

used to determine the taxpayer's true intent.      Independent

Electric Supply, Inc. v. Commissioner, supra at 726.      In this

regard, more weight is generally given to objective facts than to

the taxpayer's mere statement of her intent.      Dreicer v.

Commissioner, 78 T.C. 642, 645 (1982), affd. without opinion 702

F.2d 1205 (D.C. Cir. 1983); sec. 1.183-2(a), Income Tax Regs.

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

factors to be considered in deciding whether an activity is

engaged in for profit.   These factors include:    (1) The manner in

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

the taxpayer 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

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) whether elements of personal pleasure or

recreation are involved.    Sec. 1.183-2(b), Income Tax Regs.    This

list of factors is not exclusive, and other factors may be

considered in determining whether an activity is engaged in for

profit.   The factors are not merely a counting device where the
                                - 9 -

number of factors for or against the taxpayer is determinative,

but rather all facts and circumstances must be taken into

account, and more weight may be given to some factors than to

others.   Taube v. Commissioner, 88 T.C. 464, 480 (1987); sec.

1.183-2(b), Income Tax Regs.    Not all factors are applicable in

every case, and no one factor is controlling.    Abramson v.

Commissioner, 86 T.C. 360, 371 (1986); Allen v. Commissioner, 72

T.C. 28, 34 (1979); sec. 1.183-2(b), Income Tax Regs.

Manner in Which Activity Conducted

     The fact that a taxpayer carries on the activity in a

businesslike manner and maintains complete and accurate books and

records may indicate that the activity was engaged in for profit.

Sec. 1.183-2(b)(1), Income Tax Regs.    We find that petitioner was

very serious about her Appaloosa breeding and selling activity

and conducted it in a businesslike manner.    She maintained

detailed records of her expenses which she relied upon in making

business decisions.    She maintained a separate bank account for

her Appaloosa breeding and selling activity and did not commingle

the proceeds of the activity with her personal funds, with the

exception of one admitted instance for which she adequately

accounted.    We find that petitioner had a business plan, which

was to breed horses for sale to young and nonprofessional adult

riders.   In addition, we find that she continuously modified her

business plan to contain costs and to give herself every

opportunity to make a profit.    We find that this factor favors

petitioner.
                                  - 10 -

Expertise of the Taxpayer or Her Advisers

     Preparation for an activity by extensive study or

consultation with experts may indicate a profit motive where the

taxpayer conducts the activity in accordance with such study or

advice.   Sec. 1.183-2(b)(2), Income Tax Regs.    We find that the

record amply demonstrates that petitioner has developed an

expertise in Appaloosa pedigrees and bloodlines.     She has

consulted with and followed the advice of acknowledged experts in

her industry with respect to the economics of breeding and

selling Appaloosas.   She has regularly read "The Appaloosa

Journal", published by the National Appaloosa Horse Club.      She

has also served as a judge at Appaloosa shows.      We find that

this factor favors petitioner.

Time and Effort Expended

     The fact that the taxpayer devotes much of her personal time

and effort to carrying on an activity, particularly if the

activity does not have substantial recreational aspects, may

indicate a profit motive.    Sec. 1.183-2(b)(3), Income Tax Regs.

The fact that the taxpayer devotes a limited amount of time to an

activity does not necessarily indicate a lack of profit motive

where the taxpayer employs competent and qualified persons to

carry on such activity.     Id.   Petitioner devoted nearly all of

her personal time to her Appaloosas, including her 4 weeks of

vacation from her job as a registered nurse.     During the taxable

years in issue, her billing service dwindled, leaving her more

time to devote to her Appaloosas.      She selectively hired highly
                                - 11 -

qualified individuals, such as trainer Rusty Hadden, to develop

her Appaloosas.    We find that this factor favors petitioner.

Expectation That Assets May Appreciate

     An expectation that assets used in the activity will

appreciate in value may indicate a profit objective.     Sec. 1.183-

2(b)(4), Income Tax Regs.     Petitioner clearly expected her

broodmares and their offspring to appreciate in value.     We find

that this factor favors petitioner.

Past Success in Other Similar or Dissimilar Activities

     The fact that the taxpayer has engaged in similar activities

in the past and converted them from unprofitable to profitable

enterprises may indicate that she is engaged in the present

activity for profit, even though the activity is presently

unprofitable.     Sec. 1.183-2(b)(5), Income Tax Regs.   Petitioner

successfully operated a billing service for a number of years

until her customers retired and/or moved out of the area.       We

find that this factor favors petitioner.

Taxpayer's History of Income and Losses

     Petitioner has never had a profitable year.     She has had

sporadic sales over the years.     Her net losses have continued

beyond the customary startup period for a horse breeding and

selling activity.     We find that the circumstances within the

Appaloosa market and her personal setbacks do not fully explain

her long series of losses.     Cf. sec. 1.183-2(b)(6), Income Tax

Regs.   We find that this factor favors respondent.
                                - 12 -

Financial Status of the Taxpayer

     The fact that the taxpayer does not have substantial income

or capital from other sources may indicate that the activity is

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

Petitioner earned a modest salary as a registered nurse.    Yet,

petitioner did derive some tax benefits from her losses to the

extent that such losses offset her other income.    We find that

this factor is neutral.

Elements of Personal Pleasure or Recreation

     Petitioner does not ride horses.    Although her Appaloosas do

provide a social outlet for meeting other people, we find that

any personal pleasure or recreation that petitioner derived from

her Appaloosas is insignificant in comparison to her business

motives.   We find that this factor favors petitioner.

     After weighing the above factors, we find that the objective

facts in the record support rather than detract from petitioner's

asserted intention of making a profit from her Appaloosa breeding

and selling activity.    We conclude that petitioner has proved

that she engaged in her Appaloosa breeding and selling activity

during the taxable years in issue with the dominant hope and

intent of realizing a profit.

     To reflect the foregoing,



                                          Decision will be entered

                                     for petitioner.
