                          T.C. Memo. 2002-9



                       UNITED STATES TAX COURT



 DALE A. RINEHART AND JEANA L. YEAGER, f.k.a. JEANA L. RINEHART,
                      ET AL.,1 Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 20185-98, 15968-99,      Filed January 9, 2002.
                 15969-99, 7007-00.


     Frank C. Hider, for petitioners.

     Stephen W. Brower, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     VASQUEZ, Judge:   Respondent determined deficiencies in and

penalties on petitioners’ Federal income taxes as follows:


     1
        Cases of the following petitioners are consolidated
herewith: Jeana L. Yeager, docket No. 15968-99; Dale A.
Rinehart, docket No. 15969-99; Jeana L. Yeager, docket No. 7007-
00.
                                - 2 -

                                               Penalty
     Docket No.     Year        Deficiency    Sec. 6662

         20185-98   1994         $46,894       $9,379
         15968-99   1995          29,264        5,853
         15969-99   1995          28,765        5,753
         15969-99   1996          53,869       10,774
          7007-00   1996          27,032        5,406

The issue addressed in this opinion is whether petitioner Dale A.

Rinehart’s (Mr. Rinehart) horse breeding activity was an activity

not engaged in for profit for 1994, 1995, and 1996.     (A separate

opinion will address the issues, previously tried and briefed, of

whether petitioner Jeana L. Yeager had cancellation of

indebtedness income for 1995, whether petitioner Jeana L. Yeager

is entitled to relief pursuant to sections 662 or 6015, and

whether petitioners are liable for penalties pursuant to section

6662(a).)

                           FINDINGS OF FACT

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

The stipulation of facts, the stipulation of settled issues,3 and

the attached exhibits are incorporated herein by this reference.

At the time they filed the petitions, petitioners resided in

Campbell, Texas.


     2
        Unless otherwise indicated, 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.
     3
        All concessions by the parties are accepted by the Court,
and they will be incorporated into the decisions to be entered
when all other issues are resolved.
                                - 3 -

Cattle Activities

     Around 1969, Mr. Rinehart purchased a ranch southwest of

Celina, Texas (Celina ranch), for $800 per acre.     At this time,

he also purchased a number of polled4 Hereford cattle.     Mr.

Rinehart intended to breed registered polled Herefords and build

up a herd of cattle (polled Hereford breeding activity).       In

1971, he sold the Celina ranch for $1,600 per acre.     He also sold

his herd of polled Herefords for a profit.

     In 1971, Mr. Rinehart purchased a ranch in Van Alstyne,

Texas (Van Alstyne ranch).   He bought the Van Alstyne ranch

because it was larger and had better facilities for raising

cattle than the Celina ranch.   At this time, Mr. Rinehart also

purchased a herd of registered Herefords.

     In 1971 or 1972, Mr. Rinehart began a Hereford breeding

activity on the Van Alstyne ranch.      In 1977, when his bull died,

he ended the Hereford breeding activity.     Even though the

Hereford breeding activity was profitable overall, Mr. Rinehart

decided not to continue the Hereford breeding activity because

the cattle market was declining.

Initial Horse Activity

     In 1978, Mr. Rinehart and his then wife Donna Jean Rinehart5

got into the quarter horse industry (initial horse activity).


     4
         “Polled” Herefords have no horns.
     5
         Around 1978, Mr. Rinehart married Donna Jean Rinehart.
                                   - 4 -

Mr. Rinehart chose to specialize in cutting horses because it was

the part of the quarter horse industry that was most familiar to

him.       Mr. Rinehart had been involved with cutting horses since he

was 7 years old and had used cutting horses in his cattle

activities.       Prior to 1978, Mr. Rinehart had received training

about cutting horses from various trainers.

       In 1978, Mr. Rinehart’s business plan for the initial horse

activity was to purchase “foundation bred”6 broodmares for

breeding to outside stallions until he accumulated a herd of

approximately 20 broodmares.       At that time, he also would buy

young stallions, train them, show them to build their names, and

breed them to his own broodmares.

       In 1981 or 1982, Mr. Rinehart attended a cutting horse

seminar taught by two of the top National Cutting Horse

Association (NCHA)7 riders of all time.      He attended this seminar

to further his education and his ability to train and show

cutting horses in competitions.       Mr. Rinehart was trained on how

to cut cattle, on proper techniques, on principles of cutting,

and how to train horses to be performance cutting horses.




       6
        A foundation bred horse is a horse descended from the
first horses registered with the American Quarter Horse
Association (AQHA).
       7
        During the years in issue, Mr. Rinehart was a member of
the NCHA.
                               - 5 -

Divorce, Bankruptcy, and End of the Initial Horse Activity

     In 1986, Mr. Rinehart and Donna Jean Rinehart divorced.    As

a result of the divorce, Donna Jean Rinehart received 27 of the

horses they owned.   These 27 horses included the best broodmares.

     Also during the mid-1980s, Mr. Rinehart filed for

bankruptcy.   In 1986, Bedford National Bank seized and sold by

judicial foreclosure 21 of Mr. Rinehart’s horses, and MBank

Sherman, N.A., foreclosed upon and later sold 18 of Mr.

Rinehart’s horses.   In 1986, after the divorce and foreclosures,

Mr. Rinehart ended the initial horse activity.

Startup of New Horse Breeding Activity

     In 1990, Mr. Rinehart decided to start another cutting horse

activity (the horse breeding activity).   Mr. Rinehart leased an

arena in Royce City, Texas, to train the few horses he still

owned after the divorce and foreclosures.   In 1991, he purchased

a ranch in Campbell, Texas (Campbell ranch), for $350,000.    Mr.

Rinehart moved to the Campbell ranch because it was a “full

service facility” for a horse breeding and training operation--it

had an indoor arena, stallion barn, breeding facilities, and a

training area.   Additionally, the Campbell ranch had cross

pastures, cross fences, and “special use facilities”.    Another

reason Mr. Rinehart moved to the Campbell ranch was that it was a

high visibility property--the Campbell ranch was located

alongside a divided highway that was the main artery between
                               - 6 -

Tulsa, Oklahoma, and Houston, Texas.

     Mr. Rinehart erected a promotional sign outside the front

entrance of the Campbell ranch.   The sign had the horse breeding

activity’s phone number and advertised his two premier stallions.

It also had a fiberglass horse on the top of it that was painted

to match the color of one of his premier stallions.

     Mr. Rinehart had a business plan for the horse breeding

activity.   Instead of relying on young stallions that did not

have established reputations and attempting to build a name for

them, as in the initial horse activity, Mr. Rinehart purchased

higher quality stallions with established breeding records that

matched up to the bloodlines/lineages in his broodmares.   He bred

these horses to one another, rather than using outside stallions,

and also bred his stallions with outside mares.

     At the time he purchased the Campbell ranch, Mr. Rinehart

purchased a champion cutting horse stallion, named Smooth Herman,

as the foundation for the horse breeding activity.    Smooth Herman

had sired several champion offspring and had won several cutting

horse champion titles.

     Mr. Rinehart planned to breed Smooth Herman daughters to a

son of Doc Bar.8   Crossing a Doc Bar son with a Smooth Herman




     8
        Doc Bar was a prominent horse in the cutting horse
industry. He was the number one paternal grandsire and number
two maternal grandsire of all time.
                               - 7 -

daughter resulted in an “outcross”.9   Mr. Rinehart was

outcrossing these two bloodlines in an attempt to get “hybrid

vigor”.10

     After researching the market, in 1992 Rinehart purchased a

stallion named Doc City.   Doc City was the second youngest then

existing son of Doc Bar.

     After inserting Doc City into his breeding program, Mr.

Rinehart discovered that his mares were not getting pregnant

because Doc City had a breeding problem (he was not ejaculating

semen into the mares).   This was unexpected because over the

previous 13 years Doc City sired approximately 85 horses.

     Mr. Rinehart sought advice from veterinary experts at the

University of Pennsylvania and the University of Colorado--

universities which had done extensive breeding research.    Mr.

Rinehart decided to have Doc City evaluated by the University of

Pennsylvania.   The University of Pennsylvania determined that Doc

City could only be used for very limited breeding.   In fact, Doc

City produced only two foals for Mr. Rinehart before the horse


     9
        In the cutting horse industry, there are prominent traits
associated with certain bloodlines/lineages. In attempting to
improve the breed, horses descended from different bloodlines
with complementary traits are mated. This is termed
“outcrossing”. The purpose of outcrossing is to mate one horse
with desired traits to another horse with different desired
traits so the resultant offspring will have traits superior to
its parents (the sire and dam).
     10
        Hybrid vigor results in the best of both bloodlines in
the foal.
                               - 8 -

died in 1997.

     While Doc City was being evaluated, Mr. Rinehart attempted

to replace Doc City with another son of Doc Bar.   By that time,

however, all of Doc Bar’s sons were too old to be used

effectively in Mr. Rinehart’s breeding program.    Therefore, Mr.

Rinehart decided to purchase a grandson of Doc Bar named

Makingyourmark.

     Makingyourmark was a son of Doc O’lena and Bar Socks Babe.

Doc O’lena was the most predominant producing son of Doc Bar, and

Bar Socks Babe was one of the top ten producers of cutting

horses.

Horse Breeding Operations

     Horse breeding is difficult work.   During the years in

issue, Mr. Rinehart:   (1) Mucked (cleaned out) stalls, (2) cut,

bailed, and hauled hay, (3) performed minor surgery on his

horses, (4) fixed leaky pipes, and (5) checked the stallions,

mares, and foals on a daily basis for injuries and illnesses so

that they could be treated immediately.11

     Mr. Rinehart, as part of his planned breeding program,

determined which stallion to breed to which mare approximately 1

year in advance.   He based his decisions on the horses’

bloodlines and past breeding performance.



     11
        Mr. Rinehart had blood testing equipment on site so he
could diagnose and treat illnesses quickly.
                                - 9 -

Horse Breeding Methods:    Live Cover and Artificial Insemination

     From 1991 through 1994 or 1995, the breeding method used by

Mr. Rinehart was “teasing” the mares (to determine which mares

were in heat) and doing “live cover” (where the stallion and mare

have intercourse).   Mr. Rinehart had a special facility on the

Campbell ranch for teasing the mares.

     Around 1994, Mr. Rinehart started using artificial

insemination breeding.    Mr. Rinehart gained knowledge of equine

artificial insemination techniques through studying, reading

books, and working with veterinarians while they performed

artificial insemination.

     After learning about equine artificial insemination, Mr.

Rinehart purchased artificial insemination equipment.   Mr.

Rinehart had the following equipment on the Campbell ranch for

use in his artificial insemination breeding program:    (1) Horse

stocks that could be used to palpitate several mares at a time,

(2) a phantom mare (also known as a dummy mare) with an

artificial vagina that was used to collect the stallions’ semen,

(3) a laboratory, (4) incubators, (5) a microscope, (6) a

refrigerator, and (7) cryogenic equipment.

     Artificial insemination made it possible for his stallions

to breed with more mares than when Mr. Rinehart used live cover.

As part of his artificial insemination program, Mr. Rinehart set

up a detailed schedule for use during breeding season showing
                               - 10 -

when to collect his stallions’ semen.   This allowed him to

maximize the opportunity to fertilize his mares.12

     In the fall of 1996, Mr. Rinehart met Dr. John Allen, a

practicing veterinarian for 30 years and specialist in equine

reproduction.13   After some discussions, Mr. Rinehart decided to

have Dr. Allen work at the Campbell ranch.    At this time, the

artificial insemination program included sonograms performed by

Dr. Allen.   The sonograms allowed Mr. Rinehart to determine

better when the mares were ready for breeding and whether they

were pregnant.    Since Dr. Allen joined Mr. Rinehart’s horse

breeding activity, the pregnancy rate of Mr. Rinehart’s breeding

program increased from a rate of 40 to 45 percent to a rate of 85

to 90 percent.

The Horse Breeding Activity’s Records

     Mr. Rinehart maintained a ledger with handwritten monthly

expenses of the horse breeding activity until January 1994.

Starting in 1993, Mr. Rinehart began keeping records for the

horse breeding operation on a computer.    Mr. Rinehart kept a

register report, cash-flow report, itemized category report,



     12
        Mr. Rinehart’s mares were in heat between 7 and 9 days.
The stallions’ semen lives only 48 hours after ejaculation.
Setting a schedule of when to collect semen and inseminate the
mares allowed him to maximize the chances of fertilization.
     13
        Dr. Allen’s expertise in equine breeding included such
areas as fertility, sterility, normal breeding management,
artificial insemination, and embryo transfers.
                              - 11 -

chart of monthly income and expenses, and tax summary report.

These records detailed the date of each transaction, the check

number, a description of the payee, the category of the expense,

and the amount of the expenses.   There was also a space to write

additional notes regarding the expense.

     During the years in issue, Mr. Rinehart also kept

computerized records of foaling dates.    The foaling records

listed the name of the mare and stallion mated, the breeding

dates, the due date, the birth date, the color, the lineage, and

the sex of each foal.   There was also a space for comments.    Mr.

Rinehart also kept records of planned breeding of stallions with

specific mares.

     Additional computerized records kept by Mr. Rinehart for the

years in issue include records of the horses purchased, sold, and

that died, and records of the maintenance14 performed on each of

his horses broken down by stallions, mares, and geldings.15

     Before, during, and after the years in issue, Mr. Rinehart

prepared and filed with the American Quarter Horse Association

(AQHA)16 stallion breeding reports for his stallions.    He also


     14
        The “maintenance” performed on the horses included
shoeing, worming, giving inoculations, trimming hoofs, and
floating teeth.
     15
        The maintenance records also contained the
lineage/pedigree of each horse.
     16
        During the years in issue, Mr. Rinehart was a member of
the AQHA.
                               - 12 -

maintained a stallion breeding file for his own records.    This

file contained a copy of the AQHA stallion breeding report,

breeding schedules, monthly breeding reports by stallion and mare

(broken down by stallions he owned, mares he owned, and outside

mares), and equine breeding records for each mare broken down by

day and month for each breeding season.

     Mr. Rinehart maintained a separate file, broken down by

horse, for each of the horses he owned.    These files contained

earnings reports, show records, racing records, sire’s get

records, registration records, pedigree/lineage records, news

articles, veterinary records, advertisements, notes, invoices,

and purchase and sale records.

     Mr. Rinehart used standardized forms that are used in the

horse breeding industry.    These included stallion breeding

contracts, training contracts, mare foaling reports, AQHA

stallion breeding reports, AQHA registration applications, AQHA

transfer reports, and AQHA lease authorization forms.    The

stallion breeding contract outlined the breeding procedures and

what was expected from the client and Compass R Ranch.17

     Mr. Rinehart maintained files for his breeding and training

contracts.   Additionally, Mr. Rinehart provided copies of the

contracts to the clients.    Within these files, Mr. Rinehart


     17
        Mr. Rinehart operated the horse breeding activity under
that name “Compass R Ranch”.
                               - 13 -

maintained invoice records that include the breeding record,

maintenance records for the horse of each client, and forms

indicating compliance with Coggins testing.18

     Mr. Rinehart also maintained the following files:      Feeds

Info (which included nutritional information), Semen Log,

Reproduction Info (which included breeding and artificial

insemination materials), Bayer Eav-1 Vaccine (which included

breeding and medical materials), Stall Panels = Priefert Mfg. Co.

Inc. (which included invoices for horse breeding equipment), and

Manure Spreader-Hesston.

     Mr. Rinehart also kept extensive records regarding his

artificial insemination program.    Additionally, Mr. Rinehart

built a database on his mares’ breeding habits.

Additional Resources

     Mr. Rinehart’s library of books included breeding and

genetics books, AQHA rules and regulations, veterinary books,

management and efficiency books, foaling books, and therapy and

rehabilitation books.    Some of his books also dealt with the

economic aspects of horse businesses.

     Mr. Rinehart consulted with experts on various aspects of

the horse breeding business including showing, breeding, and

selling the horses.    Over the years, Mr. Rinehart hired

professional trainers to train his horses.


     18
          This tests for equine sickness.
                               - 14 -

Additional Background

     Mr. Rinehart advertised the horse breeding activity in trade

publications, local horse association publications, and at horse

shows.   Mr. Rinehart gave away baseball caps, pens, and other

promotional items with the Compass R Ranch name on it.     Mr.

Rinehart wore to horse shows jackets embroidered with the logo of

the Compass R Ranch and with the names of his stallions.    Mr.

Rinehart wrote articles to publicize the Compass R Ranch.

     Mr. Rinehart had stationery and business cards that bore the

name Compass R Ranch.

     From 1991 through 1999, Mr. Rinehart did not show many of

his horses; instead, he concentrated on building up a broodmare

band and increasing his stock of offspring of each stallion.

That way he had an inventory of horses of varying ages and

pedigrees to sell in order to provide purchasers with a variety

of choices.   As part of the horse breeding activity, Mr. Rinehart

also culled some of his horses.

     During the years in issue, Mr. Rinehart sold seven horses.

This was an increase from the previous years, 1991 through 1993,

when he sold no horses.    Mr. Rinehart sold his horses for the

following total amounts:    $2,441 in 1994, $4,945 in 1995, $5,960

in 1996, $14,929 in 1997, and $15,360 in 1998.

     During the years in issue, Mr. Rinehart was a pilot.    He

worked an average of only 5 days a month.    On December 1, 2000,
                               - 15 -

at age 60,19 he retired.   One of the reasons Mr. Rinehart started

the horse breeding activity was to have a source of income during

his retirement, which he anticipated to be in 2000, or in case he

lost his job before he retired.

                              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.”

     The U.S. Court of Appeals for the Fifth Circuit, to which an

appeal in this case would lie, has held that 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 intent of realizing an economic profit independent of

tax savings.   Westbrook v. Commissioner, 68 F.3d 868, 875 (5th

Cir. 1995), affg. T.C. Memo. 1993-634.

     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.



     19
          Age 60 was the mandatory retirement age.
                              - 16 -

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.   Petitioners have

the burden of proof.   Rule 142(a).20

     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

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

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



     20
        Cf. sec. 7491(a), effective for court proceedings
arising in connection with examinations commencing after July 22,
1998. Petitioners do not contend that their examination began
after July 22, 1998, or that sec. 7491 is applicable to their
case.
                                 - 17 -

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.      Id.; cf. Dunn v.

Commissioner, 70 T.C. 715, 720 (1978), affd. 615 F.2d 578 (2d

Cir. 1980).

     As an initial matter, respondent contends that Mr.

Rinehart’s testimony regarding the horse breeding activity was

not credible and that his “uncorroborated” testimony should be

disregarded.     We disagree.   Other witnesses corroborated Mr.

Rinehart’s testimony regarding the horse breeding activity.        We

found Mr. Rinehart’s testimony regarding this particular issue to

be credible.21

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 evidence established that Mr. Rinehart kept

complete and accurate books and records and that he operated the

horse breeding activity in a businesslike manner.

     Mr. Rinehart had a business plan for the horse breeding

     21
        This does not mean we find Mr. Rinehart’s testimony
regarding other issues presented in this case to be credible.        We
make no such finding herein.
                               - 18 -

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

(holding that a business plan need not be in written form and can

be evidenced by the taxpayer’s actions).    When he began the horse

breeding activity, Mr. Rinehart moved from the Van Alstyne ranch,

which was set up for raising cattle, to the Campbell ranch, which

was set up for horse breeding and training.    Mr. Rinehart kept a

library of books on the Campbell ranch to have at his disposal.

He advertised and publicized the horse breeding activity.

     Changing operating methods or adoption of new techniques in

a manner consistent with an intent to improve profitability may

also indicate a profit motive.    Sec. 1.183-2(b)(1), Income Tax

Regs.    During the years in issue, Mr. Rinehart changed his

breeding program from live cover to artificial insemination.

This made it possible for his stallions to breed with more mares

and for him to maximize the opportunity to fertilize his mares.

This provided Mr. Rinehart with additional horses to sell and/or

breed.

     We conclude that this factor indicates that petitioners had

the requisite profit motive.

Expertise of Mr. Rinehart and His Advisers

     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.   Respondent

concedes that Mr. Rinehart has extensive expertise in horse

breeding.    Mr. Rinehart consulted with experts on various aspects
                                - 19 -

of the horse breeding business including showing, breeding, and

selling the horses.     Over the years, he hired professionals to

train his horses.    When Doc Bar was not producing foals, Mr.

Rinehart sought advice from veterinary experts and had the

stallion evaluated by experts.    In 1996, Mr. Rinehart added the

services of a specialist in equine reproduction, Dr. Allen, to

the horse breeding activity.    We conclude that this factor is

indicative of the requisite profit motive.

Time and Effort Expended by Mr. Rinehart

     Mr. Rinehart was engaged in all aspects of the horse

breeding activity including:    (1) Hiring and firing all labor,

(2) purchasing of mares and stallions, (3) breeding and raising

the horses, (4) training of the horses, (5) culling the horses,

(6) maintaining the horses, (7) advertising the activity, and (8)

promoting the activity.    Respondent concedes that Mr. Rinehart

spent significant amounts of time in carrying on the horse

breeding activity.    This factor is indicative of the requisite

profit motive.

The Expectation That Assets May Appreciate in Value

     A number of experts testified at trial.    Internal Revenue

Service (IRS) real estate appraiser Armando Rodriguez concluded

that as of December 31, 1996, the value of the Compass R Ranch

was $406,000.    Paul Bierschwale, a real estate appraiser,

concluded that as of December 31, 1996, the value of the Compass

R Ranch was $500,000.    Respondent argues that we should accept
                              - 20 -

the valuation proposed by Mr. Rodriguez; petitioner argues that

we should accept the valuation proposed by Mr. Bierschwale.   Both

reports, however, conclude that by the close of the last taxable

year in issue (1996) the Campbell ranch increased in value from

its purchase price.   The only dispute between the parties is to

whether value increased by $56,000 or $150,000.   The Campbell

ranch increased in value by at least $56,000, and this supports

Mr. Rinehart’s expectation that the assets used in the activity

would appreciate in value and petitioners’ contention that the

horse breeding activity was engaged in for profit.22

     Additionally, IRS economist Roderick Moss testified that he

thought Mr. Rinehart’s horse breeding activity could be

profitable in the future.   Accordingly, we conclude that this

factor favors petitioners for the years in issue.

Mr. Rinehart’s Success in Similar or Dissimilar Activities

     The uncontradicted evidence establishes that Mr. Rinehart

enjoyed success in two previous cattle activities--the polled

Hereford breeding activity and the Hereford breeding activity.

This is indicative of the requisite profit motive.

History of Income or Loss

     Mr. Rinehart incurred hundreds of thousands of dollars in



     22
        We note that the parties submitted evidence regarding
the valuation of petitioners’ herd of horses. The factual and
expert evidence, however, concerns the value of the horses in
2000--a year well beyond the years in issue.
                              - 21 -

losses from 1994 through 1996; however, in 1995 Mr. Rinehart

reduced the amount of his losses from the horse breeding activity

by approximately $25,000 from 1994, and in 1996 Mr. Rinehart

again reduced the amount of his losses from the horse breeding

activity by approximately $25,000 from 1995.

     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 published

opinion 647 F.2d 170 (9th Cir. 1981).    Section 1.183-2(b)(6),

Income Tax Regs., however, provides that a series of losses

during the startup phase of an activity may not necessarily be an

indication that the activity is not engaged in for profit.

     Mr. Rinehart admitted that during 1986 through 1989 he could

not make a profit from the horses he owned.    After the divorce

and bankruptcy, he ended the initial horse activity and went into

a “holding period” where he kept the few horses he still had, but

he did not train, show, or breed them.    In 1990, Mr. Rinehart

reentered the cutting horse industry and started up the horse

breeding activity.

     This Court has recognized that the startup phase of a horse

breeding activity is 5 to 10 years.     Engdahl v. Commissioner, 72

T.C. 659, 669 (1979).   We believe that the years in issue, 1994

through 1996, encompassed a startup period.    See Phillips v.

Commissioner, supra; see also Engdahl v. Commissioner, supra at
                                - 22 -

669.   As Mr. Rinehart's losses were sustained during the startup

phase of the horse breeding activity, we conclude that the losses

sustained are not an indication that the horse breeding activity

was not engaged in for profit.

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.

       During the years in issue, the Campbell ranch was not used

for recreational or social entertaining.    Petitioners did not

ride the horses they owned for pleasure.    The “pleasure” Mr.

Rinehart derived from his involvement in the horse breeding

activity was not the enjoyment associated with recreation; it was

the satisfaction associated with a job or occupation.

Additionally, many of the duties performed by petitioner were not

activities that provided personal pleasure or recreation.

Accordingly, this factor does not weigh against petitioners.

Conclusion

       We note that Mr. Rinehart previously litigated in this Court

whether the horse breeding activity was an activity not engaged

in for profit for the years 1992 and 1993.    Rinehart v.

Commissioner, T.C. Memo. 1998-205 (Rinehart I).      Each taxable
                              - 23 -

year, however, stands on its own and must be separately

considered.   United States v. Skelly Oil Co., 394 U.S. 678, 684

(1969); Pekar v. Commissioner, 113 T.C. 158, 166 (1999).

     At the previous trial, Mr. Rinehart appeared pro se, his

trial lasted approximately 3 hours, and the only witness for the

taxpayer was Mr. Rinehart.   In the instant case, Mr. Rinehart was

represented by counsel, evidence was presented over 3 full days,

and additional witnesses corroborated Mr. Rinehart’s testimony

regarding the horse breeding activity.   In Rinehart I, Mr.

Rinehart stipulated that he was not involved with any other

activity similar to the horse breeding activity, that he did not

possess adequate records of income and losses for the horse

breeding activity, that he did not keep adequate records on each

of his horses, and that he received personal pleasure and

enjoyment from the horse breeding activity.   The evidence in this

case clearly established that these stipulations do not apply to

the years here in issue.   Accordingly, we have reached our

decision herein in light of the voluminous new evidence presented

to the Court.

     The evidence established that Mr. Rinehart maintained

adequate records, operated the horse breeding activity in a

businesslike manner, had extensive expertise about horse

breeding, expended a significant amount of time on the horse

breeding activity, had a reasonable expectation that the assets
                                - 24 -

used in the activity would appreciate in value, and had success

in other breeding activities.    Furthermore, Mr. Rinehart

sustained the losses in issue during the startup phase of the

horse breeding activity.   Accordingly, we conclude that Mr.

Rinehart engaged in the horse breeding activity during 1994,

1995, and 1996 with the primary purpose and intent of making a

profit within the meaning of section 183.

     Our holdings in this opinion will be incorporated into the

decisions to be entered in these cases when all other issues are

resolved.
