                  T.C. Summary Opinion 2006-161



                     UNITED STATES TAX COURT



             JUDITH A. SANDERS-CASTRO, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 6319-05S.                  Filed October 4, 2006.


     Judith A. Sanders-Castro, pro se.

     Roberta L. Shumway, for respondent.



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

the provisions of section 7463 of the Internal Revenue Code in

effect when the petition was filed.1   The decision to be entered

is not reviewable by any other court, and this opinion should not

be cited as authority.


     1
        Unless otherwise indicated, all subsequent section
references are to the Internal Revenue Code in effect for 2001,
the taxable year in issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
                                   - 2 -

       Respondent determined a deficiency in petitioner’s Federal

income tax for the taxable year 2001 in the amount of $14,490, as

well as additions to tax for that same year, as follows:

$2,189.25 under section 6651(a)(1), $1,508.15 under section

6651(a)(2), and $364.12 under section 6654(a).

       After concessions by respondent, the two issues for decision

are:       (1) Whether petitioner’s horse showing and breeding

activities were activities engaged in for profit within the

meaning of section 183; and (2) whether petitioner is liable for

the addition to tax under section 6651(a)(1) for failure to

timely file her 2001 Federal income tax return.       We hold that

petitioner’s horse showing and breeding activities were not

engaged in for profit within the meaning of section 183 and that

she is liable for the addition to tax under section 6651(a)(1).

                                Background

       Some of the facts have been stipulated, and they are so

found.       We incorporate by reference the parties’ stipulation of

facts and accompanying exhibits.2

       At the time the petition was filed, Judith Sanders-Castro

(petitioner) resided in San Antonio, Texas.



       2
        As she did not file a pretrial memorandum, at trial
petitioner specifically requested the opportunity to provide the
Court with a written reply to respondent’s submission.
Consequently, both parties were ordered to submit posttrial
memoranda within 90 days. Respondent’s posttrial memorandum was
filed June 1, 2006; petitioner’s brief was never received.
                                - 3 -

     Petitioner is currently employed as an attorney by Texas

RioGrande Legal Aid, Inc.    In 2001, petitioner worked part time

at Texas Rural and Legal Aid and performed contract work for

another attorney.    She had both wage income and Schedule C,

Profit or Loss From Business, income from her work as an

attorney.    Petitioner’s husband is a social worker.

     Neither petitioner nor her husband rides horses.    Petitioner

was introduced to horse showing and breeding activities by her

long-time friend Cindy Pruitt (Ms. Pruitt), who also raised

horses in her spare time.    Petitioner studied Ms. Pruitt’s

operations for over a year and began accompanying her to horse

shows; petitioner herself joined the Appaloosa Horse Club in

1998.    Fascinated with Appaloosas because of their beauty and her

enchantment with their history in Native American lore,

petitioner’s own horse showing and breeding activities began in

1998 when she purchased her first horse, a 2-year-old Appaloosa

stallion named Skips Jrs. Shado (Skippy), from Ms. Pruitt for

$2,000.    Skippy got sick and died in 1999.

     A few months after she purchased Skippy, petitioner

purchased a mare named Sarah Air for $4,700.    The mare was

pregnant at the time of the purchase and, a few weeks later,

foaled King Shados Air (King).3    Petitioner sold King for $5,300


     3
        Although petitioner purchased the mare in May 1998, she
did not take official ownership of the horse or her foal until
                                                   (continued...)
                                 - 4 -

in 2000 and did not report any gain as income on her Schedule C

for that year.

     Petitioner bred Sarah Air with Jr’s Shado, the same stallion

that produced Skippy and King.    Jr’s Shado was owned by T.L.

Seville (Mr. Seville).

     Sarah Air foaled Saras Chula Shado (Chula) in May 1999.

Petitioner bred Sarah Air another time with Jr’s Shado,

unsuccessfully, in 1999.   Breeding the same pair still another

time yielded a horse named Star in 2001.     Chula was sold in 2002

in exchange for $1,250 and training for Star valued at $1,000.

Both Star and Sarah Air were later given away to a friend for

free.4

     In 1999, petitioner purchased another mare, Flash,

discovered by Ms. Pruitt at a rodeo.     The idea was that

petitioner would buy Flash and pay for training while Ms. Pruitt

would maintain the horse, and the two would split the profits

from Flash’s eventual sale.5   Petitioner purchased Flash for

$3,600, had her trained for about 6 months (at a cost of


     3
      (...continued)
Jan. 23, 1999.
     4
        Petitioner testified that, at the time of trial, the
transfer of the horses was not yet complete but that she was
incurring no further related expenses and that her friend had
“assumed ownership” of the horses.
     5
        Despite this 50-percent partnership arrangement,
petitioner claimed 100 percent of the depreciation deductions for
this horse on her 1999 and 2001 tax returns.
                                - 5 -

approximately $3,600), and ultimately gave her away at no charge

to a friend in 2004.

     Petitioner hired people she considered to be experts to care

for and train the horses.    Most of the horses were boarded with

Ms. Pruitt in Texas or with Mr. Seville in Colorado or New

Mexico.    Petitioner paid Ms. Pruitt, Mr. Seville, and others to

train and show the horses.

     Part of building a horse’s reputation--and thus its

appreciation in value--results from its performance at horse

shows.    For example, Sarah Air won numerous riding competitions

during the time petitioner owned her.    The shows in which

petitioner entered her horses did not pay prize money.    Rather,

the horses would win points for placing in various categories.

None of petitioner’s horses were entered in any competitions in

2001.

     Petitioner listed her horse showing and breeding activities

on her Federal income tax returns with the fictitious business

name “Autumn Skies Ranch”, but she never filed a name

registration for that business.    She never made business cards or

letterhead.    She did not regularly issue Forms 1099 (information

returns) to the professionals she paid to board or train her

horses.    She did not regularly enter into written contracts

concerning the care, training, or showing of her horses.
                                - 6 -

     Petitioner did not keep a separate bank account for her

horse showing and breeding activities, but she testified that she

maintained a spreadsheet with information on each horse and its

expenses.6   She did not do any bookkeeping for the activities

because she felt that, with relatively few horses, she would be

able to track her expenses accurately.   No income was reported

from the horse showing and breeding activities through the

taxable year 2001.7

     Petitioner did not advertise her horses for sale in trade

magazines or journals at any point in her operations.     Petitioner

ceased her horse activities in November 2005.

     At the time the notice of deficiency was issued, petitioner

had not yet filed a Federal income tax return for 2001.      Based on

a substitute for return prepared pursuant to section 6020(b),

respondent determined a $14,490 deficiency in tax, along with

additions to tax totaling $4,061.52, for 2001.

     Petitioner filed her petition with the Court on April 1,

2005.    On April 6, 2005, petitioner and her husband jointly filed

a Form 1040, U.S. Individual Income Tax Return, for the 2001

taxable year with the Internal Revenue Service.




     6
         The spreadsheet was not introduced as an exhibit.
     7
        Petitioner has yet to file returns for subsequent years,
but she testified to the fact that the activities were never
profitable.
                                - 7 -

      After concessions by respondent, only two issues remained at

trial.    The first issue was whether petitioner operated her horse

showing and breeding activities with the objective of making a

profit.   The second issue was whether the addition to tax under

section 6651(a)(1) is appropriate.      We discuss both issues in

detail below.

                             Discussion

1.   Horse Showing and Breeding Activities

      Section 183 specifically precludes deductions for activities

not engaged in for profit except to the extent of the gross

income derived from such activities.      Sec. 183(a) and (b)(2).

Deductions are not allowable for activities that a taxpayer

carries on primarily for sport, as a hobby, or for recreation.

Sec. 1.183-2(a), Income Tax Regs.    For a taxpayer’s expenses in

an activity to be deductible under section 162, Trade or Business

Expenses, or section 212, Expenses for Production of Income, and

not subject to the limitations of section 183, a taxpayer must

show that the taxpayer engaged in the activity with an actual and

honest objective of making a profit.      Hulter v. Commissioner, 91

T.C. 371, 392 (1988); Dreicer v. Commissioner, 78 T.C. 642, 645

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

Hastings v. Commissioner, T.C. Memo. 2002-310.      Although a

reasonable expectation of a profit is not required, the

taxpayer’s profit objective must be actual and honest.      Dreicer
                                - 8 -

v. Commissioner, supra at 645; sec. 1.183-2(a), Income Tax Regs.

Whether a taxpayer has an actual and honest profit objective is a

question of fact to be answered from all the relevant facts and

circumstances.   Hulter v. Commissioner, supra at 393; Hastings v.

Commissioner, supra; sec. 1.183-2(a), Income Tax Regs.    Greater

weight is given to objective facts than to a taxpayer’s mere

statement of intent.   Dreicer v. Commissioner, supra at 645; sec.

1.183-2(a), Income Tax Regs.   The taxpayer bears the burden of

establishing he or she had the requisite profit objective.8    Rule

142(a); Keanini v. Commissioner, 94 T.C. 41, 46 (1990); Hastings

v. Commissioner, supra.

     The regulations set forth a nonexhaustive list of factors

that may be considered in deciding whether a profit objective

exists.   These 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



     8
        Generally, and aside from sec. 183-related issues, the
Commissioner’s determinations are presumed correct, and the
taxpayer bears the burden of proving those determinations wrong.
Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84
(1992); Welch v. Helvering, 290 U.S. 111, 115 (1933). Under sec.
7491, the burden of proof may shift from the taxpayer to the
Commissioner if the taxpayer produces credible evidence with
respect to any factual issue relevant to ascertaining the
taxpayer’s tax liability. Sec. 7491(a)(1). In this case there
is no such shift because petitioner neither alleged that sec.
7491 was applicable nor established that she fully complied with
the requirements of sec. 7491(a)(2). The burden of proof remains
on petitioner. Compare sec. 183(d), which is inapplicable to the
instant case because its conditions have not been satisfied.
                               - 9 -

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) any elements indicating personal pleasure or recreation.

See sec. 1.183-2(b), Income Tax Regs.

     No single factor, nor even the existence of a majority of

factors favoring or disfavoring the existence of a profit

objective, is controlling.   See id.    Rather, the relevant facts

and circumstances of the case are determinative.    See Golanty v.

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

opinion 647 F.2d 170 (9th Cir. 1981).    Although there are facts

that favor petitioner, on the basis of all of the facts and

circumstances in the present case, we must find that petitioner

was not engaged in her horse showing and breeding activities for

profit within the meaning of section 183.    See Rule 142(a);

INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); Welch v.

Helvering, 290 U.S. 111, 115 (1933).

     We do not analyze in depth all nine of the factors

enumerated in the regulation but rather focus on some of the more

important ones that lead to our decision.
                              - 10 -

     A.   Complete and Accurate Books and Records

     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.   Here, the balance of the facts supports

respondent’s contentions.

     Petitioner commingled funds from her horse showing and

breeding activities with her personal finances.     While not

determinative, commingling funds can be one indication that an

activity is engaged in as a hobby and not for profit.     See

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

     Additionally, petitioner, an attorney, did not have any

written contracts with the professionals she hired to care for,

train, and show her horses.

     Petitioner failed to keep any specific books and records

with respect to the horse activities’ profitability and

management, and any records she did maintain were poorly

organized and inaccurate.9

     Petitioner failed to develop a budget or a business plan.

While budgets and business plans are not required, a lack of

information upon which to make educated business decisions tends

to belie a taxpayer’s contentions that an activity was pursued


     9
        Although petitioner did not accurately track and report
her expenses for the horse showing and breeding activities,
substantiation was not raised as an issue in this case.
                                 - 11 -

with the objective of making a profit.        Dodge v. Commissioner,

T.C. Memo. 1998-89, affd. without published opinion 188 F.3d 507

(6th Cir. 1999).

      Inasmuch as petitioner was a sufficiently competent

professional in other areas, her lack of businesslike treatment

of these activities weighs against a finding that petitioner had

the requisite profit objective.

      B.     Petitioner’s Research Into the Activity

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

as well as his or her consultation with experts, may be

indicative of a profit objective.      Sec. 1.183-2(b)(2), Income Tax

Regs.      Petitioner sought general advice from the few breeders and

trainers she knew and with whom she was already friendly.        She

attended shows and read trade literature.        There is no evidence

however, that petitioner reviewed the records of other breeding

operations or that she sought specific advice as to how to make

her own operation profitable.      Petitioner had no idea how

saturated the horse-breeding market may have been before entering

it.   She chose Appaloosas because of their beauty and not because

they represented a good business investment.        Petitioner used

only a single stallion to breed with her mare, and the stallion

required live insemination visits to be successful; there is no

indication that any research was done to determine the cost-

effectiveness of this arrangement.        This factor also weighs
                                - 12 -

against a finding that petitioner had the requisite profit

objective.

     C.    Losses From the Activity

     A taxpayer’s history of income or losses with respect to the

activity can indicate whether a profit objective was present.

Sec. 1.183-2(b)(6), Income Tax Regs.     Petitioner estimated at

trial that she incurred approximately $8,300 in expenses related

to the horse showing and breeding activities that she did not

deduct on her Federal income tax return for a previous taxable

year.     Without taking those expenses into account, petitioner has

claimed $43,289--all as losses--in deductions from the

commencement of these activities in 1998 through the taxable year

in issue.     In petitioner’s favor is the fact that she ceased

involvement with the activity in 2005.

     Horse breeding is an activity subject to unforeseen risks,

such as the premature death of a horse.     In addition, petitioner

could have been considered to be in a startup phase as 2001

represented only her fourth year of participation in an activity

with a long investment period.     While cases have held that horse-

breeding activities may be engaged in for profit despite

consistent losses during the startup phase, see Golanty v.

Commissioner, supra at 427, it is not merely the absolute loss

that the Court must consider.     Rather, it is the overall record,

and most notably the fact that the one time petitioner realized
                               - 13 -

any gain from the sale of a horse, she neglected to include it on

her Schedule C for the applicable year.      The Court finds that

this factor weighs against the existence of a profit objective.

     D.   Profit From the Activity

     Some profit, even if only occasional, may indicate that an

activity is engaged in for profit.      Sec. 1.183-2(b)(7), Income

Tax Regs.   Absent actual profits, the opportunity to earn

substantial profits in a highly speculative venture may be

sufficient to indicate that an activity is engaged in for profit.

See id.   Petitioner never put herself in a position to earn a

profit in the year at issue.   She did not enter her horses in

competitions that paid cash prizes, but only in those that

awarded points.   None of her horses were entered into any

competitions during the taxable year.      She never advertised any

of her horses for sale.   While petitioner could have recouped

some of her losses through the sale of her horses (one of which

was a successful brood mare with a proven record of performance

in competition) at the time she ended her participation in the

activity, she chose not to.    She chose instead to give the horses

away to a friend.   Petitioner testified that the market for

horses was down and that she would not have been able to fetch a

good price for her horses; if a profit objective had been at the

heart of her participation in this activity, petitioner should
                                 - 14 -

have been willing to offset her losses by some amount when she

ceased participation, even if overall she never made a profit.

     E.   Petitioner’s Financial Status

      The fact that the taxpayer has substantial income from

sources other than the activity in question, particularly if the

losses from the activity generate substantial tax benefits, may

indicate that the activity is not engaged in for profit.     Sec.

1.183–2(b)(8), Income Tax Regs.      During the taxable year 2001,

petitioner reported wage income of $89,831 and a Schedule C gain

of $5,893 from her part-time job performing contract work for

another attorney.      During the same year, petitioner reported

Schedule C losses from the horse showing and breeding activities

of $13,128.   Without the other income, petitioner’s family could

not have successfully sustained losses of approximately 13

percent of their household income.

      Considering all the facts and circumstances, we find that

petitioner’s horse showing and breeding activities were not

engaged in for profit within the meaning of section 183(c).

Respondent’s determination of an income tax deficiency is

therefore sustained.

2.   Addition to Tax

      Section 6651(a)(1) imposes an addition to tax for failure to

file a return by its due date.      The addition equals 5 percent for

each month or fraction thereof that the return is late, not to
                                   - 15 -

exceed 25 percent.       Id.   Respondent bears the burden of

production with respect to the addition to tax.         See sec.

7491(c); see also, e.g., Swain v. Commissioner, 118 T.C. 358, 363

(2002); Higbee v. Commissioner, 116 T.C. 438, 446 (2001).

Respondent has met his burden.

     The last date for petitioner to file her taxable year 2001

return was April 15, 2002.        Sec. 6072(a).   Petitioner’s 2001

return was not filed, however, until April 6, 2005, almost 3

years past its statutory due date and 5 days after the petition

in this case was filed.        The return was clearly late.

     “A failure to file a tax return on the date prescribed leads

to a mandatory penalty unless the taxpayer shows that such

failure was due to reasonable cause and not due to willful

neglect.”   McMahan v. Commissioner, 114 F.3d 366, 368 (2d Cir.

1997), affg. T.C. Memo. 1995-547.        The taxpayer bears “the heavy

burden of proving both (1) that the failure did not result from

‘willful neglect,’ and (2) that the failure was ‘due to

reasonable cause’”, in order to escape the penalty.           United

States v. Boyle, 469 U.S. 241, 245 (1985).         “Willful neglect”

denotes “a conscious, intentional failure or reckless

indifference.”     Id.    Petitioner did not establish that her

failure to timely file was due to reasonable cause and not to

willful neglect.
                              - 16 -

     Petitioner argued that extenuating circumstances caused her

to be late in filing her tax return for the taxable year at

issue.   She argued that her part-time employer was very demanding

and that she had tremendous difficulties at home.   She further

testified that 2002 was a terrible year for her family.

     A taxpayer may have reasonable cause for failure to timely

file a return where the taxpayer or a member of the taxpayer’s

family experiences an illness or incapacity that prevents the

taxpayer from filing his or her return.   See, e.g., Hobson v.

Commissioner, T.C. Memo. 1996-272; Tabbi v. Commissioner, T.C.

Memo. 1995-463.   Petitioner and her husband both managed to hold

down professional jobs during the relevant time period;

petitioner herself also managed to engage in part-time work,

participate in her horse showing and breeding activities, and

care for her family around the time this return was due and for

some time thereafter.   This would indicate that she could have

filed the return on time had she chosen to do so.   See Watts v.

Commissioner, T.C. Memo. 1999-416; Wright v. Commissioner, T.C.

Memo. 1998-224, affd. without published opinion 173 F.3d 848 (2d

Cir. 1999).

     Further, the vast majority of the tragic events to which

petitioner refers occurred after the April 15, 2002 filing

deadline.   Although the Court greatly sympathizes with petitioner

and her family for their difficulties, petitioner provided no
                                - 17 -

information demonstrating the extent to which her family’s

difficulties prevented her from filing the 2001 return at some

point before being “pounced upon” by the IRS.10

     On the basis of the record before us, we therefore conclude

that petitioner did not demonstrate that her failure to timely

file a return was due to reasonable cause and not willful

neglect.    See sec. 301.6651-1(c), Proced. & Admin. Regs.; sec.

1.6161-1(b), Income Tax Regs.    Accordingly, petitioner is liable

for the addition to tax under section 6651(a)(1) for 2001.

                             Conclusion

     After considering all of the facts and circumstances, we

hold that petitioner’s horse showing and breeding activities were

not engaged in for profit within the meaning of section 183 and

that she is also liable for the addition to tax under section

6651(a)(1) for her failure to timely file her 2001 tax return.

     Reviewed and adopted as the report of the Small Tax Case

Division.




     10
        Given the stipulations in this case, a pattern emerges.
Petitioner did not file her Federal income tax return for the
taxable year 1999 until Sept. 17, 2001, well beyond the statutory
deadline of Apr. 15, 2000. See sec. 6072. Petitioner did not
file her Federal income tax return for the 2000 taxable year
until Oct. 11, 2001. At the time of trial, and despite having an
accountant with whom she regularly consulted, petitioner had not
yet filed her Federal income tax returns for taxable years 2002,
2003, 2004, and 2005.
                               - 18 -

     To reflect our disposition of the disputed issues, as well

as respondent’s concessions,



                                         Decision will be entered

                                    for respondent for a

                                    deficiency of $4,395 and an

                                    addition to tax under section

                                    6651(a)(1) of $988.65, and

                                    decision will be entered for

                                    petitioner for the additions

                                    to tax under sections

                                    6651(a)(2) and 6654(a).
