                            T.C. Memo. 1996-428



                          UNITED STATES TAX COURT



            ROGER G. COTNER AND MARLAN W. COTNER, Petitioners v.
                COMMISSIONER OF INTERNAL REVENUE, Respondent



        Docket No. 19739-94.               Filed September 23, 1996.



        Roger G. Cotner, pro se and for petitioner Marlan W. Cotner.

        James F. Mauro, for respondent.



                  MEMORANDUM FINDINGS OF FACT AND OPINION

        CARLUZZO, Special Trial Judge:    This case was heard pursuant

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

182.1



        1
      All section references are to the Internal Revenue Code in
effect for the year in issue. All Rule references are to the Tax
Court Rules of Practice and Procedure.
                               - 2 -

     Respondent determined a deficiency in petitioners' 1990

Federal income tax in the amount of $900, and an accuracy-related

penalty pursuant to section 6662(a) in the amount of $180.     With

the exception of the section 6662(a) accuracy-related penalty,

all of the issues resulting from adjustments made in the notice

of deficiency have been conceded by petitioners.2   In their

petition, petitioners claim they are entitled to a capital loss

deduction not included on their original 1990 Federal income tax

return.   Consequently, the issues for decision are:   (1) Whether

petitioners are entitled to a deduction for a long-term capital

loss sustained in connection with the sale of a horse; and (2)

whether the underpayment of petitioners' 1990 Federal income tax

was due to negligence so as to render them liable for the

accuracy-related penalty under section 6662 for that year.

                         FINDINGS OF FACT

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

The stipulation of facts and the exhibits attached thereto are

incorporated herein by this reference.   During the year in issue,

petitioners were husband and wife and filed a joint Federal

income tax return.   At the time the petition was filed,

     2
      In addition to the issues framed by the pleadings,
respondent agrees that petitioners understated by $1,013, a
depreciation deduction claimed on their 1990 Federal income tax
return. Although no issue involving an additional depreciation
deduction is formally before the Court, the parties, in response
to a suggestion by the Court, have agreed that the allowance of
this additional depreciation deduction will be reflected in their
Rule 155 computations.
                               - 3 -

petitioners resided in Grand Haven, Michigan.    Roger G. Cotner

is, and was during the year in issue, a practicing attorney.     He

has been a member of the bar of this Court since 1982.

References to petitioner are to Marlan W. Cotner.

     Petitioners filed a joint Federal income tax return for the

year 1990 on or about October 18, 1991.    After completion of

respondent's audit and during the preparation of the notice of

deficiency, which was issued on August 18, 1994, petitioners

submitted to respondent a Form 1040X, Amended U.S. Individual

Income Tax Return, dated July 12, 1994.    The Form 1040X contained

an amended Schedule D claiming a long-term capital loss.

Roger G. Cotner prepared petitioners' original return as well as

the Form 1040X.   Petitioners now concede the adjustments made in

the notice of deficiency.   In their petition, however,

petitioners raise the issue of whether they are entitled to the

capital loss deduction claimed on their amended return.

     During the year in issue petitioner worked as a self-

employed artist and as indicated, Roger G. Cotner was employed as

an attorney.   Petitioner has apparently had a lifelong interest

in horses and horseback riding.   She began riding horses in the

third grade.   She purchased her first horse while she was

attending college as an art major.     Her particular interest is in

dressage riding, a form of riding in which the horse is required

to execute a variety of precision movements upon command from its
                                 - 4 -

rider.   Dressage riders are rated at different levels from

training through grand prix.

     Petitioner had taken horseback riding lessons once or twice

per week for a period of 10 years prior to the year in issue.

Some of her lessons were taken from a former Olympic rider.     As

of the date of trial, she had progressed to the second level of

dressage riding.   There is nothing in the record that suggests

that petitioner's riding, dressage or otherwise, was done on

other than a personal, recreational basis.

     At various times during her life, petitioner owned a total

of 5 horses.   During 1990, petitioner owned only one horse, which

was named Sassy.   Sassy was purchased in 1986 at the age of 4 for

$10,000.   Petitioner acquired Sassy because of her belief that

the horse would perform well in dressage riding.    Petitioner did

not acquire Sassy with the intent to breed her.    It would appear

that petitioner acquired the horse solely for riding purposes.

However, shortly after she purchased Sassy, petitioner decided to

breed her.   After considering several potential stallions,

sometime in the spring of 1987, petitioner decided upon a

stallion named Reckless Blade.    Petitioner entered into a

standard breeding contract with the owners of Reckless Blade and

paid a stud fee of $850.   In the spring of 1988, as a result of

the breeding, Sassy produced a live foal, which was given the

barn name of Daisy.   The parties stipulated that petitioners

incurred actual expenses related to the breeding of Sassy and the
                               - 5 -

maintenance of Daisy in the amount of $7,714.07.   Included in

this amount are the following expenditures:

           Expenditures        Explanation

           $4,583.00           - stud fee; boarding and care for
                               Daisy; and boarding & care of Sassy
                               during pregnancy.

            3,131.07           - costs to maintain horses, plus a
                               moving expense.


     In February of 1990, petitioners sold Daisy for $1,400.

Daisy was sold at the approximate age of 22 months.   A dressage

horse reaches its peak value between age 12 and 14, and only

after extensive training.   Petitioners did not provide any

training to Daisy between her birth in 1988 and sale in 1990,

nor did they enter Daisy in any dressage competitions prior to

sale.   Petitioner testified that personal, family matters

precluded her from spending the time with Daisy that would have

been necessary to train the horse for dressage riding.

                              OPINION

     Petitioners claim that they incurred a loss on the sale of

Daisy and that, pursuant to section 165(c)(2), they are entitled

to deduct the loss as a long-term capital loss.    In calculating

the amount of the long-term capital loss petitioners computed

their cost basis in Daisy by taking into account all of the

expenditures incurred in connection with Daisy's care.

Respondent offers a variety of reasons why petitioners are not

entitled to the deduction here in dispute.
                                 - 6 -

     As we have pointed out in numerous opinions, deductions are

a matter of legislative grace.    A taxpayer who claims entitlement

to a deduction must identify the specific statute that allows for

the deduction and prove that all of the requirements of that

statute have been satisfied.     New Colonial Ice Co. v. Helvering,

292 U.S. 435, 440 (1934).

     Generally, section 165(a) allows as a deduction any loss

sustained during the taxable year and not compensated for by

insurance or otherwise.    Disregarding certain parts of section

165(c) that have no application to this case, section 165(c)(2)

provides that in the case of an individual, the deduction is

limited to losses incurred in any transaction entered into for

profit.   In this case, we consider the relevant "transaction" to

be the production of the foal, Daisy.

     To be entitled to a loss under section 165(c)(2),

petitioner's primary motive for entering into the transaction

must have been to make a profit.     Fox v. Commissioner, 82 T.C.

1001, 1021 (1984).   By "primary,"   we mean "of first importance"

or "principally".    See Malat v. Riddell, 383 U.S. 569, 572

(1966); Fox v. Commissioner, supra; Surloff v. Commissioner, 81

T.C. 210, 233 (1983).   Although profit need not be the sole

motive, if we find that petitioner's intent to make a profit was

merely incidental, petitioners will not be entitled to the loss

under section 165(c)(2).
                                - 7 -

     Whether a transaction is entered into for profit is a

question of fact.   The burden of proof is on petitioners to show

that petitioner entered into the transaction primarily for

profit.   Rule 142(a).   Greater weight is accorded objective facts

than is given to petitioner's self-serving statements

characterizing her intent.     Fox v. Commissioner, supra; Siegel v.

Commissioner, 78 T.C. 659, 699 (1982); Engdahl v. Commissioner,

72 T.C. 659, 666 (1979).

     Taking petitioner's testimony as presented, there is simply

very little to suggest that the decision to produce and sell a

foal was made primarily for profit purposes.    Petitioner

testified that she did not purchase Sassy with the intent to

breed her.   We must assume from that testimony that her

investigation and beliefs with respect to Sassy's heritage were

more in connection with Sassy's performance riding than with the

horse's breeding potential.    Petitioner's only testimony with

respect to a profit intent came in the form of the following

generalized responses to a series of questions put to her during

direct examination:

     Q     Prior to actually breeding Sassy did you
           investigate how much you'd be able to sell
           a foal for?

     A     Well, the market at the time was quite strong
           when I bought Sassy. She was $10,000. She
           was four. So ...

     Q     She was age four?

     A     She was age four. A three- or four-year old you
           could command 8,000 to 10,000.
                               - 8 -


     If petitioner's primary purpose in breeding Sassy was to

produce a foal that could be sold for a profit, we would have

expected that petitioners would have produced some evidence as to

how she intended to implement her plan, with some references to

projected expenses, anticipated training programs for the foal,

and revenue estimates that were based upon more than what she

paid for Sassy.   See, e.g., Hartford v. Commissioner, T.C. Memo.

1995-351.   As it turns out, it would appear that petitioner's

decision to sell Daisy was not in accordance with a previously

developed plan to do so, but rather resulted from the extra

expenses petitioners were forced to incur in maintaining an

additional horse.

     Following Daisy's birth, petitioners, who each maintained a

career unrelated to horse breeding, displayed little interest in

developing the foal so that it could be sold at a profit.

Petitioner testified that a horse with Daisy's bloodlines would

reach a peak value between age 12 and 14, and only with extensive

training.   However, petitioners did not provide any training to

the foal between its birth in 1988 and its sale in 1990, nor did

they enter Daisy in any dressage competitions prior to sale.

Moreover, Daisy was sold at approximately 22 months old, well

before she could possibly reach her peak value.

     It is clear from the record that petitioner had a keen

interest in horses in general, and dressage riding in particular.

It is equally clear that petitioner's interest in horses and
                               - 9 -

dressage riding was on a personal, recreational basis.     We think

it more likely than not that petitioner's decision to breed Sassy

was for the primary purpose of perpetuating what she believed to

be an excellent bloodline, and that any profit motive was merely

incidental to her primary purpose.

     In light of the foregoing, we find that petitioner's

motivation behind producing the foal was primarily personal in

nature and that any profit motive that existed was merely

incidental.   The transaction in which Daisy was sold was nothing

more than the sale of petitioner's personal, albeit capital,3

asset.   The loss from the transaction is not within the

categories of losses allowed by section 165, or any other

provision of the Internal Revenue Code.   Accordingly, petitioners

are not entitled to a long-term capital loss deduction for the

year 1990 in connection with the sale of Daisy.

     In view of the foregoing, we need not address respondent's

other arguments related to this issue.

 Accuracy-Related Penalty

     Respondent determined that petitioners are liable for the

accuracy-related penalty imposed by section 6662(a).    Section

6662(a) and (b)(1) imposes a penalty on any portion of an

underpayment which is attributable to negligence or disregard of


     3
      Respondent, in her brief, suggests that   Daisy was not a
capital asset in the hands of petitioner. No    authority for this
proposition was stated and it would appear to   us that, given the
express language of sec. 1221, which provides   the definition of a
capital asset, Daisy clearly fits within that   definition.
                                - 10 -

rules or regulations.    The term "negligence" includes any failure

to make a reasonable attempt to comply with the statute, and the

term "disregard" includes any careless, reckless, or intentional

disregard.    Sec. 6662(c).   The penalty does not apply to any

portion of an underpayment for which there was reasonable cause

and with respect to which the taxpayer acted in good faith.       Sec.

6664(c).   Respondent's imposition of the section 6662(a) penalty

is presumptively correct, and petitioners bear the burden of

proving that they are not liable for the accuracy-related penalty

under section 6662(a).    Rule 142(a); cf. Welch v. Helvering, 290

U.S. 111, 115 (1933); Bixby v. Commissioner, 58 T.C. 757, 791-792

(1972).

     Petitioners have conceded all of the adjustments made in the

notice of deficiency, which adjustments gave rise to respondent's

imposition of the accuracy-related penalty.     They have offered no

evidence or explanation of the circumstances surrounding the

filing of their 1990 Federal income tax return, other than it was

prepared by Roger G. Cotner.     Respondent argues that as an

attorney, Roger G. Cotner should have known that certain of the

deductions claimed on the 1990 Form 1040 were "blatantly wrong",

evidenced by their concessions in this case.     We note that as a

practicing attorney, Roger G. Cotner is held to a higher standard

of care than other taxpayers.     Tippin v. Commissioner, 104 T.C.

518 (1995).    Petitioners' failure to explain the circumstances

surrounding the preparation and filing of their 1990 Federal
                             - 11 -

income tax return, particularly in view of Roger G. Cotner's

background, leads us to conclude that respondent's imposition of

the accuracy-related penalty is appropriate.   Accordingly,

petitioners are liable for the accuracy-related penalty under

section 6662(a) for the year 1990.

     To reflect the foregoing,

                                          Decision will be entered

                                     under Rule 155.
