                        T.C. Memo. 2003-233



                      UNITED STATES TAX COURT



                 MICHAEL G. BUNNEY, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 2081-02.                Filed August 4, 2003.



     John Alan Cohan, for petitioner.

     Lorraine Y. Wu, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     COHEN, Judge:   Respondent determined deficiencies in

petitioner’s Federal income taxes and an addition to tax as

follows:
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                                          Addition to Tax
          Year         Deficiency         Sec. 6651(a)(1)

          1997          $19,780                  --
          1998            4,980               $186.05
          1999           21,222                  --

     The issue for decision is whether petitioner is entitled to

deduct claimed losses reported on Schedule F, Profit or Loss from

Farming, from his horse activity for the years in issue.

Petitioner presented neither evidence nor argument concerning the

addition to tax and is thus deemed to have conceded that issue.

     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.

                         FINDINGS OF FACT

     Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference.

Petitioner resided in La Jolla, California, at the time he filed

the petition in this case.

     Petitioner received an undergraduate degree in marketing

from San Diego State University.     He received a master of

business administration with a specialization in finance from

National University.   Petitioner has been employed with several

public and privately held companies since he was 21 with

positions ranging from sales representative to chief operating

officer and executive vice president.     Petitioner spent 3 years
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of active duty in the Navy and 23 years in the Naval Reserves,

retiring at the rank of captain.    Petitioner has taught courses

in marketing, sales management, business planning, small business

management, computer science, aeronautics, and accounting at

various colleges in southern California.

     Petitioner was married prior to the years in issue and was

granted a Judgment of Dissolution of the marriage on August 17,

1992.   Petitioner’s daughter, Sarah A. Bunney, was born on

March 13, 1983.

     During 1997, petitioner was employed by Time Warner

Entertainment and Video Home Sales Services, Inc.   Petitioner’s

wages as reported on his Forms W-2, Wage and Tax Statement,

totaled $99,962 in 1997.    During 1998, petitioner was employed by

Winnebago Software Co. (Winnebago) and Verio-San Diego, Inc.   In

1998, petitioner traveled to northern California and Sun Valley,

Idaho, as part of his employment.   Petitioner’s wages as reported

on his Forms W-2 totaled $34,739 in 1998.   During 1999,

petitioner was employed by Winnebago and Pulse Engineering, Inc.

As a part of his employment in 1999, petitioner traveled to

Singapore; China; Germany; Toronto, Canada; Boston,

Massachusetts; New York City, New York; and Eden Prairie,

Minnesota.   Petitioner’s wages as reported on his Forms W-2

totaled $122,385 in 1999.
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The Horse Activity

     Petitioner began riding horses when he was 8 years old and

has always had an interest in horses.   In 1990, he developed an

interest in “reining” horses, a type of western riding sport.

Petitioner engaged in the horse activity under the name M&S

Performance Horses (M&S).   At the outset, petitioner neither

obtained a business license nor filed a fictitious name statement

for M&S.   During the years in issue, petitioner operated M&S to

breed, train, sell, and compete horses.

     Petitioner researched the horse activity by going to reining

competitions, reading books and publications about the industry,

and attending clinics.   In 1992, petitioner purchased his first

breeding stallion, an American paint horse, Bandits Lucky Doc.

On November 23, 1992, petitioner prepared a business plan for

M&S, including an income statement and an estimate of revenues

and expenses.

     Over the next few years, M&S changed direction due to a

change in the breeding rules for reining horses.   As a result of

this change, petitioner began to purchase high-quality broodmares

to breed with horses in southern California.   Petitioner did not

update his business plan to reflect the change in the direction

of the business.   Petitioner sold Bandits Lucky Doc in 1996.

     Petitioner employed Manuel Campos (Campos) as a trainer for

6 years.   Campos’s business, Manuel Campos Performance Horses
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(Campos Horses), had about 15 to 20 full-time clients, with 3 of

them engaging in breeding or training as a business.    When

petitioner first became a client of Campos Horses, he owned a

breeding stallion and was breeding paint horses.    Petitioner also

took riding lessons from Campos.

     From January 1, 1995, through December 31, 1996, petitioner

was a member of the National Reining Horse Association (Reining

Association).    Petitioner let his membership expire at the end of

1996.    Petitioner was not listed with the Reining Association as

a trainer or breeder during the years in issue.    In March 2001,

petitioner signed a declaration with the Reining Association

stating that he had not trained or assisted in training for

remuneration for the prior 5 years.     Neither petitioner nor M&S

was listed with the Reining Association as having collected any

lifetime earnings or points from Reining Association approved

shows.    Petitioner’s daughter, however, has ridden horses in

reining competitions in the youth categories.    Petitioner’s

daughter earned $4.81 in lifetime earnings and 18.50 points in

Reining Association approved shows as of December 31, 2002.

Petitioner’s Business Records

     Petitioner maintained his business records using the

computer software program known as Quicken.    Petitioner created

with the Quicken program a list of expenses for the years in

issue.    Petitioner did not maintain records of any bills from
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veterinarians for services provided to M&S.    Campos Horses

occasionally would provide bills and invoices for services

performed, as petitioner requested.

     Petitioner did not receive or maintain bills of sale or

purchase records for all of the horses he owned.    Petitioner did

not receive or maintain registration documents or transfer

reports to establish the number and identities of the horses he

owned during the years in issue.   Petitioner did not consistently

provide a bill of sale to customers who purchased his horses.

The retained copies of bills of sale showed either petitioner or

petitioner and his daughter as the sellers.

     Petitioner kept advertising and promotional materials on his

computer.   Petitioner prepared flyers and business cards on his

computer advertising Bandits Lucky Doc for breeding.    Of the

advertisements that petitioner kept, none of them listed M&S or

petitioner as the seller or breeder of the horse advertised.     In

2000, petitioner used the name “Three Colts West Performance

Horses” to promote a horse on a flyer.    In 2001, petitioner

placed three advertisements in Performance Horse Magazine under

his name without reference to M&S.

     Petitioner distributed business cards at competitions and

shows in order to advertise Bandits Lucky Doc.    M&S did not have

stationery with its own name or logo.    Instead, almost all

correspondence was prepared under petitioner’s name or under
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petitioner’s and petitioner’s daughter’s names.   Several letters

were prepared under the heading of “Olympic Equine Enterprises”

or “Three Colts West Performance Horses”.   Petitioner did not

retain correspondence sent to M&S from potential clients or other

third parties.

     Until 1996, petitioner insured Bandits Lucky Doc.

Petitioner did not insure any of the horses that he owned during

the years in issue.   In 1996, petitioner prepared an inventory of

some of the equipment used by M&S in order to have the equipment

covered under his homeowner’s insurance policy.   Some of the

equipment was stored at an offsite trainer’s facility.

     Petitioner did not have a dedicated telephone line for M&S

and instead used a pager, a cellular telephone, and his home

telephone line.   Petitioner occasionally used his employers’

telephone numbers for M&S.   In 2000, petitioner opened a

dedicated bank account for M&S with Union Bank of California.    On

March 23, 2000, petitioner filed a fictitious business name

statement for M&S.

     On May 15, 1996, in connection with custody and child

support proceedings, petitioner signed a declaration that was

filed with the Superior Court of California for the County of

San Diego.   In the declaration, petitioner claimed that the

losses incurred by M&S should be considered to reduce his income

for purposes of calculating child support payments.   Petitioner
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made a similar claim regarding losses from a consulting business,

The Graham Group (Graham).    Petitioner estimated $2,050 in

monthly losses from M&S and $525 in monthly losses from Graham.

     On October 21, 1999, petitioner filed an Income and Expense

Declaration with the Superior Court.     Petitioner estimated

monthly expenses of $3,482 for his daughter’s “pet supplies and

associated expenses”.   On June 16, 2000, petitioner filed a

second Income and Expense Declaration estimating monthly expenses

of $3,588 for pet supplies for “daughter’s horses”.     On May 15,

2001, petitioner filed a Responsive Declaration to Order to Show

Cause or Notice of Motion with the Superior Court.     Petitioner

stated in the declaration that he paid 100 percent of the

expenses related to his daughter’s three horses, totaling over

$1,600 per month.

Federal Tax Returns

     Petitioner filed Forms 1040, U.S. Individual Income Tax

Return, for 1997 through 1999.    Petitioner listed his occupation

on the returns as “Manager:    Equine Business”.   Attached to each

of the Forms 1040 was a Schedule F reporting a net farm loss each

year for petitioner’s horse activity.     Petitioner described his

horse activity on the Schedules F as “equine breeding, training,

and sales”.
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     From 1993 through 2000, petitioner reported the following

gross receipts and losses with respect to the horse-related

activity:

     Year       Gross Income            Expenses     (Loss)

     1993       ($11,000)                $14,380    ($25,380)
     1994        (10,350)                 40,797     (51,147)
     1995         (2,125)                104,738    (106,863)
     1996          -0-                    80,332     (80,332)
     1997         (9,000)                 82,065     (91,065)
     1998          1,000                  62,972     (61,972)
     1999          2,900                  94,474     (91,574)
     2000         13,700                 106,550     (92,850)
        Total   ($14,875)               $586,308   ($601,183)

Petitioner has never realized a profit from the horse activity.

     Petitioner filed Form 4868, Application for Automatic

Extension of Time to File U.S. Individual Income Tax Return, for

1998, extending the due date for the return until August 15,

1999.   Petitioner did not request a further extension of time to

file.   On August 26, 1999, petitioner filed his return for 1998.

                               OPINION

     At the outset, we note that petitioner’s briefs did not

comply with Rule 151(e) in that his proposed findings of fact

recite testimony from trial and rely on documents that were not

admitted into evidence.   Thus his briefs are unreliable and

unhelpful.   The factual assertions not based on evidence will be

disregarded.
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The Horse Activity

     Respondent determined that petitioner’s horse activity was

not an activity engaged in for profit within the meaning of

section 183.   Under section 183(a), if an activity is not engaged

in for profit, no deductions attributable to the activity shall

be allowed except as provided in section 183(b).   Section

183(b)(1) allows only those deductions that are not dependent

upon a profit objective, such as taxes.   Section 183(b)(2) allows

the deductions that would be allowable if the activity were

engaged in for profit, but only to the extent that gross income

attributable to the activity exceeds the deductions permitted by

section 183(b)(1).   An “activity not engaged in for profit” is

defined in section 183(c) as “any activity other than one with

respect to which deductions are allowable for the taxable year

under section 162 or under paragraph (1) or (2) or section 212.”

     Under section 183(d), in the case of an activity consisting

in major part of the breeding, training, showing, or racing of

horses, if the gross income derived from the activity exceeds the

deductions for any 2 of 7 consecutive taxable years, then the

activity shall be presumed to be engaged in for profit unless the

Commissioner establishes to the contrary.   See Golanty v.

Commissioner, 72 T.C. 411, 425 (1979), affd. without published

opinion 647 F.2d 170 (9th Cir. 1981).   Because M&S has operated
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at a loss since it began in 1992, the presumption does not apply

in this case.

     The Court of Appeals for the Ninth 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,

predominant, or principal purpose and intent of realizing an

economic profit independent of tax savings.      Wolf v.

Commissioner, 4 F.3d 709, 713 (9th Cir. 1993), affg. T.C. Memo.

1991-212; Indep. Elec. Supply, Inc. v. Commissioner, 781 F.2d

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

1984-472; see Prieto v. Commissioner, T.C. Memo. 2001-266, affd.

59 Fed. Appx. 999 (9th Cir. 2003).      The taxpayer’s expectation

need not be a reasonable one, but the profit objective must be

bona fide.   Golanty v. Commissioner, supra at 425-426; sec.

1.183-2(a), Income Tax Regs.   In determining whether the

requisite intention to make a profit exists, greater weight is to

be given to the objective facts than to the taxpayer’s self-

serving characterization of his intent.      Indep. Elec. Supply,

Inc. v. Commissioner, supra at 726; sec. 1.183-2(a), Income Tax

Regs.

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

nonexclusive list of factors to be considered in determining

whether the taxpayer has the requisite profit objective.      The
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factors are:    (1) The manner in which the taxpayer carries on the

activity; (2) the expertise of the taxpayer or his advisers;

(3) the time and effort expended by the taxpayer in carrying on

the activity; (4) the expectation that assets used in the

activity may appreciate in value; (5) the success of the taxpayer

in carrying on other similar or dissimilar activities; (6) the

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

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

earned; (8) the financial status of the taxpayer; and

(9) elements of personal pleasure or recreation.   These factors

are not intended to be exclusive, and no one factor or majority

of the factors need be considered determinative.    Golanty v.

Commissioner, supra at 426-427; sec. 1.183-2(b), Income Tax Regs.

In this case, the predominant factors weighing against petitioner

are whether petitioner carried on the activity in a businesslike

manner, petitioner’s history of losses, and the elements of

personal pleasure involved.   None of the other factors supports

his position.

     Petitioner argues that he conducted his horse activity in a

businesslike manner.    Maintaining complete and accurate books and

records, conducting the activity in a manner substantially

similar to comparable businesses that are profitable, and making

changes in operations to adopt new techniques or abandon

unprofitable methods are factors that may indicate that a
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taxpayer conducted the activity for profit.     Engdahl v.

Commissioner, 72 T.C. 659, 666-667 (1979); sec. 1.183-2(b)(1),

Income Tax Regs.

     Petitioner did not maintain accurate and complete books and

records for M&S.   Petitioner testified that it was not his

practice to use bills of sale or purchase agreements when horses

changed ownership.   The documents that petitioner provided as

bills of sale were computer-generated, and petitioner admitted to

printing them from his computer hard drive in preparation for

trial.   Petitioner testified that it was not the general practice

in the industry to provide bills of sale and that the important

documents were the registration document and transfer report.    At

the time of trial, however, petitioner was unable to provide

registration documents for any horse that he owned, and he did

not have copies of transfer reports for any horses that he

purchased or sold during the years in issue.     Petitioner did not

maintain records of the breeding of any mares.

     The materials that petitioner provided as evidence of his

advertising were also computer-generated and were printed in

preparation for trial.   Petitioner provided no evidence of

original advertisements used by M&S.     Petitioner had no record of

correspondence from other persons.     The correspondence he

provided was also computer-generated and was prepared for trial.
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     Petitioner had no records of bills or invoices for any

expenses he incurred on behalf of M&S.    Petitioner provided a

list of expenses that was prepared using the Quicken software

program.    The expense report was prepared and printed solely for

trial.

     Petitioner did not maintain records for the purpose of

decreasing expenses or increasing profits.    Almost all of

petitioner’s evidence regarding his record keeping was printed

from his computer in preparation for trial.    Petitioner provided

no credible evidence of conducting a business of horse breeding,

and there is no reliable evidence that he was breeding any horses

after selling Bandits Lucky Doc.

     A taxpayer’s history of income or loss with respect to an

activity may indicate the presence or absence of a profit

objective.   See Golanty v. Commissioner, 72 T.C. at 426; Kuberski

v. Commissioner, T.C. Memo. 2002-200; sec. 1.183-2(b)(6), Income

Tax Regs.    The magnitude of the activity’s losses in comparison

with its revenues may be an indication that the taxpayer did not

have a profit objective.     McKeever v. Commissioner, T.C. Memo.

2000-288.    A continuous series of losses during the startup stage

will not necessarily be deemed indicative that the activity was

not engaged in for profit.    Sec. 1.183-2(b)(6), Income Tax Regs.

The cumulative loss, however, should not be of such a magnitude

that an overall profit on the entire operation could not possibly
                              - 15 -

be achieved.   See Bessenyey v. Commissioner, 45 T.C. 261, 274

(1965), affd. 379 F.2d 252 (2d Cir. 1967).

     From 1992 until 2000, M&S had cumulative losses totaling

$601,183.   Petitioner claims that it takes time to reach a

profitable level in a horse breeding business and that M&S was

still in the startup phase.   Petitioner has not, however,

provided any evidence or plan that he could ever recoup his prior

losses or make the business profitable.   Petitioner did not

provide any evidence that he changed his business plan in order

to make the business profitable.   The magnitude of M&S’s

continuing losses in comparison to the revenues M&S received

negates a profit objective.

     Elements of personal pleasure or recreation from an activity

may indicate that the activity was not engaged in for profit.

Sec. 1.183-2(b)(9), Income Tax Regs.   Petitioner stated in

documents filed with the Superior Court that he supported his

daughter’s interest through the years by providing for the costs

of maintaining her horses and paying for riding competitions.

Petitioner has provided no credible evidence that he owned any

horses other than those used by his daughter for recreational

purposes.

     Based on the preponderance of the evidence, and particularly

the large, recurring, and unlikely to be recouped losses, we
                             - 16 -

conclude that petitioner’s horse activity was not engaged in for

profit.

     To reflect the foregoing,

                                        Decision will be entered

                                   for respondent.
