                     T.C. Memo. 2009-220



                   UNITED STATES TAX COURT



MARCIA TRESCOTT HELMICK AND ROBERT P. HELMICK, Petitioners v.
         COMMISSIONER OF INTERNAL REVENUE, Respondent



  Docket No. 13713-06.              Filed September 22, 2009.



       Ps ran a horse-breeding and -boarding operation in
  which they kept and cared for as many as 60 horses on
  the same property as their personal residence. Ps had
  no full-time employees and did most of the work
  themselves, and they did not use the horses for
  personal pleasure. Ps intended to make a profit to
  supplement their income, but, over a number of years,
  they incurred a string of losses. The only substantial
  income Ps had from other sources was P-H’s modest
  salary as a county employee, against which they applied
  the losses.

        Held: On the basis of all the facts and
   circumstances, the horse-breeding and -boarding
   operation was an activity engaged in for profit under
   I.R.C. sec. 183 in the years 1993 to 2002.
                               - 2 -

     Marcia Trescott Helmick and Robert P. Helmick, pro sese.

     M. Jeanne Peterson, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     GUSTAFSON, Judge:   The Internal Revenue Service (IRS) issued

to petitioners Marcia Trescott Helmick and Robert P. Helmick a

statutory notice of deficiency on April 11, 2006, pursuant to

section 6212,1 showing the IRS’s determinations of the following

deficiencies in income tax and accompanying failure-to-file

additions to tax and accuracy-related penalties under sections

6651(a)(1) and 6662,2 respectively, for tax years 1997 to 2002:




     1
      Unless otherwise indicated, all citations of sections refer
to the Internal Revenue Code of 1986 (26 U.S.C.), as amended, and
all citations of Rules refer to the Tax Court Rules of Practice
and Procedure.
     2
      Respondent concedes that the $2,133.50 failure-to-file
addition to tax under section 6651(a)(1) for 2001 was overstated
by $150 in the notice of deficiency and seeks an addition of only
$1,983.50 for that year. Respondent concedes that the $1,614.75
failure-to-file addition to tax under section 6651(a)(1) for 2002
was overstated by $1,291 in the notice of deficiency and seeks an
addition of only $323.75 for that year. Respondent concedes that
the $1,925.40 accuracy-related penalty under section 6662 for
2001 was overstated by $120 in the notice of deficiency and seeks
a penalty of only $1,805.40 for that year.
                                 - 3 -

                                    Addition to Tax      Penalty
    Tax Year        Deficiency      Sec. 6651(a)(1)     Sec. 6662
      1997            $4,114           $1,028.00          $822.80
      1998             5,861            1,383.50         1,172.20
      1999             6,371            1,465.50         1,274.20
      2000             6,446            1,440.50         1,289.20
      2001             9,627            2,133.50         1,925.40
      2002             7,598            1,614.75         1,519.60

     The issue for decision is whether the Helmicks’ horse-

breeding and -boarding operation (hereinafter, the horse

activity) was an activity engaged in for profit pursuant to

section 183.   We find that the Helmicks’ horse activity was

engaged in for profit.

                          FINDINGS OF FACT

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

The stipulation of facts and supplemental stipulation of facts

filed September 10, 2008, and the attached exhibits are

incorporated herein by this reference.    Trial of this case was

held in Denver, Colorado, on September 10, 2008.      Ms. Helmick and

Mr. Helmick testified.    Mr. Helmick, in particular, was a candid

and credible witness.    Ms. Helmick, though given to some

overstatement (e.g., about the number of hours she worked and the

quantum of records she maintained), was believable as to the gist
                                - 4 -

of her testimony.3   Respondent called no witnesses.   At the time

that they filed their petition, the Helmicks resided in Colorado.

Initial Horse Activity

     In or around 1980, Ms. Helmick (then known as Marcia L.

Trescott) and Richard E. Taylor acquired a roughly 1-1/2 to 2

acre parcel of real estate in a primarily residential

neighborhood in Niwot, Colorado, a town in Boulder County about 9

miles from the city of Boulder, Colorado.   She conducted a small

horse activity on that property before her marriage to

Mr. Helmick in the mid-1980s.   After the Helmicks married, the

property was transferred to Ms. Helmick and Mr. Helmick as

tenants in common, and Mr. Helmick joined in the conduct of the

horse activity on that property.   Beginning no later than July

1986 and continuing through all the tax years at issue, the

Helmicks’ primary residence was a house located on the same

property on which they conducted their horse activity.


     3
      For purposes of disputing Ms. Helmick’s credibility,
respondent asks the Court to take judicial notice of a document
that she filed in bankruptcy court, in which she stated that,
after the trial in this case, the Court “ruled from the bench
* * * that the IRS was wrong to have attempted, at any time, to
characterize the farm as a hobby”; but respondent points out that
there is no such ruling in the trial transcript of this case.
However, the Court did speak to the parties off the record,
observing that the Helmicks’ horse activity did not appear to be
a mere “hobby”, and that the disallowance of section 183 (though
sometimes referred to as the “hobby loss” provision) reaches more
than hobbies and disallows losses unless the activity is entered
into for profit. Ms. Helmick’s statement does not accurately
characterize the Court’s actual comment, but it is not (as
respondent argues) an “outright fabrication”.
                               - 5 -

The Helmicks’ Horse Activity

     The Helmicks’ horse activity principally involved the

breeding and boarding of horses.   The Helmicks’ boarding activity

consisted of keeping horses belonging to third parties on their

property, and caring for and feeding those horses for a fee.     The

Helmicks’ horse-breeding activities consisted of acquiring

purebred Arabian stallions and mares for the purpose of breeding

them with each other in order to produce and raise offspring for

sale.   These breeding activities began in earnest in 1984 when

Ms. Helmick purchased SS Bay Moun, a 2-year-old Arabian purebred

stallion, for $30,000.   Although Ms. Helmick had physical custody

of SS Bay Moun, the horse’s previous owners refused to transfer

clear title.   As a result, Ms. Helmick could not register the

horse or its offspring as purebred Arabians, and the Helmicks

lost some sales.   In response, the Helmicks filed a lawsuit in

1985, which remained pending for 9 years, to obtain clear title

to SS Bay Moun in order to register the horse and its offspring

as purebred Arabians and thus to increase their value on the

equine market.   In 1994, at the conclusion of the litigation, the

Helmicks acquired clear title to SS Bay Moun.

     The Helmicks’ horse activity began with a focus on breeding

horses to create salable livestock, but that focus shifted to

boarding horses when the Helmicks concluded that breeding was

less profitable because of a perceived decline in sale prices for
                               - 6 -

purebred Arabian horses in the 1980s and 1990s.   The Helmicks

also believed that boarding horses would become increasingly

profitable for them because of their property’s favorable zoning

status, discussed below, which gave them a virtual monopoly on

boarding horses in Niwot, Colorado.

     From 1993 to 2002 Ms. Helmick typically spent her entire

work week conducting the horse activity.   Mr. Helmick, who worked

full time as a land-use planner for Boulder and Larimer Counties,

typically worked on the horse activity in early mornings and

evenings, and on weekends.   Conducting the horse activity

involved, inter alia, buying and transporting hundreds of pounds

of feed each week, mucking stalls, shoveling hay, caring for sick

horses, and guiding pregnant mares through the birthing process.

In fact, the Helmicks frequently had to watch over their pregnant

mares during the night as well as the day.   On occasion during

the foaling season--which extended from January to April--the

Helmicks would have to take turns staying awake at night to

ensure that one of them checked on the mares at least once each

hour.   The strenuous nature of the work took its toll on the

Helmicks.   Mr. Helmick suffered from a bad back, which sometimes

left him bedridden, and Ms. Helmick tore her shoulder.

     The Helmicks never hired full-time employees, but they would

occasionally hire part-time assistants--usually high school

students--to help them with the horse activity.   Mr. Helmick had
                                - 7 -

a daughter (who was not Ms. Helmick’s daughter) who was born in

1981 and of whom he had joint custody.   However, the daughter did

not live with Mr. Helmick and seldom stayed with him during the

weekends when he had visitation rights, because she did not enjoy

cleaning stalls or doing other work in connection with the

horses.    We find that Mr. Helmick’s daughter did not spend a

material amount of time working with or riding the horses.

The Helmicks’ History of Other Employment and Business Ventures

     From 1993 to 2002 Ms. Helmick was not otherwise employed or

involved in business ventures aside from the horse activity.

Furthermore, Ms. Helmick does not allege, nor does the record

show, that she was ever involved in any other business ventures.4

     Mr. Helmick worked full time as a land-use planner for

Boulder County from 1980 to 1994 and for Larimer County from 1995

through all of the tax years at issue.   His salary for that job

during 1998 to 2002 never exceeded $65,000.   Neither he nor Ms.

Helmick had any other substantial sources of income during 1993

to 2002.   From 1995 to 1996 Mr. Helmick also ran his own part-

time, private land-use consulting business, which he referred to

as “Action Consulting”.   This business had a total of six clients

over its brief existence, but Mr. Helmick speculated at trial


     4
      Ms. Helmick alleged that she entered the business of horse
breeding and boarding through her “business associations” with
“rural equine residential real estate”. However, she did not
allege that she was involved in a real estate business, nor did
she describe what that business might entail.
                               - 8 -

that because of the business’s low overhead it was “probably”

profitable.   Mr. Helmick ultimately closed Action Consulting

because he preferred the “regular paycheck and benefits” from his

work with county governments to the uncertain cashflow associated

with private consulting.   Mr. Helmick does not allege, nor does

the record show, that he was ever involved in any other business

ventures.

The Helmicks’ Property and Zoning Status

     From 1997 to 2000 the number of horses (both owned and

boarded) on the Helmicks’ property in Niwot ranged from 40 to 60.

At any given time during that period, the Helmicks owned between

40 and 70 percent of the horses on their property.   Those horses

were kept in a barn with 13 stalls inside and an outdoor arena

for exercise.   In or around 1994 the Helmicks made plans to

improve their property by adding to their house and barn and

constructing an indoor riding arena, and they took out a

construction loan for that purpose.    The Helmicks believed that

these improvements and additions to their property would make

their boarding activities--to which their focus was shifting--

more profitable by lowering labor costs (because it is easier to

clean indoor facilities than outdoor facilities where horses

exercise, particularly during inclement weather) and by

increasing the fees they could charge (because they could offer

more amenities, like the indoor riding arena).
                               - 9 -

     However, these improvements were delayed by an adverse

determination by Boulder County, which held that the Helmicks

were in violation of zoning law and would have to reduce the

number of horses kept on their property.   The Helmicks responded

by engaging in a several-months-long campaign to challenge

Boulder County’s determination, which effort included soliciting

clients and friends to testify on their behalf.    Before 1997 they

won the right to continue to have 40 horses on their property,

which was then zoned as an equestrian center.   However, the

Helmicks were required to keep a minimum of 40 horses on their

property to maintain its status as an equestrian center in their

primarily residential neighborhood.    If they kept fewer than 40

horses on the property, then the number of horses they were

entitled to keep on their property would decrease

correspondingly.   Moreover, if the Helmicks completely failed to

maintain their property’s status as an equestrian center, then

they would be permitted to keep only two horses.    The zoning

situation thus imposed on them, in effect, a downward ratchet

that required them to maintain the size of their herd or

incrementally lose their right to run the horse activity.

     The Helmicks began construction on the additions to their

house and barn and on the indoor riding arena in 1997 after

winning their zoning dispute with Boulder County.    However,

because of a dispute with the contractor whom the Helmicks hired
                             - 10 -

to construct the indoor riding arena, the proposed construction

of that arena ceased in the late 1990s after the foundation was

built, and the arena was never finished.    The Helmicks sued the

contractor and ultimately settled the lawsuit in 2001 for $5,000.

Expertise of the Helmicks and Their Advisers

     The Helmicks were largely self-taught in the running of the

horse activity, but by 1993, the Helmicks each had over 8 years

of experience in breeding and boarding horses on their property.

In addition, the record shows that Mr. Helmick was a member of

the board of directors of various professional horse-breeding and

-boarding associations--including the Colorado Horsemen’s

Council, and the Boulder County Horsemen’s Association--at

various times during 1993 to 2002.

     The Helmicks were classified as amateur owners in the equine

industry, i.e., they were not professionally qualified or

compensated as horse trainers, and any training they performed

was incidental to their breeding and boarding operation.      The

Helmicks were not veterinarians.   However, the Helmicks consulted

numerous veterinarians with respect to their horse activity.        In

particular, the Helmicks occasionally employed a veterinarian to

inspect their mares to determine the appropriate time to breed

them in order to increase the likelihood of conceiving a mare

instead of a stallion, because at the time, mares would fetch a

higher price on the equine market.    In the late 1980s the
                                - 11 -

Helmicks discontinued the use of veterinarians for this purpose

to save themselves and their clients the cost of veterinarian’s

fees.     By that time Mr. Helmick had become proficient enough to

inspect the mares himself and achieve a success rate of

influencing the sex of the colt that was lower than the

veterinarian’s rate but still above the norm.

The Helmicks’ Books and Records

        Ms. Helmick was responsible for the bookkeeping for the

horse activity.     She did not prepare any contemporaneous business

plans or financial statements for the horse activity.     However,

Mr. Helmick would give the receipts generated by the horse

activity to Ms. Helmick, and after they had accumulated for some

time, she would enter them into a Quicken or QuickBooks program

on their computer.     In response to pointed questions, Ms.

Helmick’s testimony was equivocal on whether she made her Quicken

entries promptly or delayed doing so for months or years.       We

therefore find that Ms. Helmick delayed making her Quicken

entries for months or years after she received the receipts from

Mr. Helmick.     The Helmicks used Quicken to generate summaries of

their income and expenses for, inter alia, preparing their Forms

1040, U.S. Individual Income Tax Return, and dealing with IRS

audits.

        At trial the Helmicks did not present the receipts as

evidence to corroborate their income or expenses for the tax
                                - 12 -

years at issue.    However, the Helmicks introduced evidence of

their practice of saving their receipts and creating computer-

generated records therefrom in the form of the Quicken summaries

of their source and use of funds for all six of the tax years at

issue, and we find their testimony, corroborated with those

summaries, to be credible.     However, they did not show that they

kept sufficiently current with their Quicken entries to enable

them to determine at any given moment the amount of their current

deficit.

Losses From the Helmicks’ Horse Activity

     The Helmicks’ horse activity generated losses every year at

least after Mr. Helmick became involved with the activity in late

1984 or 1985.     On Schedules F, Profit or Loss From Farming,

attached to their Forms 1040 for the six years at issue (1997-

2002) and the five previous years (1992-96), the Helmicks

deducted a string of losses from their horse activity, as listed

below, totaling approximately $400,000 (and averaging about

$36,000 per year).

     However, for purposes of evaluating the Helmicks’ profit

motive for persisting in the horse activity, those losses may be

somewhat misleading in two respects.     First, the Schedule F

expenses that gave rise to those reported losses included a

portion of the mortgage interest expense and tax that the IRS’s

notice of deficiency allowed as additional itemized expenses.
                              - 13 -

The Helmicks would have incurred these expenses, and could have

deducted them, whether or not they had engaged in the horse

activity.   Second, the Schedule F expenses included depreciation

on assets that the Helmicks had previously purchased and which

therefore did not represent current costs of running the

activity.   On the one hand, the prospect of claiming the tax

benefit of such depreciation could be a tax-related, non-profit-

related motive for undertaking the activity.    But on the other

hand, a person who already owned the asset might well disregard

depreciation in making a decision as to whether he could hope to

turn a profit from the activity and as to how long he could

afford to incur losses before turning the corner.    In this case

the evaluation of the Helmicks’ profit motive should include a

reckoning of the actual out-of-pocket, marginal loss generated by

the horse activity that reduces the Schedule F losses by the

depreciation, taxes, and interest.     When that reduction is made,

the marginal loss of the activity is shown to have been on

average about $27,000 per year, i.e., more modest than the

Schedules F would seem to indicate:
                                - 14 -

            Schedule                                        Marginal
   Year       F Loss   Depreciation      Interest   Taxes     Loss
   1992      $57,034        ---             ---      ---       ---
   1993      57,315           ---          ---       ---      ---
   1994      28,544           ---          ---       ---      ---
   1995      23,608           ---          ---       ---      ---
   1996       9,561           ---          ---       ---      ---
                          1
   1997      29,783         $6,947         -0-       -0-    $22,836
   1998      34,847          6,947       $6,091      $612    21,197
   1999      41,174          6,206        6,419     1,858    26,691
   2000      32,584          4,894        2,501       588    24,601
   2001      28,023          3,789        6,150        52    18,032
   2002      57,896          6,402        2,094        11    49,389
    Total   400,369                                         162,746
     1
      Because the 1997 Form 1040 is not in the record, we use the
1998 depreciation figure as an approximation.

Post-Suit Year Operation of the Horse Activity

     The Helmicks married in the mid-1980s and remained married

through all of the tax years at issue.      However, the Helmicks

separated in 2003, and their divorce was accompanied by

contentious litigation.   In the course of that litigation, some

of the Helmicks’ assets were divided.      On October 2, 2007, the

divorce court ordered Ms. Helmick to vacate the house and

property in Niwot, where she and Mr. Helmick had lived together

and conducted the horse activity.     Neither of the parties

alleges, nor does the record show, the exact date on which the

Helmicks concluded their horse activity.      However, the record

does show that the Helmicks’ separation in 2003 and subsequent

litigation precipitated the end of that activity.
                              - 15 -

     At trial Ms. Helmick testified that the receipts that she

and Mr. Helmick saved to substantiate their income and expenses

from the horse activity should still be located in the house in

Niwot.   Ms. Helmick also testified that those receipts are

inaccessible to her because she would be arrested if she returned

to the house in violation of the divorce court’s order.   However,

Mr. Helmick testified with equal conviction that he had been

unable to find the receipts after he “went through the house with

a fine-toothed comb.”   Mr. Helmick also testified that he had “no

knowledge of where * * * [the receipts] are” today, but he is

certain that they must have existed “because * * * [the Helmicks]

constructed the tax returns from those records.”   On the basis of

the Helmicks’ testimony, we find that the Helmicks

unintentionally lost their receipts in the disruption of the

horse activity that resulted from their divorce.

Notice of Deficiency

     The Helmicks failed to timely file their Forms 1040 for tax

years 1997 through 2002, because they believed there was no tax

due for those years, as a result of the losses from their horse

activity.   However, the Helmicks did eventually file those forms

late with the IRS over the course of 2003, reporting losses from

the horse activity and claiming net operating loss carryovers
                             - 16 -

generated by the horse activity in previous years.5   On April 11,

2006, the IRS mailed the Helmicks a notice of deficiency for tax

years 1997 through 2002, which disallowed the losses from their

horse activity as so-called hobby losses from an activity not

engaged in for profit pursuant to section 183.   The notice of

deficiency also disallowed net operating loss deductions carried

forward from their horse activity for the tax years at issue and



     5
      The Helmicks’ Forms 1040 bear apparent discrepancies, but
they seem to show that, as of the beginning of the year 1997, the
Helmicks had accumulated net operating losses of $28,792,
available to be carried forward and used as deductions.
Schedule 1 to the notice of deficiency bears a similar figure of
$29,762, and we assume this to be the correct figure. The
schedules attached to the Helmicks’ Forms 1040 for 1998 through
2002 seem to reflect that those forms include claimed deductions
of net operating loss carryforwards; but in that respect they
seem to be in error: If the Helmicks’ Schedule F losses are
allowed for the six years in issue, then for the five years 1997,
1998, 1999, 2000, and 2002, their Forms 1040 reflected overall
net losses after subtracting from their wage income and tax
refund income (a) their Schedule F losses, (b) their itemized
deductions, and (c) their exemptions. Those net losses so
computed were $1,930 in 1998, $4,131 in 1999, $5,103 in 2000, and
$11,375 in 2002. Using figures from Schedule 1 to the IRS’s
notice of deficiency, similar results are obtained by subtracting
“Net Operating Loss Deduction” from “Taxable income as Shown in
return as Filed”. The return for 1997 is not in the record, but
using the figures from Schedule 1 in the notice of deficiency,
the net loss for 1997 was $15,275. Thus, the Helmicks did not
need to deduct any NOL carryforwards in order to have zero
taxable income in those five years. The one exception was 2001,
in which they did apparently need an NOL deduction of $17,161 in
order to have zero taxable income. The net losses from 1997
through 2000 total $26,439, and if carried forward they would be
sufficient to offset the 2001 income. Thus, if the Helmicks’
Schedule F losses are allowable, as we find they are, then the
suit-year losses are sufficient to eliminate all their taxable
income for all of the years in suit, and carryforwards from the
pre-suit years 1992 to 1996 are immaterial.
                              - 17 -

tax years 1993 to 1996, and determined failure-to-file additions

to tax and accuracy-related penalties under sections 6651(a)(1)

and 6662.   In response to the notice of deficiency, the Helmicks

petitioned this Court, pursuant to section 6213(a), to

redetermine their deficiencies.

                              OPINION

     At issue is the Helmicks’ entitlement to deductions for tax

years 1997 to 2002 arising from their horse activity during tax

years 1993 to 2002.6   A taxpayer who is carrying on a trade or

business may deduct ordinary and necessary expenses incurred in

connection with the operation of the business.     Sec. 162(a).

However, a taxpayer generally may not deduct expenses incurred in

connection with a hobby or other non-profit activity to offset

taxable income from other sources.     Sec. 183(a).7   We find that

the Helmicks’ horse activity, though unprofitable, was engaged in

with the intention of making a profit during tax years 1993 to



     6
      Only tax years 1997 to 2002 are at issue. However, it is
well settled that we may determine the correct amount of a net
operating loss for a tax year not at issue (whether or not the
assessment of a deficiency for that year is barred) as a
preliminary step in determining the correct amount of a net
operating loss carryover to a tax year at issue. See
sec. 6214(b); Lone Manor Farms, Inc. v. Commissioner, 61 T.C.
436, 440 (1974) (citing ABKCO Indus., Inc. v. Commissioner, 56
T.C. 1083, 1088-1089 (1971), affd. 482 F.2d 150 (3d Cir. 1973)),
affd. without published opinion 510 F.2d 970 (3d Cir. 1975).
     7
      Section 183(a) provides generally that if an activity is
not engaged in for profit, no deduction attributable to that
activity shall be allowed except as provided in section 183(b).
                                - 18 -

2002.     Although their intention to make the activity eventually

profitable was objectively unreasonable, it was their genuine

subjective intention.     By the time of the years in issue, the

Helmicks had invested so much time and effort in this failing

activity that they could see no way out except to somehow make

the thing work.     No other possible purpose explains their

willingness to persist in an activity that had become so

frustrating and unpleasant.     Therefore, the Helmicks are entitled

to deduct their expenses and net operating losses from that

activity for those years.

A.   Burden of Proof

        Generally, the Commissioner’s determinations set forth in a

notice of deficiency are presumed correct, and the taxpayer bears

the burden of showing the determinations are in error.     Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).     Since the

IRS determined that the Helmicks’ horse activity was not engaged

in for profit, that determination is presumed correct, and the

Helmicks have the burden to prove otherwise.

B.      Activities Not Engaged In for Profit

        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.”     An activity

constitutes a “trade or business” within the meaning of section
                                - 19 -

162--and it escapes the limitation of section 183--if the

taxpayer’s actual and honest objective is to realize a profit.

Osteen v. Commissioner, 62 F.3d 356, 358 (11th Cir. 1995), affg.

in part and revg. in part T.C. Memo. 1993-519.      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. Commissioner, 91 T.C.

371, 393 (1988); sec. 1.183-2(a), Income Tax Regs (26 C.F.R.).

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.

     The stereotypical abusive scenario involving horse breeding

is the wealthy businessman who runs a real business during the

week--with business records, income projections, accountability

to banks and investors, and so on--and owns a “gentleman’s farm”

as a weekend retreat where he keeps horses for the recreation of

himself and his family and friends.      He dabbles in breeding

horses, with no expectation of ever making a profit, so that he

can deduct the expenses of his horses and thereby have Uncle Sam

subsidize the weekend farm.   However, some horse-related
                               - 20 -

operations are actually engaged in for profit.    See, e.g., Miller

v. Commissioner, T.C. Memo. 2008-224.     The Helmicks’ horse

activity does not fit the stereotypical abusive scenario; instead

they engaged in the horse activity with a motive to make a

profit, and they are therefore entitled to deduct their losses.

     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

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.    Rather, all facts and

circumstances must be taken into account, and more weight may be

given to some factors than to others.     Id.; see Dunn v.

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

Cir. 1980).

     We now address these nine factors.
                               - 21 -

C.   Analysis of the Helmicks’ Horse Activity

     1.     Manner in Which the Activity Is Conducted

     The fact that a taxpayer carries on the activity in a

business-like manner and maintains complete and accurate books

and records may indicate a profit objective.    Sec. 1.183-2(b)(1),

Income Tax Regs.    A change of operating methods, adoption of new

techniques, or abandonment of unprofitable methods in a manner

consistent with an intent to improve profitability may also

indicate a profit objective.    Id.   Respondent emphasizes the

Helmicks’ failure to prepare contemporaneous business plans or

financial statements, which in some circumstances might indeed be

a sign that a serious profit objective is lacking.      However,

respondent concedes that the Helmicks retained their receipts

from the horse activity and subsequently entered them into a

Quicken or QuickBooks program on their computer.    The record

shows that the Helmicks kept records in an unprofessional and

disorganized manner that would have satisfied no prospective

investor, but the Helmicks were not seeking or accounting to any

investor.    For the Helmicks it was enough to know that the

business was not turning a profit (not yet, as they thought of

it), and their shoebox record keeping was adequate for their

purpose.

     While the Helmicks had no written business plan for their

horse activity, the evidence established that they did have a
                              - 22 -

rudimentary plan, which was to weather their current losses while

maintaining the value of their herd and keeping at least 40

horses on their property in order to preserve that property’s

favorable zoning status as an equestrian center.     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).   This zoning status gave the Helmicks a

virtual monopoly on boarding horses in Niwot, Colorado, and they

hoped eventually to exploit this competitive advantage for a

profit by shifting their focus from horse breeding to boarding.

In line with this plan, the Helmicks sought to lower their labor

costs and increase the boarding fees they could charge by

significantly improving their boarding facilities.     In 1997 the

Helmicks began to construct an indoor riding arena as well as

additions to their house and barn.     Respondent correctly notes

that the indoor riding arena was never completed.    However, the

Helmicks did construct the foundation for the indoor riding

arena, and the project ceased only because of a dispute with the

contractor they hired to build that arena.     The record shows that

the Helmicks were sincere about upgrading their facilities.

     Respondent disputed the adequacy of the Helmicks’ books and

records for substantiation of their expenses under section 6001.

The Helmicks’ practice of merely retaining their receipts and

subsequently quantifying them was indeed informal.     However, the
                              - 23 -

practice was sufficient to keep the Helmicks apprised of their

cash on hand and expenses, which in turn was sufficient for their

purpose of weathering their current losses to achieve monopoly

profits in the future.

     As respondent correctly notes, the Helmicks did not present

the receipts as evidence to corroborate their income or expenses

for the tax years at issue.   However, “[i]t is well established

that the Tax Court may permit a taxpayer to substantiate

deductions through secondary evidence where the underlying

documents have been unintentionally lost or destroyed.”     Davis v.

Commissioner, T.C. Memo. 2006-272 (citing Boyd v. Commissioner,

122 T.C. 305, 320-321 (2004), Malinowski v. Commissioner, 71 T.C.

1120, 1125 (1979), Furnish v. Commissioner, T.C. Memo. 2001-286,

Joseph v. Commissioner, T.C. Memo. 1997-447, and Watson v.

Commissioner, T.C. Memo. 1988-29).     As is set out above, the

Helmicks unintentionally lost their receipts from the horse

activity in the course of Ms. Helmick’s relocation and the

litigation that arose from their divorce.    Thus, the Helmicks

will be permitted to substantiate their expenses from that

activity through secondary evidence.    We find the Helmicks’

testimony that they retained their receipts from the horse

activity and subsequently entered them into the computer database

of their Quicken program--corroborated with printouts of Quicken

summaries of their source and use of funds derived from those
                              - 24 -

receipts--to be credible.   We therefore hold that the Helmicks

kept adequate records to substantiate their expenses from the

horse activity for tax years 1993 to 2002.

     Notably, the Helmicks spent 9 years, from 1985 to 1994,

suing for clear title to SS Bay Moun, the purebred Arabian

stallion they purchased to jumpstart their horse-breeding

activity.   The Helmicks always had the possession and use of the

horse, and they always enjoyed any pleasure that such possession

and use might bring.   However, without a clear title, neither the

horse nor its offspring could be registered or sold as purebred

Arabians.   This caused the Helmicks to lose sales, because

registered horses are more valuable on the equine market.     Thus,

it necessarily follows that the lawsuit to register SS Bay Moun

was motivated not by personal pleasure but by a desire to

increase profits and weighs in favor of the Helmicks.   See Miller

v. Commissioner, T.C. Memo. 2008-224 (listing registration of

horses as a fact that weighed in favor of finding that a horse

breeder carried on his activity in a business-like manner).

     We conclude that this factor--the manner in which the

activity is conducted--is mixed:   partly in respondent’s favor,

but overall in the Helmicks’ favor, indicating that they had the

requisite profit objective.
                               - 25 -

     2.     Expertise of the Taxpayers and Their Advisers

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

as well as his consultation with experts, may indicate a profit

objective.    Sec. 1.183-2(b)(2), Income Tax Regs.   By 1993 the

Helmicks had modest relevant expertise:    Each had over 8 years of

experience in breeding and boarding horses on their property, and

Mr. Helmick had served on the board of directors of various

professional horse-breeding and -boarding associations.     In

addition, the Helmicks hired veterinarians to assist them with

their horse breeding from time to time, and Mr. Helmick became

proficient at horse breeding by observing their practices.

Respondent acknowledges all of these facts but still contends

that the Helmicks failed to demonstrate that they consulted

“economic experts or developed any personal economic expertise”

in the business of horse breeding and boarding.      It is true that

the record does not show that the Helmicks consulted “economic

experts”.    However, Mr. Helmick’s tangential expertise as a

career land-use planner enabled him to recognize generally the

value of the favorable zoning status of the Helmicks’ property--

and fueled his hope to leverage that status into monopoly

profits.

     We conclude that this factor--expertise--is neutral for

assessing whether the Helmicks had the requisite profit

objective.
                               - 26 -

     3.   Time and Effort Expended

     The fact that the taxpayer devotes much of his personal time

and effort to carrying on an activity, particularly if the

activity does not have substantial personal or recreational

aspects, may indicate a profit objective.   Sec. 1.183-2(b)(3),

Income Tax Regs.   As respondent concedes, the mere fact that the

Helmicks kept and cared for over 40 horses on their property

proved the Helmicks spent some time and effort in their horse

activity--particularly in light of the fact that the Helmicks

never hired any full-time employees.    The record shows much more

than respondent concedes.    Ms. Helmick was not otherwise employed

from 1993 to 2002 and typically spent her entire work week in the

conduct of the horse activity.   Mr. Helmick also credibly

testified to the fact that he devoted his early mornings, his

evenings, and his weekends to the conduct of the horse activity.

The Helmicks clearly spent very substantial amounts of time in

the horse activity.   This time was spent not riding horses or

attending horse shows but rather performing the dawn-to-dusk

labor--often grueling and strenuous labor--of mucking stalls,

shoveling hay, caring for sick horses, and guiding mares through

the birthing process.   The Helmicks’ estimates of the hours they

spent seem overstated, but they also seem sincere, reflecting the

fact that their work was exhausting and--as profits failed to

materialize--discouraging.   We attribute their exaggerations not
                                - 27 -

to deliberate dishonesty but to a lack of perspective that

resulted from their immersion in taxing and disappointing toil.

     We conclude that this factor--time and effort--is strongly

in the Helmicks’ favor and indicates that they had the requisite

profit objective.

     4.     The Expectation That Assets May Appreciate in
            Value

     A taxpayer’s expectation that assets used in the activity

may appreciate in value and generate an overall profit may

indicate a profit objective.     Sec. 1.183-2(b)(4), Income Tax

Regs.     An overall profit is present if net earnings and

appreciation are sufficient to recoup the losses sustained in the

“intervening years” between a given tax year and the time at

which future profits were expected.      See Bessenyey v.

Commissioner, 45 T.C. 261, 274 (1965), affd. 379 F.2d 252 (2d

Cir. 1967).     Respondent correctly notes that the Helmicks’ horse

activity sustained losses from no later than 1985 through at

least 2002, but respondent seems to assume that the requisite

profit motive as of any given year must involve an expectation

that even all past losses will be recouped, so that the activity

will have generated a net profit over its entire course.     This

position distorts the notion of profit motive for purposes of

section 183.

     If a natural disaster caused the death of 90 percent of a

rancher’s herd and resulted in a catastrophic loss that could
                              - 28 -

never be recouped, but the rancher thereafter expected to

generate an overall prospective profit by breeding and selling

the remaining 10 percent of his herd on a foregoing basis, then

he could not be said to lack a profit objective after the

disaster merely because he would never recoup the prior loss.

Likewise, even assuming arguendo that the Helmicks could never

recoup their losses from years prior to 1997, if they expected to

generate an overall profit from 1997 onward, then they cannot be

said to lack a profit objective with respect to those later years

merely because they would never recoup their losses from years

prior to 1997.   Rather, the Helmicks meet their burden as to any

year for which they show that they expected eventually to recoup

losses sustained in the “intervening years” (to use the phrase

from Bessenyey) between the current year and the hoped-for

profitable future.   Thus, we must determine, as of each of the

relevant years, whether the Helmicks expected their horse

activity to generate an overall profit between that year and the

time at which future profits were expected.

     The Helmicks’ long-term goal was to profit from (i) creating

a self-perpetuating herd of purebred Arabian horses that would

increase in value over time, and (ii) maintaining their

property’s favorable zoning status as an equestrian center in the

middle of an otherwise residential neighborhood.   In determining

whether the possibility of an overall profit is present, we take
                             - 29 -

into account the appreciation of both the herd and the zoning

status, because they were both assets that were used in the horse

activity.8

     Respondent correctly notes that “a vague and unauthenticated

notion” that assets used in the Helmicks’ horse activity were

appreciating in value does not constitute a bona fide expectation

that appreciation would be sufficient to recoup the losses

sustained during the intervening years.    La Musga v.

Commissioner, T.C. Memo. 1982-742.    However, the Helmicks

credibly testified that if they had liquidated their entire herd,

they would have suffered a “monstrous loss”.   Furthermore, the

favorable zoning status of the Helmicks’ property was contingent

on keeping at least 40 horses on that property.   If the Helmicks

liquidated their herd and ceased to keep horses on their

property, then they would lose that zoning status.   While the

Helmicks are not appraisers, their estimate that preserving the

value of their herd and the favorable zoning status would

eventually yield an overall profit was plausible and--more



     8
      The regulations provide that “all the facts and
circumstances” must be taken into account to determine the
activity or activities of the taxpayer. Sec. 1.183-1(d)(1),
Income Tax Regs. Because of the close nexus between the horse
activity and the zoning status, i.e., the zoning status was both
dependent on and necessary for the conduct of the activity, there
is no doubt that the zoning status was an asset used in the
activity--not in a separate real estate investment activity. See
Keanini v. Commissioner, 94 T.C. 41, 46 (1990).
                               - 30 -

pertinent here--was their genuine subjective assessment of the

value that their horse activity was generating and would continue

to generate.

     We conclude that this factor--expectation that assets may

appreciate--is in the Helmicks’ favor and indicates that they had

the requisite profit objective.

     5.   The Taxpayers’ Success in Similar or Dissimilar
          Activities

     Even if an activity is unprofitable, the fact that a

taxpayer has previously converted similar activities from

unprofitable to profitable enterprises may indicate a profit

objective with respect to the current activity.

Sec. 1.183-2(b)(5), Income Tax Regs.    The Helmicks do not allege,

nor does the record show, that either of them was ever involved

in a similar and profitable business venture.    From 1995 to 1996

Mr. Helmick ran a part-time, private land-use consulting business

that had at total of six clients over its brief existence.

However, the record does not show whether this business was

profitable.    Nor does it show any similarities between that

business and the horse activity.

     We conclude that this factor--success in similar or

dissimilar activities--is in respondent’s favor.
                              - 31 -

     6.   History of Income or Loss

     An important consideration is the taxpayer’s history of

income or losses related to the activity.   Sec. 1.183-2(b)(6),

Income Tax Regs.   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).   In the tax years

at issue, and in prior years, the Helmicks claimed an impressive

string of losses from their horse activity on their Forms 1040.

In the eleven years from 1992 through 2002, the Helmicks claimed

a total of over $400,000 of losses.

     Section 1.183-2(b)(6), Income Tax Regs., 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.   However, this Court has recognized that the startup

phase of an American horse-breeding activity is 5 to 10 years.

Engdahl v. Commissioner, 72 T.C. 659, 669 (1979).   Since the

Helmicks ran their horse activity for no less than 8 years before

1993 and 12 years before the tax years at issue, we conclude that

their horse activity was not in its startup phase and this

exception does not apply.

     We conclude that this factor--history of income or loss--is

in respondent’s favor.
                               - 32 -

     7.   Amount of Occasional Profits

     The amount and frequency of occasional profits earned from

the activity may indicate a profit objective.

Sec. 1.183-2(b)(7), Income Tax Regs.    Respondent correctly notes

that the Helmicks’ horse activity sustained an unbroken string of

losses from no later than 1985 through at least 2002.

See id.   Moreover, the record does not show that the Helmicks’

horse activity was ever profitable.

     We conclude that this factor--occasional profits--is in

respondent’s favor.

     8.    Financial Status of the Taxpayers

     A lack of income from sources other than the activity in

question may indicate a profit objective.   In contrast,

substantial income from sources other than the activity in

question, particularly if offset by substantial tax benefits, may

indicate the activity is not engaged in for profit.   Sec. 1.183-

2(b)(8), Income Tax Regs.   The Helmicks did not have any

substantial income aside from Mr. Helmick’s salary as a land-use

planner for Boulder and Larimer Counties, which never exceeded

$65,000 during 1998 to 2002.   In fact, even without the losses

from the horse activity, the Helmicks’ total taxable income

during that period would never have exceeded $50,000 in any year,
                             - 33 -

and their marginal tax rate would never have exceeded

28 percent.9

     It is true, as respondent notes, that section 183 does not

apply just to “wealthy individuals”, Ranciato v. Commissioner,

T.C. Memo. 1996-67; and taxpayers with modest tax liabilities can

have a motive to shelter those liabilities.    However, “the wealth

of an individual is a fact to consider in determining the

applicability of section 183.”   Id.   The Helmicks’ income tax

liability would have been higher without the claimed losses from

the horse activity, and the tax deficiencies calculated by the

IRS for the six years in issue total just over $40,000.    However,

the Helmicks’ middle-class status meant that they could not

afford to maintain the horse activity simply for pleasure if

there was no hope of future profit.    The Helmicks were not

wealthy individuals whose unprofitable activities would suggest

an effort to shelter unrelated income with anticipated losses.

We do not find it credible that the Helmicks would keep and care

for 40 to 60 horses on their property for the purpose of

sheltering the modest salary of a public servant.




     9
      The notice of deficiency shows that, according to the IRS’s
computations, the Helmicks’ highest taxable income was in 2002,
in the amount of $49,733. Married individuals filing jointly
with taxable income in that amount had a marginal tax rate of
28 percent in the years in issue. See sec. 1(a).
                             - 34 -

     We conclude that this factor--financial status--is in the

Helmicks’ favor and indicates that they had the requisite profit

objective.

     9.   Elements of Personal Pleasure

     The absence of personal pleasure or recreation relating to

the activity in question may indicate a profit objective.

Sec. 1.183-2(b)(9), Income Tax Regs.    Respondent contends that

the Helmicks “concede that they took personal pleasure in their

horse breeding and boarding activity.”    First, as respondent

correctly notes, “[t]he mere fact that a taxpayer derives

personal pleasure from a particular activity does not, per se,

demonstrate a lack of profit motive.”     Miller v. Commissioner,

T.C. Memo. 2008-224.

     Second, respondent supports his contention that the Helmicks

took personal pleasure in their horse activity with snippets of

their testimony that are not fair to their context.    In

particular, respondent notes that “Mr. Helmick liked ‘rubbing the

nose of a nice, warm, furry creature’.”    Mr. Helmick made that

statement in the context of explaining his profit objective and

the hard physical nature of keeping and caring for a herd of

horses:

     the business was intended to ultimately supplement the
     income, not to dodge paying taxes.

     And, yes. I guess I enjoyed it at times. You know,
     rubbing the nose of a nice, warm, furry creature is
                              - 35 -

     good. The number of days I was laid up with a bad back
     or other things from moving all that feed are clearly
     probably not items of personal pleasure.

On the basis of the record and the testimony cited by respondent,

we find that the Helmicks derived little personal pleasure from

the horse activity.   The record does not show that riding horses

was the Helmicks’ hobby.   Nor does the record show that the

Helmicks used their horses to entertain family or friends.     In

fact, Mr. Helmick’s daughter often declined to visit him during

the weekends in order to avoid working with the horses.

     Ultimately, respondent contends that the Helmicks kept and

cared for dozens of horses on their property--without the help of

any full-time employees--solely for their personal pleasure.

Respondent further contends that the Helmicks contested Boulder

County’s adverse determination that their horse activity violated

zoning law only so that they could continue to enjoy taking care

of those horses.   If the Helmicks had paid a staff to handle the

day-to-day chores of the horse activity, and they had merely

visited the horses, it might be credible to assert that they

enjoyed maintaining a large herd.   However, we cannot find on the

facts that the Helmicks derived so much pleasure from the company

of purebred Arabian horses that they were willing to spend all of

their free time and lose thousands of dollars every year to

maintain a herd on the same property as their personal residence.

Even if the Helmicks had failed to maintain their property’s
                                 - 36 -

zoning status as an equestrian center, they would still have been

entitled to keep two horses on their property.    If pleasure had

been the goal, then keeping and caring for 2 horses--rather than

40--would seem to have been preferable.

     We conclude that this factor--elements of personal

pleasure--is in the Helmicks’ favor and indicates that they had

the requisite profit objective.

                               Conclusion

     We conclude that the Helmicks engaged in their horse

activity during tax years 1993 to 2002 with the actual and honest

objective of making a profit, and that section 183 is

inapplicable in this case.10

     To reflect the foregoing,


                                      Decision will be entered for

                                 petitioners.




     10
      Since we hold that section 183 is inapplicable in this
case and the Helmicks are entitled to deductions for their losses
from their horse activity, it follows that the Helmicks are not
liable for the failure-to-file additions to tax and the accuracy-
related penalties that the IRS determined in its notice of
deficiency under sections 6651(a)(1) and 6662.
