sitting with us so we will start our first case for the day is appeal fifteen fifteen forty five and it's a state of her staller versus the united states  the first issue we think have a minimum number words even if we were to even if this court were to affirm the judgment below we believe that the plaintiffs appellants or intitled to if i could just start this shot start you out in light of the evidence that the horse farm was on half a pole in all years but one one and yet there was no apparent effort to adopt a new business plan or otherwise take corrective actions to turn it around how would how would we hold things that's the chord below committed clear error in determining that it was not undertaken for profit because that's what we i think that's what we have to zero in on here thank you judge well we disagree with the court's opinion we think that the plaintiffs appellants took several actions over the years changing their operations and procedures to improve profit one such action is they really relocated their farm horse breeding operation from springfield illinois to tennessee  they also purchased a larger farm you know additional property in tennessee for pasture land they dug ponds for worse is which reduced water cost and a lot water transportation costs on the farm are any of those things any different than what they would have done if they were enjoying the horses for pleasure absolutely how so well they had thirty five to forty horses and the  horses would consume a lot of water if they had three or four horses that they could have just put a a been ordered or a tub out and filled it with water and they would have had to refill it every day because they would it with water as opposed to driving out on the farm its a large farm and driving out on the farm and refilling water on the farm property so one thing that i don't get is if this was a profit business how horses were given away free or they were sold for prices so low that expenses could not be covered or they were expensive horses were brought from oats and they couldn't even be used for breeding well that's a good question judge i think during this time period two thousand and three to two thousand and five there was the economy was was tanking horse sales weren't good you know if you had if it was a seller's market you could get the price you wanted but since it was a buyer's market you had to say you had to sell a horse for what it what it was worth or what someone would pay also the fact that they did give away some horses that was done as you know partially for marketing partially for promotion and but but but other than horse shows and trail rides the the most important in industry show was skin show horses that it did were not that did participate in any kind of marketing or not use for breeding and then getting back to the price of the horses sold most certainly got a lot of money for the horses he sold and then he had a big salary he got half of the sales proceeds all the prize money the right to breed is own  the stollers last and what he charged other business customers to be on the farm he also was responsible for all the care on the farm and in mucking stalls and repairing fences and there's an awful lot there was an awful lot of work that mr motes did mr motes and he his employees did on the farm and i think the court below frankly just just didn't did expended the expertise of the plaintiffs and and their advisers and the manner in which the activities were carried out is what additional impact do you think it would have had on your case if he'd been allowed to also testify as an expert witness which of course didn't yes i think it would have been a and he's not you know he's not formally educated and i think that in that bothersome i think he's nervous in courtrooms and testifying nonetheless he did testify healer as so are all of us i will tell right right everyone we're all nervous but nonetheless he did testify at length with it with his procedures and things he did his methods and frankly he just stated that he did things whatever whatever he did it was to read you know he did it at the least possible cost to do it yourself not to hire someone to do it and that way you could stay in business so what was his methodology to arrive at a conclusion that this was a for profit  methodology how was based on his his personal observations which which is legitimate for a for an expert to base opinions on personal observation it was based on his experience and quite frankly he has his methodology it was quite simple he didn't go into great length or detail in his testimony to the court but his to his testimony was that he did he spent the least possible money on everything that that had to be done for instance they the taxpayers plaintiff's appellants bought some medical instruments and did some other of their medical tests for the corpse they did away with the insurance on the horses because they were spending too much insurance they dug the pots they bought additional land they grew planted grass so that the horses could a motion in limine to keep him out is that there's a expert can we we disagreed and filed a motion in opposition but the thing that we never never occurred with there was never  than the steps he took try to save money or to try to save the business for example he didn't do any were view of the finances he didn't look at the finances in light of the non factor tests that the regulations say are important he has no experience in financing or the business side of reading and selling horses i understand that he knows about trying to save costs and that kind of thing but that's different than being in the in the financial on the financial side of the business side of reading and selling trying to stand judge williams but he ran his own business for for forty plus years he testified that he has stayed in business w other barmes went out of business during the same period so yeah sure correct he didn't go into any detail on right and he didn't do any analysis of all those that have gone out of business versus he is and he didn't use these factors well he didn't do an analysis but i think it is his message was that if you if you do things as cheaply as possible or if b s frugal is possible don't buy a new truck don't hire anyone to do work that you can do yourself if you follow that methodology if you're going to put yourself in the best position to to survive keeping costs down just as consistent with running it as a personal hobby as running it for profit for profit and how would that make it clearly erroneous for the district judge to come up the way he did could we really hold to that whether farm has two horses or forty horses or one hundred horses you know provides no indication whatsoever as to what do horses are on and they maintained merely for pleasure or for profit will you i don't reason not clearly erroneous for the district court to reach that finding on this record there was testimony from wayne helps lead the government's expert but based on his years of traveling around the entire continent consulting with people on horse farms he believed that there would be pleasure farms with twenty or thirty horses on them in fact he testified that his own father's farm which was never run as a business had about twenty horses on it and therefore there was support for that particular finding in the record and there are a host of other facts discussed in the government's brief that further support the district court's finding that i say was not a for profit activity i want to briefly just touch on three aspects of that evidence this morning first as judge drover noted the losses in this case are large and consistent across the across a number of years in fact from almost every every year to me from one thousand nine hundred ninety two thousand and nine others say lost in excess of one hundred thousand dollars its only profit was in one nine hundred ninety seven and that profit was only fifteen hundred dollars and its history of profits and losses is thus commensurate with any number of other activities including the dog breeding operation that this court considered in berger that have been found not to be for profit activities where over course the record keeping here was the least fishing to handle enterprise that he did not have the documents necessary to show costs by category on an ongoing basis which he testified were necessary to get an accurate view of those costs and to address a cost centers and justified that i say he did not have the cell records that would be necessary to track its revenue over time moreover the records in this case a similar both to the records in berger which this court found were not sufficient to allow the taxpayers to make informed business decisions and to the records in philly rose which the first circuit found had all three of these insufficiencies that mr tapley discussed an inability to address cos inability to track profits and going to liddy to look at the overall financial health of the and then it's norms of the timing for the business plan and i write that that was created after the lawyers advice after the audit began yes your honor that's exactly correct in fact after the audit began l s a also created a website for the first time and within about a year after the notices of deficiency were issued woman starlit months determined that she would no longer carry on at all she terminated the corporation at that point after it became clear that the tax benefits would no longer be forthcoming does it doesn't matter to your view of the case that the burden was on the funds here i know your honor does not as  it's also highly relevant that the star there is had a significant amount of outside income throughout the years in which alice a was operating that income during the years that issue ranged between about five hundred seventy thousand dollars and one point seven million dollars per taxpayers actually concede that this factor favors the government moreover why they're being earns well yes your honor but in this context if taxpayers have substantial outside income and are taxpayer wanting to make a hobby sustainable over the long term you know the liver and steak n shake we're both restaurant says yet the district court considers delivery event not the similar enough to be relevant under factor five it seems to me that at best this factors should've been considered neutral one rather than one that weight in  alice and the independent restaurant but not the steak and shake businesses in any event which the district court was justified in finding that the stars did not apply any business knowledge they gained from the steak n shake in the context and even if this fifth factor were to be neutral it would not change the overall analysis that i say was not on the whole run for profit taxpayers taxpayers fallback position here is that even if analysts say is a for profit enterprise this dollars should be entitled to remove from their individual tax returns the rental income that they reported receiving from analysts say if that argument conflates true separate and independent relationships  report as passed through income and the nat income that the corporation generated but because an s corporation is an independent entity that files its own tax returns and calculates its own income the shareholders of such a corporation are entitled to enter into contracts and other relationships with the corporation as if they were unrelated parties and the style that it would the government face any conflicting claims if if we adopted the view of  now that it's clear that they are not entitled to those deductions they are seeking to undo that transaction by saying there is no rant at all and by removing that individual rental income from their tax returns but they're not entitled to do is hours a night circuit case because this is income they received in their individual capacity it's not past their income from the corporation in fact it couldn't possibly be past their income from the corporation excuse me because it's an ex the rental payments were an expense to alice a even though they were income to this dollars for your honour's very briefly about the district court's holding that mack no it is not qualified to testify as an expert even if the district court had considered and therefore the in the admission of macro its conclusion that alice a was a for profit enterprise would not have made any difference moreover as both judge williams and judge shah she just did earlier meccano it's had no reliable know the nine factors in the law in order to testify under what an expert could testify to about whether or not the businesses run for profit or not wide of the nine factors which are a legal test require a  witness to know those ninety five you're on our positions at a minimum the expert must know either the underlying facts or the legal standard certainly some knowledge of the underlying facts with which mr marks did not have here very very briefly we would just like to comment that the government's expert mr hips lee recommended that the stollers and ls they take all these additional actions  computerization additional records additional cost accounting except are about everything that mr hips lee recommended there was a cost to it and the plaintiffs appellants in this case tried to balance paying additional cost versus conserving cost and trying to earn a profit we think the fact that some of these additional activities were not commenced  reflects their intent to earn a profit rather than spend money for additional administrative items that may or may not help further we think that mr hips  lee himself in his expert report conceded that the plaintiffs and mr motes had had sufficient expertise to hit vive the stollers in this case mr motes had been friends of hal stellar now deceased and wilma stellar for forty years so they had a good business relationship and were friends we don't think that that should cloud mr motives professional judgment or his his ability to advise mr starr finally counsel talks about the the berger case we think that needs to be revisited frankly war expounded upon the the philly else case which counsel mentioned that the farmer didn't have a profit for thirty seven years so that's considerably different than the case at hand when he actually said that the the business plan need not be in writing as long as you have a business plan upon my recommendation i thought it was a better practice to put the business plan in writing even though they have a business plan and the courts have held that it doesn't have to be in writing further we think the the fact that the at the conclusion of our evidence that the the court ruled that burden of proof had shifted to the defendant we think that it is important and i think it's more than you know that i think it's more than just a neutral position  i also conceded that the financial status one of the nine factors in this financial status of the tax payers favor the government and i think that's correct i argue the other eight factors and also the number of horses i think that the number of horses on a farm is a ten factor and finally with no real want to for a hearing the methodology and knowledge of the underlying facts unfortunately did not come out and thank you for your time thank you very much q thank you as well history and the case will be taking under guys thank you very much