PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

____________

Nos. 22-1501, 22-1502, and 22-1503

____________

MITCHEL SKOLNICK; LESLIE SKOLNICK,

Appellants in No. 22-1501

v.

COMMISSIONER OF INTERNAL REVENUE

____________

MITCHEL SKOLNICK; BRIANNA SKOLNICK,

Appellants in No. 22-1502

v.

COMMISSIONER OF INTERNAL REVENUE

____________

ERIC FREEMAN,

Appellant in No. 22-1503

v.

COMMISSIONER OF INTERNAL REVENUE

____________
2

On Appeal from the United States Tax Court

(IRS Nos. 16-24649, 16-24650, 16-24980)

Tax Court Judge: Honorable Albert G. Lauber

____________

Submitted Under Third Circuit L.A.R. 34.1(a)

January 30, 2023

Before: HARDIMAN, KRAUSE, and MATEY, Circuit 

Judges.

(Filed: March 8, 2023)

Bryan E. Bloom 

Kevin H. DeMaio

Faegre Drinker Biddle & Reath 

600 Campus Drive 

Florham Park, NJ 07932

B. Paul Husband

Law Offices of B. Paul Husband

101 South First Street

Suite 202

Burbank, CA 91502

Richard W. Craigo

10724 Wilshire Boulevard 

Suite 406 

Los Angeles, CA 90024

Counsel for Appellants
3

David A. Hubbert

Janet A. Bradley

Joan I. Oppenheimer

United States Department of Justice 

Tax Division 

Room 4738 

950 Pennsylvania Avenue, N.W. 

P.O. Box 502 

Washington, DC 20044

Counsel for Appellee

___________

OPINION OF THE COURT

____________

HARDIMAN, Circuit Judge.

Mitchel Skolnick, Leslie Skolnick, Brianna Skolnick, 

and Eric Freeman (collectively, Taxpayers), appeal an order of 

the United States Tax Court. They argue the Court clearly erred 

when it held their horse activity—undertaken through 

Bluestone Farms, LLC (the Company)—was “not engaged in 

for profit” under § 183 of the Internal Revenue Code.

Taxpayers also claim the Court erred when it held they could 

not carry forward net operating losses (NOLs) allegedly arising 

from their horse activity in prior years. After scrutinizing the 

Tax Court’s comprehensive opinion, the record, and the briefs, 

we perceive no reversible error. We will affirm.
4

I

A

During the tax years at issue, 2010–2013, Mitchel

Skolnick and Eric Freeman owned the Company, a horse farm 

in New Jersey. They bought, sold, bred, and raced 

Standardbred horses. Mitchel’s first wife, Leslie, and his 

second wife, Brianna, are parties to the case only because they 

filed tax returns jointly with Mitchel. So we focus on the 

activities of Mitchel and Eric.

Mitchel received an undergraduate degree from Emory 

University in 1976 and an MBA from Adelphi University in 

1986. He remained in Atlanta after college and worked briefly 

as an engineer in training. In 1978, he joined Solgar Co., Inc., 

a successful vitamin company his father Allen Skolnick 

operated. That same year, Allen took an interest in 

Standardbred horses, which led him and his wife to found 

Southwind Farms to start a breeding operation. In 1986, 

Mitchel started his own consulting firm and became involved 

in the Standardbred industry when Allen asked him to manage

three horses. By 1996, Mitchel had retired from his consulting 

business and was working full-time at Southwind with Allen.

Eric graduated from Cornell in 1966 and earned an 

MBA from the University of Virginia two years later. His 

career focused mainly on insurance. Eric’s clients included 

Southwind and Allen’s other ventures. Allen introduced Eric 

to Standardbred horse breeding.

Around 1993, Eric asked Allen if he could get involved 

in the horse breeding industry. Allen invited Eric to join him, 

along with Mitchel, in the Chancery Equine Group, a syndicate 
5

that enabled investors to purchase Standardbred horses. When 

Allen invited Eric to invest, he cautioned Eric that though he 

might lose all his money, he would at least meet people he 

would never meet otherwise. Eric called the predictions 

“prophetic.”

Following disputes with his father, Mitchel left

Southwind and the Chancery Group in 1998. Mitchel had 

discussed with Eric starting their own horse farm and they had 

created a business plan and a budget for the Company. They 

planned to buy and breed a stallion and to board other horses. 

To that end, they acquired 61 acres in Hopewell, New Jersey, 

not far from Southwind. They paid $559,000 for the property 

and called it Bluestone Farms.

By 2000, Mitchel did not have the money to pay for the 

Company’s expenses, so Eric paid most of the bills while 

Mitchel returned to his consulting firm. That year, Mitchel and 

Eric crafted a second business plan, hoping to supplement the 

Company’s income by winning horse races and breeder’s 

awards. In 2001, the Company received $325,000 from a 

passive investor, Frank Russo, in exchange for a 15 percent 

interest. In 2002, the Company bought a 30-acre property, 

Wert Farm, for $850,000.

In 2003, the Company sold a conservation easement at 

Bluestone for $869,640. The same year, Mitchel retired from 

the consulting business again, and he and Eric developed a 

third business plan. They wrote a fourth (and final) business 

plan in 2004. Soon after, Mitchel began receiving millions of 

dollars from an irrevocable trust his parents created. In 2007, 

the Company purchased 200 acres near Bluestone (the 

Rosenthal Farm) for $4 million. Mitchel and Eric planned to 

expand operations with more broodmares at Rosenthal Farm, 
6

but that effort was halted after New Jersey ceased using 

Atlantic City casino funds to subsidize racetracks. The 

Company was audited in 2008, but the Commissioner of 

Internal Revenue took no adverse action. By 2009, Mitchel had 

received about $10 million from his parents’ trust.

B

During the tax years at issue (2010–2013) between 15 

and 25 horses lived at Bluestone, Wert, and Rosenthal Farms

at any given time. Other horses were boarded at out-of-state 

farms. The Company employed between seven and ten 

employees who assisted with the horses and organized the 

Company records. None of the employees had a budget. 

Taxpayers do not contest that they lost more than $3.5 million 

during the years at issue and more than $11.4 million between 

1998 and 2013. See Skolnick v. Comm’r, 2021 WL 5936986, 

at *20 (T.C. Dec. 16, 2021). 

Mitchel handled daily operations for the Company, 

including paying bills and monitoring the horse breeding 

process. Eric split his time between Florida and New Jersey, 

and handled the Company’s insurance needs, but had little 

involvement in its day-to-day operations. Eric did, however, 

accompany horses to races and attended “pretty lavish parties.” 

App. 972. Taxpayers contributed capital and made loans to the 

Company without differentiating between the two.

Over the years, Taxpayers increasingly focused on 

winning studs. The Company owned a 35% interest in a 

successful stallion, Always A Virgin, stabled in Indiana. In 

2013, the Company bought for about $50,000 a 35 percent 

interest (later increased to 55 percent) in a horse sired by 

Always A Virgin called Always B Miki. Always B Miki earned 
7

purses totaling $2.7 million from racing through his retirement 

in 2016 and generated substantial stud fees. In 2016, the 

Company sold interests in Always B Miki for nearly $1.2 

million, enabling it to report a modest overall profit in that 

year. 

During the tax years at issue, the Company responded 

to changes in the horse market. New Jersey stopped subsidies 

to racetracks and decreased the purse structures for breeder’s 

awards. Meanwhile, Pennsylvania had tightened its 

requirements for awards by requiring breeders to locate mares 

in Pennsylvania for 180 days to maintain eligibility for statesponsored races. So the Company continued its previous 

partnership with a Kentucky operation, Cane Run Farm, to 

board horses outside Kentucky, including in Pennsylvania, to 

capitalize on breeder’s awards.

The Wert and Rosenthal Farms were never expanded to 

include additional mares, as originally planned. Mitchel and 

Eric tried to sell those properties in 2012 to a publicly traded 

home builder, Toll Brothers, but negotiations failed. When 

Mitchel and Eric were approached in 2013 about a purchase of 

the building rights on Wert and Rosenthal Farms, they declined 

the offer. 

The Company also paid for many of Mitchel’s personal 

expenses. Mitchel moved to Bluestone in 2008 after he 

separated from Leslie. Brianna began staying with him around

2009. Beginning in 2010, and for the rest of the years at issue, 

Mitchel and Brianna lived together rent-free in a renovated 

farmhouse at Bluestone. The Company paid to tear down and 

rebuild the farmhouse. By 2011, Brianna had a Company credit 

card that she sometimes used for personal expenses. The 

Company also paid for Brianna to keep her horses at Bluestone. 
8

In 2013, Mitchel divorced Leslie and married Brianna. Mitchel 

admitted at trial that Company funds “definitely” paid for 

wedding expenses, including extensive landscaping. App. 790.

C

Mitchel filed joint tax returns with Leslie for 2010–

2012, and with Brianna for 2013, claiming Company losses 

substantial enough to eliminate any income tax liability for

those years. Eric also claimed losses and reported owing little 

or no taxes for the years at issue.

In 2016, the Internal Revenue Service sent notices of 

income tax deficiencies and penalties to Mitchel and Leslie for 

2010–2012, Mitchel and Brianna for 2013, and Eric for 2010–

2013. Taxpayers timely filed amended petitions in the United 

States Tax Court for a redetermination of the deficiencies and 

penalties.

After a five-day trial, the Tax Court sustained the

deficiency determinations, holding that Taxpayers could not 

deduct Company losses because their horse breeding activity 

was not engaged in for profit under § 183 of the Internal 

Revenue Code. Skolnick, 2021 WL 5936986, at *22. The Court 

also held that Taxpayers failed to substantiate net operating 

loss carryforwards that allegedly arose from Company activity. 

Id. at *23. The Court further held that Mitchel and Leslie were 

liable for the late-filing penalty, but Taxpayers were not liable 

for the accuracy-related penalties. Id.

Under the final orders, the Skolnicks were liable for tax 

deficiencies for 2010–2013 of $282,036, $230,141, $189,077, 

and $174,664, respectively. Eric Freeman was liable for tax 

deficiencies of $52,421, $38,514, $39,478, and $21,385 for 
9

those years. Mitchel and Leslie were also ordered to pay

$67,026 for filing late in 2010. Taxpayers filed timely appeals 

and we consolidated the cases.

II

The Tax Court had jurisdiction under 26 U.S.C. §§ 6214 

and 7442. We have jurisdiction under 26 U.S.C. § 7482(a)(1). 

Venue was proper because, at the time they filed their petitions, 

Mitchel and Brianna resided in New Jersey, and Leslie resided 

in Pennsylvania. Eric resided in Florida, but the parties 

stipulated to venue in the Third Circuit for his appeal. 

III

The key issue on appeal is whether Taxpayers’ horse

activity was not engaged in for profit under § 183 of the 

Internal Revenue Code during 2010–2013. We review that 

factual determination for clear error. Keating v. Comm’r, 544 

F.3d 900, 903 (8th Cir. 2008); Comm’r v. Duberstein, 363 U.S. 

278, 291 & n.13 (1960). “[W]e affirm the court’s finding so 

long as it is ‘plausible’; we reverse only when ‘left with the 

definite and firm conviction that a mistake has been 

committed.’” Cooper v. Harris, 581 U.S. 285, 309 (2017) 

(citation omitted).

Section 183(a) of the Internal Revenue Code provides 

that “[i]n the case of an activity engaged in by an individual or 

an S corporation, if such activity is not engaged in for profit, 

no deduction attributable to such activity shall be allowed. . . 

.” 26 U.S.C. § 183(a). Treasury Regulation 1.183–2(b) lists

nine non-exclusive factors to consider in determining whether 

an activity is engaged in for profit. They are: (1) the manner in 

which the taxpayer carries on the activity; (2) the expertise of 
10

the taxpayer or his advisors; (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; (8) the financial status of the taxpayer; and (9) 

elements of personal pleasure or recreation. 26 C.F.R. § 1.183–

2(b). The inquiry is fact-driven and we give greater weight to 

objective facts than to intent. 26 C.F.R. §§ 1.183−2(a), (b). No 

one factor is determinative and the analysis does not depend on 

a preponderance of the nine factors. 26 C.F.R. § 1.183–2(b).

The Tax Court considered these factors and determined 

that Taxpayers did not conduct the Company’s horse activity 

during 2010–2013 with a genuine intent to make a profit. 

Skolnick, 2021 WL 5936986, at *12–22. Section 183 thus 

disallowed as deductions the losses that the Company passed 

through to them. In its analysis, the Court found that five 

factors—1, 6, 7, 8, and 9—favored the Commissioner. Three

factors—3, 4, and 5—were neutral. And only factor 2 favored 

Taxpayers. We review these three groups in turn. Taxpayers 

dispute the Tax Court’s analysis of every factor. 

A. Factors Favoring the Commissioner

1

Because the history of income and losses (factor 6) was 

“by far” the most important to the Tax Court’s analysis, we 

begin with that factor before discussing the other four that 

favored the Commissioner. Skolnick, 2021 WL 5936986, at 

*20. And it weighed heavily against Taxpayers. Id. Between 

1998 and 2013, the Company lost more than $11.4 million. The 
11

Tax Court has held the start-up phase for horse activity is five 

to ten years. Engdahl v. Comm’r, 72 T.C. 659, 669 (1979). But 

the Company’s losses continued essentially unabated after that 

timeframe. By 2010 the Company had been in operation for 

twelve years. Yet from 2010 through 2013, the Company lost 

more than $3.5 million.

Taxpayers point to profits the Company earned after the 

years at issue, emphasizing the success of Always A Virgin. 

But as the Tax Court noted, those profits occurred after the IRS 

selected Mitchel and Leslie’s tax return for examination. So 

Taxpayers were motivated to generate a profit. Skolnick, 2021 

WL 5936986, at *20. Taxpayers’ arguments about their gross 

receipts also fall flat because they failed to measure them 

against their expenditures. See Faulconer v. Comm’r, 748 F.2d 

890, 901 (4th Cir. 1984).

Taxpayers try to excuse the Company’s lack of profit by 

citing adverse events beyond their control. The Tax Court 

acknowledged that the economic environment for 

Standardbred horses had declined and that a financial crisis 

occurred in 2008. Skolnick, 2021 WL 5936986, at *20. But the 

elimination of the New Jersey subsidy to the horse industry in 

2012 “d[id] not explain the magnitude of [the Company’s] loss 

in 2012 ($993,066) or the magnitude of its losses in earlier 

years when the subsidy existed.” Id. Likewise, the Company’s 

losses during the severe downturn in the economy from 2008–

2010 ($3,063,893) were barely greater than its losses in 2011–

2013 ($2,993,873), when the economy was recovering. Id. So 

the Tax Court did not clearly err when it found that adverse 

market conditions did not explain the Company’s sustained 

unprofitability. The substantial history of losses strongly 

weighed against Taxpayers.
12

2

The Tax Court found that the way Taxpayers conducted 

their horse activity (factor 1) also strongly favored the 

Commissioner. Skolnick, 2021 WL 5936986, at *12–15.

Taxpayers challenge this finding by citing their voluminous 

business records. The Tax Court acknowledged the records but 

identified significant inaccuracies and gaps in them. Id. at *12.

For example, although the Company was founded in 1998, the 

initial operating agreement between Mitchel and Eric was 

dated 2001. At trial, Mitchel could not recall how much he or 

Eric had initially contributed to the Company or if their 

contributions were equal. Mitchel also testified that he and Eric 

did not distinguish between capital contributions and loans. In 

the same vein, important changes in the ownership interests of 

the Company were not memorialized until after the IRS began

its examination.

Taxpayers claim the Court erroneously found that the 

regulation “requires” a plausible business plan. Taxpayers Br. 

26 n.11. But the Court said no such thing. Skolnick, 2021 WL 

5936986, at *12. The lack of a business plan after 2004, plus 

the lack of employee budgets, supported a finding that the 

horse activity was not conducted in a businesslike manner. 

Mitchel did not help his case either when he testified that costsaving options suggested by staff were not a priority because 

he approached the Company “not so much in income and 

expenses.” App. 910.

If that were not enough, the Company paid for personal 

expenses, including the Bluestone farmhouse reconstruction 

and landscaping for Mitchel’s wedding. Brianna used a 

Company credit card for her personal expenses. Mitchel set 

aside the bills for the cost of boarding Brianna’s horses and 
13

Company staff widened the walking path for her. At trial, when 

asked about some of these costs, Brianna called them her “bar 

tab,” but she could not say how much she owed. App. 1514–

1515. Mitchel likewise testified: “it sounds like a lot of money, 

but . . . [Brianna is] my wife,” although he was still married to 

Leslie when many expenses were incurred. App. 803, 806–

811. The Tax Court did not err when it said that piling these 

costs onto Bluestone “sits uneasily” with claims that the 

Company operated with a profit motive. Skolnick, 2021 WL 

5936986, at *14.

Taxpayers argue persuasively that the Court should not 

have substituted its own business judgment in evaluating how 

Mitchel and Eric responded to losses. See Skolnick, 2021 WL 

5936986, at *15. Under the regulation, changing operating 

methods to respond to losses is evidence of a profit motive. 26 

C.F.R. § 1.183–2(b)(1). Taxpayers responded to changes in

breeder’s award requirements, including by partnering with 

Cane Run and boarding their horses in other states. Even so,

those actions were minor cost-saving measures that are not 

quite the “abandonment of unprofitable methods” 

contemplated by this part of the regulation. 26 C.F.R. § 1.183–

2(b)(1). Despite the Tax Court’s slight misstep, there remained

sufficient evidence that the Company was not run in a 

businesslike manner. So the Court did not clearly err in 

weighing this factor in favor of the Commissioner.

Mitchel’s and Eric’s financial status (factor 8) also 

weighed strongly in the Commissioner’s favor. Skolnick, 2021 

WL 5936986, at *21. The Tax Court correctly considered 

Taxpayers’ substantial income from sources other than the 

Company as evidence that their horse breeding activity was not 

engaged in for profit. Both the Skolnicks’ and Eric’s returns 
14

during the years in question reported six-figure gross income 

from sources other than the Company.

Mitchel insists he did not invest in the Company for tax 

benefits, but the record suggests otherwise. The Company 

produced substantial tax benefits. Mitchel’s income totaled 

$3.5 million, some $1.5 million of which was taxable. Mitchel 

argues that if he had been motivated by tax savings, “surely” 

he would have been “savvy enough” to switch his tax-exempt 

bonds to another investment. Taxpayers Br. 51. But the 

substantial annual Company losses for 2010–2013 reduced 

Taxpayers’ income tax liabilities for those years to zero or 

close to it. 

Taxpayers argue that any tax benefits were not 

dispositive. That’s true, but the Tax Court did not rely on this 

factor alone. The tax benefits were real, they were significant, 

and the Court did not err in finding that factor 8 favored the 

Commissioner. 

3

The last two factors that favored the Commissioner are

the amount of occasional profits (factor 7) and the elements of 

personal pleasure or recreation (factor 9). Though we perceive 

some weaknesses in the Court’s analyses of these factors, it

placed little weight or emphasis on either one.

Taxpayers raise some persuasive challenges to the Tax 

Court’s analysis of factor 7—the amount of occasional profits. 

There is some evidence the Court did not acknowledge. For 

example, Frank Russo’s purchase of a 15 percent interest in the 

Company for $325,000 in 2001, although not generating an 

overall profit, was significant. Though Russo’s investment did 
15

not put the Company in the black that year, the Court could 

have cited the sale as evidence that the Company was a 

business. There was also the 2003 sale of a conservation 

easement for $869,640, which offset a $652,453 loss. Finally,

there were profits in 2016 from the sale of the interest in 

Always B Miki. But even had the Court noted this income, it 

would not have tipped the balance in favor of Taxpayers. The

income was appreciably less than the Company’s consistent 

losses, which often exceeded $1 million a year. As the 

regulation states: “[a]n occasional small profit from an activity 

generating large losses . . . would not generally be 

determinative that the activity is engaged in for profit.” 26 

C.F.R. § 1.183–2(b)(7). And the profit generated from Always 

B Miki is tempered by the fact that it occurred after the tax 

years at issue and after Taxpayers received the notices of 

deficiency. 

Factor 7 also accommodates speculative investments. 

The Tax Court acknowledged that it had “previously found 

certain horse activities—especially racing activities—to be 

highly speculative ventures, even likening them to wildcat oil 

drilling ventures.” Skolnick, 2021 WL 5936986, at *20 (citing 

Annuzzi v. Comm’r, 2014 WL 5904717, at *12 (T.C. Nov. 13, 

2014)). The Court then emphasized that the Company’s efforts 

are in breeding, not racing. Id. Yet the Court ignored the 

possibility that breeding might be a speculative industry. At 

Southwind, for example, one horse drove farm profits. Mitchel 

also testified that “you raise several horses in the expectation 

that one of them will go on to be what Always B Miki is.” App. 

620. Still, the Court did not err in ultimately finding no hope 

of a big payout. The net profit from the sale of Always B Miki

in 2016, for example, was $281,450, far below what was 

needed to offset the millions of dollars lost in prior years. 
16

Taxpayers make another good point when they claim

the Tax Court applied the wrong legal standard to factor 7. 26 

C.F.R. § 1.183–2(b)(7). The Court did not think Taxpayers

“entertained a reasonable belief, during 2010–2013, that the 

outsized success of a few horses would make Bluestone 

profitable overall.” Skolnick, 2021 WL 5936986, at *21. But a 

“reasonable expectation of profit is not required.” 26 C.F.R. 

§ 1.183–2(a). The applicable standard is not whether 

Taxpayers had “a bona fide expectation” of profit, but whether 

they engaged in the activity with the “objective” of making a 

profit. See Dreicer v. Comm’r, 665 F.2d 1292, 1299–1300 

(D.C. Cir. 1981) (quoting 26 C.F.R. § 1.183–2(a)). The statute

bars deductibility of losses emanating from “‘activities not 

engaged in for profit,’ not activities lacking an expectation of 

profit.” Id. (quoting 26 U.S.C. § 183). Despite this 

misstatement, the Tax Court did not clearly err in finding that

factor 7 favored the Commissioner. As explained above, any 

profits, real or expected, were minimal compared to losses, 

even characterizing horse breeding as speculative. Although 

Taxpayers valiantly mined the record to show that the Court 

could have weighed the evidence differently, their evidence 

does not convince us that the District Court clearly erred. 

Factor 9—elements of personal pleasure or recreation—

favored the Commissioner. As the Tax Court has previously 

recognized, “[s]uccess in business is largely obtained by 

pleasurable interest therein.” Jackson v. Comm’r, 59 T.C. 312, 

317 (1972) (citation omitted). Still, “if the chance for profit is 

small relative to the potential for gratification, the latter may 

emerge as the primary motivation.” Annuzzi, 2014 WL 

5904717, at *13. Here, Taxpayers do not meaningfully resist 

the Court’s analysis about Eric. But as to Mitchel, they insist

there is no evidence he enjoyed the horse activity because he 
17

never rode horses or had parties at Bluestone. The 

Commissioner argues that the Court based its finding on the 

opportunity to socialize. We agree with Mitchel on this point. 

The record does not support that the prospect of social 

opportunities mattered to Mitchel, notwithstanding his 

wedding party at Bluestone. We also agree with Mitchel that 

his enjoyment of the analytical approach to breeding supported 

the Company’s profit motive. 

We are unpersuaded, however, by Mitchel’s argument 

that any benefits of his residence at Bluestone somehow 

discount his pleasure in living on the property. The record 

supports the Court’s finding that the personal pleasure Mitchel 

derived from living at Bluestone outweighed the benefits that 

accrued to the Company. Mitchel moved to the farm in 2008 

after he separated from Leslie. By 2010, he and Brianna were 

living together rent-free in the renovated farmhouse. Mitchel 

allowed Brianna to use the property to ride her horses and to 

use a Company credit card for personal expenses. He also 

arranged for substantial improvements to Bluestone before

their wedding and derived pleasure from residing on the 61-

acre estate. These personal motives suggest that Mitchel’s

operation of the Company was not for profit. On balance, we 

agree with the Court’s finding that factor 9 favored the 

Commissioner.

B. Neutral Factors

The Court deemed factors 3, 4, and 5 neutral. The Court 

and the parties spent more time evaluating factor 4—the 

expectation that the assets used in the activity may appreciate 

in value—so we focus on that factor first.
18

The Court found that the horse breeding operation and 

real estate holdings at Bluestone were interrelated. Skolnick, 

2021 WL 5936986, at *18. It follows that Taxpayers’ 

expectation that the original property would appreciate 

supported their profit motive. The same is not true, however, 

of the Wert and Rosenthal Farms. There was little horse 

activity on those farms. They were almost sold to Toll Brothers 

for housing development, but whatever appreciation might 

have occurred in that respect could not have supported the 

notion that the Company bred horses for profit. 

As for the horses, the Court did not err when it found 

there was no plausible basis to find the Company’s herd would 

meaningfully appreciate in value. Skolnick, 2021 WL 5936986, 

at *19. Even accepting Taxpayers’ belief that Always B Miki 

would succeed, the Company lost more than $11 million on 

horse ownership between 1998–2013. Weighing the evidence 

of Mitchel’s testimony against that of the IRS experts and the 

actual losses, we hold that the Court did not clearly err in 

discounting any expectation of the horses appreciating in 

value.

We agree with the Tax Court that this factor was neutral 

because that expectation does not support a finding that the 

horse activity as a whole was conducted with a genuine intent 

to make a profit. 

We address factors 3 and 5 only briefly. Factor 3—the 

time and effort expended—was not meaningfully disputed by 

Eric, presumably because his involvement in the Company was 

minimal. Not so for Mitchel, who worked eight to nine hours a 

day, five to six days a week. Taxpayers rightly note that 

considerable hours spent on an activity might reflect a profit 

motive. But hours alone are not necessarily enough to find that 
19

this factor must favor a taxpayer. See, e.g., Betts v. Comm’r, 

2010 WL 2990300, at *9 (T.C. Jul. 27, 2010) (although Betts 

spent a “significant amount of time on her horse activity,” the

“many personal and recreational aspects” made the factor 

neutral). Here the Tax Court acknowledged Mitchel’s time, but 

also credited the testimony of Company employees that he was 

not much of a hands-on manager. Skolnick, 2021 WL 5936986, 

at *16. The evidence here is equivocal, so the Court did not 

clearly err.

Taxpayers rightly note that “withdrawal from another 

occupation to devote most of his energies to the activity” may 

suggest that the activity is engaged in for profit. 26 C.F.R. 

§ 1.183–2(b)(3). Mitchel and Eric stopped working at their 

other jobs before working for the Company. And even after

Mitchel went back to work at his consulting firm to help pay 

the Company’s bills, his second retirement coincided with his 

anticipated receipt of millions of dollars of trust funds. The 

Court did not clearly err in finding factor 3 to be neutral either. 

As for factor 5—success in similar activities—

Taxpayers showed no meaningful synergy between their past 

business activities and their horse breeding operation. The 

Court did not err in finding this factor neutral.

C. Factor Favoring Taxpayers

Factor 2—the expertise of Taxpayers and their 

advisors—was the only one that favored Taxpayers. Skolnick, 

2021 WL 5936986, at *16. Both Mitchel and Eric had 

experience in the horse breeding industry dating back to their 

work with Southwind and the Chancery Equine Group. The 

Tax Court credited that experience. Skolnick, 2021 WL 

5936986, at *16. Taxpayers argue that their experience should 
20

have been given more weight. But the case they cite did not 

give this factor significant weight. See Den Besten v. Comm’r, 

2019 WL 6312955, at *9 (T.C. Nov. 25, 2019).

Mitchel and Eric also consulted experts in the industry. 

But for § 183 purposes, that counts only if the expert advice 

advances the profit motive. See Whatley v. Comm’r, 2021 WL 

289333, at *7 (T.C. Jan. 28, 2021). Taxpayers did not reveal

what type of advice they sought from their advisors. So the 

Court did not err in giving little weight to the consultation of 

experts. As the Court noted, hobbyists “often seek expert 

advice” about their interests. Skolnick, 2021 WL 5936986, at 

*16. And even if this factor were afforded more weight, it 

would have done little to alter the balance of all the other 

factors.

* * *

In sum, the Tax Court did not clearly err in finding that 

Taxpayers’ horse activity during 2010–2013 was “not engaged 

in for profit” under § 183.

IV

Taxpayers also sought to carry forward net operating 

losses generated by the Company in the years prior to 2010 to 

shelter future investment income, including the deficiencies at 

issue. See 26 U.S.C. § 172(b)(1)(A). Contrary to Taxpayers’

unsupported claim that the NOL determination is a legal 

question, we consider it a matter of fact and agree with our 

sister courts that we review the sufficiency of evidence 

submitted for tax deductions for clear error. See, e.g., Buelow 

v. Comm’r, 970 F.2d 412, 415 (7th Cir. 1992) (“The tax court’s 

determination that a taxpayer has failed to come forward with 
21

sufficient evidence to support a deduction is a factual 

finding”); Thompson v. Comm’r, 631 F.2d 642, 646 (9th Cir. 

1980), cert. denied, 452 U.S. 961 (1981).

The first two pieces of evidence submitted—the income 

tax returns—are insufficient because Taxpayers cannot rely 

solely on their own returns to establish losses. Roberts v. 

Comm’r, 62 T.C. 834, 837 (1974).

Taxpayers insist that their third piece of evidence—the

IRS’s No Change letter submitted in 2010 after the audit of 

their 2008 tax returns—makes this case unique. We disagree.

The audit and letter did not address whether Taxpayers 

operated the Company intending to make a profit. The letter 

simply says the Internal Revenue Agent proposed no changes 

to their 2008 tax return. App. 5633. Again, tax returns cannot 

establish losses on their own. And the claimed NOLs were 

from more years than just the audit year (2008), and each tax 

year stands on its own. United States v. Skelly Oil Co., 394 U.S. 

678, 684 (1969).

Taxpayers also failed to submit ledgers from the years 

prior to 2010 in which the asserted NOLs occurred. The last 

piece of evidence Taxpayers submitted were the general 

ledgers from the years 2010–2013. Recognizing their error in 

not submitting more evidence, Taxpayers moved to add 

evidence five months after the record was closed. The Tax 

Court denied that motion as untimely and Taxpayers have not 

challenged that order. 

For the reasons stated, the Tax Court did not clearly err 

in denying the NOL carryforward deductions.
22

V

Mitchel and Leslie claim that any finding in their favor 

on the prior two issues will eliminate their late-filing penalty

for 2010 under 26 U.S.C. § 6651(a)(1). They forfeited this 

argument by only raising it in a footnote. See United States v. 

Centeno, 793 F.3d 378, 388 n.9 (3d Cir. 2015). They also cited 

no law to support their legal claim. So Mitchel and Leslie 

remain liable for the penalty.

* * *

The Tax Court adeptly conducted the five-day trial and 

issued a comprehensive opinion. At most, Taxpayers have 

shown that the Tax Court could have weighed the evidence

differently. Because more is necessary to show clear error, we

will affirm the decision.