T.C. Mem o. 2 01 5- 10 9

UNITED STAT ES TAX COURT
DENISE CELESTE MCMILLAN, Pet it io ne r v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 37 20 -1 2. Fi le d J un e 1 1, 2 01 5.

Inth e an swe r, R as se rte d a n i nc reas edde fic ie nc y inin co m e ta x on acco un t o f hi s d is al lo wan ce o f a l eg al ex pe ns e d educ ti on P cl ai m edon on e Sch edul e C, Pro fitor Lo ss Fro m Bu si ne ss , addres si ng he r IT an d d at ab as e m an ag em en t ac ti vi ty andhi s d is al lo wan ce o f P's de du ct io n fo r a l os s cl ai m edon a se co ndSch edul e C rel at in g t o h er equi ne act iv it y . In the an swe r, R al so ass ert edanaccuracy-rela te d pe na lt y . Held : P i s en ti tl edto on e-h al f of th e cl ai m edleg al ex pe ns e de du ct io n. Held , furth er, P m ay

no t d educ t the equi ne act iv it y lo ss be cau se th e act iv it y

was n oten ga ge d i n fo r pr of itex cep t tha t s he m ay

de du ct th e ex pe ns e cl ai m edforin te res t s in ce R h as fai le d t o p ro ve th e in de bt edne ss to whi chth e in te res t was all oc at edwas n otin cu rredina tra de or b us in es s o r in anact iv it y en ga ge d i n fo r pr of

it
. Held , furth er, R h as no t ca rri edhi s b ur de n o f pr ov in g ap pl ic ab il ity

of t he accu racy-rela te d p en al ty.- 2 -

[* 2] Den is e Cel es te McM il la n, p ro se. Pri sc il laA. Parret t an d Van es saM. Hop pe , for res po nd en t.

MEMORANDUM FINDINGS OF FACT AND OPINION HALPERN, Ju dg e: Res po nd en t d et erm in eda de fic ie nc y of $ 45 7 i n pe ti ti on er's 20 09 Fed eral in co m e ta x. Th e d efi ci en cy res ul te d fr om

res po nd en t's ad jus tm en t i nc reas in g p et it io ne r's 20 09 gro ss in co m e b y $1 1,7 18 on acco un t o f a ret ire m en t ac co un t d is tri bu ti onth atsh e h adrece iv edbu t h adno t re po rte d a s in co m e. Pet it io ne r as si gn ederro r to th atad jus tm en t b utno w con ced es th atitwas co rrec t. By th e an swe r, res po nd en t as se rts (1) anin crea se d d efi ci en cy for20 09 of $6 ,77 6, re su lt in g i n ato ta l d efi ci en cy of $ 7,2 33 , and(2) anaccuracy-rela te d pe na lty of $ 1,4 47 . The i nc reas edde fic ie nc y res ul ts be cau se res po nd en t wo ul d di sa ll ow two d educ ti on s tha t p et it io ne r cl ai m edinde te rm in in g h er t ax ab le in co m e: (1) a de du ct io n o f $2 6,3 12 forleg al ex pe ns es th atpe ti ti on er cl ai m edin
co nn ect io n wi th anact iv it y sh e d es cri be d a s i nf

orm at io n t ech no lo gy andda taba se m an ag em en t (I T act iv ity ), an d (2 ) a d educ ti on for a lo ss of $ 7,4 86 th atpe ti ti on er cl ai m edon acco un t o f anact iv it y sh e d es cri be d a s " ho rs e b reed in g andsh owi ng " (equi ne act iv it y ).- 3 -

[* 3] Unl es s o th erwi se in di cat ed , all sec ti on refe ren ces are t o t he Int ern al Rev enue Co de ineffe ctfor20 09 , andall Ru le refe ren ces are t o t he Tax C ou rt Ru le s o f Prac ti ce an d P ro cedur e. All do ll ar am ou nt s ar e ro un de d t o t he ne ares t do ll ar. Bec au se th e o nl y

it em s re m ai ni ng forde ci si on are the in crea se d d efi ci en cy an d t he pe na lt y

(a n ew m at te r), res po nd en t b ears th e b ur de n o f pr oo f. See Ru le 14 2( a)(1 ). FINDINGS OF FACT W e h av e, pu rs ua ntto Ru le 91 (f), d eem edst ip ul at edcert ai n fa ct s an d t he
au th en ti ci ty of cert ai n d oc um en ts . The p art ie s h av e st ip ul at edcert ai n fa ct s an d t he
au th en ti ci ty of cert ai n d oc um en ts . Tho se fact s ar e so fou nd , andth e d oc um en ts st ip ul at edare ac cep te d a s au th en ti c. Res id en ce Pet it io ne r res id edinCal ifo rn iawhensh e fi le d t he pe ti ti on . Pet it io ne r's 20 09 Fo rm

10 40 Pet it io ne r pr ep aredhe r 20 09 Fo rm 10 40 , U.S. Ind iv idua l In co m e Tax Return, an d t im el y

fil edit . Am on g the it em s tha t p et it io ne r at ta ch edto th atreturn are t wo Sc he du le s C , Pro fitor Lo ss Fro m Bu si ne ss , anda Fo rm

88 29 , Exp en se s fo r Bu si ne ss Use o f Your Hom e.- 4 -

[* 4] The fir stSch edul e C rel at es to th e IT act iv it y (IT act iv it y

Sch edul e C). It rep orts gro ss in co m e o f $6 5,0 00 an d n etin co m e o f $1 4,8 09 . It rep orts , am on g ot he r ex pe ns es , $2 6,3 12 forleg al an d p ro fes si on al servi ces (le ga l ex pe ns es ) an d $1 7,9 13 (carrie d o ve r fro m th e Fo rm 88 29 ) as anex pe ns e fo r th e b us in es s u se of pe ti ti on er's ho m e. The F orm 88 29 rep orts 50 % as t he bu si ne ss us e p erce nt ag e fo r pe ti ti on er's bu si ne ss us e o f he r ho m e. The IT Sc he du le C al so rep orts car an d tru ckex pe ns es , a de pr eci at io n e xp en se , an o ffi ce ex pe ns e, an d a n e xp en se for
supp li es . The sec on d S ch edul e C rel at es to th e equi ne act iv it y (equi ne act iv it y Sch edul e C). Itrep orts zero rece ip ts an d t he fol lo win g e xp en se s:

Exp en se Am ou nt Adv ert is in g $1 00 Car a ndtru ck 55 0 In te res t (o th er tha n m ortg ag e) 5,6 90 1 Ren t o r le as e (o th er b us in es s p ro pe rty) 96 0 Oth er (m ag azi ne s an d t ackclo th in g) 18 6 Tota l 7,4 86 The in te res t ex pe ns e rel at es to a li ne of c red itpe ti ti on er 1 ob ta in edan d m on ey

sh e b orro wedin20 07 inord er t o p ay th e co st of tra ns po rti ng a ho rs e to Aus tra li a. See d is cu ss io n i nf ra.- 5 -

[* 5] Leg al Exp en se s Pet it io ne r res id es ina co nd om in iu m un it , inwhi chsh e m ai nt ai ns a ho m e of fic e. A ho m eo wne rs ass oc ia ti on (HOA) ha s v ari ou s dut ie s an d re sp on si bi li ti es with re sp ectto th e co nd om in iu m un it . The l eg al ex pe ns es rel at e to a di sp ut e be twee n p et it io ne r, onth e o ne ha nd , andhe r ne ig hb or s an d t he HOA, on t he ot he r. In20 05 , pet it io ne r, by cou ns el , fil eda co m pl ai ntfor da m ag es inSta te co urt na m in g a s d efen da nt s the HOA andva rio us un na m edpe rs on s (HOA l it ig at io n)
. The gro un ds forth e co m

pl ai ntwere b reac h o f co ntract , bre ach of f iduc iary du ty, an d n ui sa nc e, an d p et it io ne r so ug htin jun ct iv e an d d ecl arat ory

rel ie f. Pet it io ne r st at edth e fo ll owi ng factua l b as es for he r co m pl ai nt : (1 ) do gs run ni ng wil d, d og s ba rk in g, an d d og s d efec at in g a ro un d t he pro pe rty, (2) co ns tru ct io n d efec ts rel at ed to th e p res en ce o f m ol d i n h er b athr oo m , and(3) co ns tru ct io n d efec ts th atcau se d
no is e p ro bl em s. Th e HOA li ti ga ti on was s et tl edinJu ne 20 10 . In 2 00 9, i n co nn ect io n wi th th e HOA li ti ga ti on , pet it io ne r was in vo lv edina se pa rat e le ga l act io n (s ep arat e act io n) in vo lv in g m is de m ean or cri m in al ch arg es co nn ect edwith he r at te m ptto ga th er ev id en ce fo r th e HOA li ti ga ti on . The l eg al ex pe ns es , $2 6,3 12 , con si stof $ 5,0 00 pa idon Marc h 3 1, 2 00 9, t o Gary A. Sm it h, PLC , for le ga l re pr es en ta ti oninth e se parat e act io n; $2 1,1 00 pa idonva rio us da te s i n 2 00 9 to Jo hn A. Schl aff, Es q., fo r co un se l an d l eg al rep res en ta ti on inco nn ect io n wi th- 6 -

[* 6] bo th th e HOA li ti ga ti on an d t he sep arat e act io n; an d $ 21 2 i n s he rif f's de pa rtment andco urt co st s. Equ in e Act iv it y Pet it io ne r te st ifi edth atsh e is anin te rn at io na l dres sa ge rid er an d t rai ne r. Dres sa ge is a co m

pe ti ti ve eque st ria n s po rt d es ig ne d t o s ho wcas e a h or se 's ph y si qu e an d t rai ni ng wher e a h or se an d ri de r are ex pe ct edto pe rfo rm fro m m em ory a se rie s o f pr ed et erm in edm ov em en ts or t es ts su chas " th e h al t" , "th e tr ot ",
an d " th e can te r", t o n am e a few. Pet it io ne r te st ifi edth atdre ss ag e co m pe ti ti on s d o no t p ay m uc h andth atin co m e is earn edina dr es sa ge bu si ne ss fro m studfees an d fro m pu rch as in g, trai ni ng , sh owi ng , andsel li ng ho rs es . She tes ti fie d t ha t, i n 2 00 9, sh e tr ai ne d h or se s, al th ou gha m ov in g c om pa ny hadlo sthe r rec or ds do cu m en ti ng th atact iv it y . Peti ti on er cl ai m s tha t s he ha s b eeninth e dres sa ge bu si ne ss si nc e th e m id -1 97 0s . She ha s an affi ni ty for dres sa ge . Gol drus h I ( Gol drus h) is a ho rs e th atpe ti ti on er o wne d fr om at l eas t 1 99 9 th ro ug h J anua ry

20 08
. Dur in g t ha t p eri od , pet it io ne r own edno ot he r ho rs e, an d, dur in g t he
rem ai nd er o f 20 08 an d dur in g 2 00 9, p et it io ne r own edno ho rs e. Fro m at l eas t 1 99 9 t hr ou gh 20 09 , pet it io ne r di d n otco m pe te inan y

ho rs e sh ows with Go ldru shor a ny oth er h or se .- 7 -

[* 7] Befo re 1 99 9, Go ldru sh si redfiv e fo al s, an d p et it io ne r earne d b etween $1 ,00 0 a nd$1 ,50 0 fo r eac h fo al . From 19 99 th ro ug h 2 00 9, p et it io ne r di d n ot br eedGol drus h o r an y

ot he r ho rs e. In20 07 , bec au se pe ti ti on er was un su cces sf ul inbre ed in g Go ldru sh inth e Uni te d S tate s, s he de ci de d t o s en d h im to Aus tra li a in th e h op e th athi s b reedan d bl oo dl in e wou ldm ak e h im anatt ract iv e b reed in g s ta ll io n t he re. Unf ortuna te ly, in Ja nu ary 20 08 , aft er Go ldru sharri ve d i n Au st ral ia , he b ecame un ex pe ct ed ly ill an d di ed
. Pet it io ne r te st ifi edth athe r bu si ne ss pl anwas t o s earc h fo r th e "ri gh t" ho rs e, tra in th e h or se , sh ow the ho rs e, an d s el l the ho rs e fo r a p ro fit . She tes ti fie d t ha t he r go al was t o p ur ch as e a h or se for$2 5,0 00 to $3 0,0 00 , tra in an d s ho w th e h or se , an d t he n s el l i t fo r anam ou ntinex ces s o f $1 00 ,00 0 a ndpo te nt ia ll y inex ces s o f $1
m il li on . She tes ti fie d tha t s he was s ur e th ata rece ntEuro pe ansal e o f a
co m pe ti ti on dre ss ag e h or se ha d fe tc he d m il li on s o f euro . She tes ti fie d t ha t, i n 20 09 , sh e lo ok edfora ho rs e to pu rch as e b utdi d n otfin d o ne th atm ethe r requi rem en ts . Duri ng 20 09 , sh e h adall of h er t ack ; i .e., th e g ear u se d i n e qu ip pi ng a h or se , in cl ud in g asad dl e, a b rid le , a m art in ga le , etc . Beg in ni ng at l eas t wi th he r 20 04 Fo rm 10 40 , pet it io ne r in cl ud edas p artof he r return aSch edul e C fo r th e equi ne act iv it y . For n on e o f th os e y ears di d- 8 -

[* 8] pe ti ti on er re po rt any netin co m e fro m th e equi ne act iv it y , andon ly for 2 00 4 di d s he rep ort an y

rece ip ts , $5 88 , fro m

th e act iv it y . The fo ll owi ng tab le sh ows pe ti ti on er's rep orte d i nc om e fro m so ur ces ot he r th anth e equi ne act iv ity an d h er equi ne act iv it y

rece ip ts an d e xp en se s as rep orte d o n h er 2 00 4 t hr ou gh 20 09 Fo rm s 10 40
. Year Net i nc om e fro m

ot he r so ur ces Equ in e act iv it y

rece ip ts Equ in e act iv it y

ex pe ns es 20 04 $6 1,9 45 $5 88 $3 6,4 53 20 05 61 ,16 6 -0
- 22 ,27 7 20 06 54 ,81 8 -0
- 33 ,12 8 20 07 63 ,14 3 -0
- 51 ,69 7 20 08 -0
- -0
- 4,2 03 20 09 14 ,86 0 -0
- 7,4 86 Pet it io ne r's rep orte d n etlo ss es fro m th e equi ne act iv it y

for20 04 th ro ug h 2 00 9 to ta le d $ 15 4,6 56
. Pet it io ne r's form er ac co un ta nttes ti fie d. He h adno t p rep aredhe r in co m e ta x returns for10 or 1 2 years. Whenhe pre pa redhe r returns , th ere wer e so m e y ears whe n the equi ne act iv it y

m ad e a p ro fitan d s om e whe n i t d idno t. Fo r he r 20 07 an d 2 00 8 t ax y ears , res po nd en t h addi sa ll owe d p et it io ne r's equi ne act iv it y

ex pe ns e d educ ti on s b ecau se sh e fai le d t o s ho w th atth e act iv it y was- 9 -

[* 9] en ga ge d i n fo r pr of

it . W e su st ai ne d re sp on de nt 's d is al lo wan ce an d t he
res ul ti ng de fic ie nc ie s o n t he gro un d t ha t, fo r th os e y ears , pet it io ne r's equi ne act iv ity was n otanact iv it y

en ga ge d i n fo r pr of

it . McMi ll anv. Co m

m is si on er, T.C. Mem o. 2 01 3- 40 , app eal fil ed(9t h C ir. Se pt . 9, 2 01 3)
. Pet it io ne r's Prep arat io n o f Her Re tu rn Pet it io ne r pr ep aredhe r 20 09 Fo rm 10 40 . Peti ti on er re vi ewedhe r 20 09 Fo rm 10 40 be fo re fi li ng itan d b el ie ve d i t t o b e co rrec t. OPINION I. Leg al Exp en se s The fact s tha t we h av e fo un d s up ra u nd er the he ad in g " Leg al Exp en se s"
en co m pa ss subs tant ia ll y

th e fac ts th atres po nd en t p ro po se d i n h is op en in g b rie f
supp orti ng th e arg um en t tha t p et it io ne r m ay no t d educ t the leg al ex pe ns es . His arg um en t i n t ha t b rie f co ns is ts of t wo p arag rap hs . In the fir stpa rag rap h, h e p oi nt s ou t tha t, wh il e se ct io n 1 62 (a) a ll ows a de du ct io n fo r al l o rd in ary an d n eces sa ry ex pe ns es pa idor i nc urreddu rin g t he tax ab le y ear i n c arrying on an y tra de or bu si ne ss , sec ti on 26 2( a), as a ge ne ral rul e, pr oh ib it s a d educ ti on for pe rs on al , li vi ng , or fa m il y

ex pe ns es . He add s tha t o rd in ary an d n eces sa ry leg al ex pe ns es are ge ne ral ly deduc ti bl e und er s ect io n 1 62 when th ey ari se fro m , or are p ro xi m at el y rel at edto , a bu si ne ss act iv it y . E.g., Testv. Co m m is si on er, T.C. Mem o. 2 00 0- 36 2,- 10 -

[* 10 ] 20 00 W L 17 38 85 8, at*4 . The o rig in an d c ha ract er o f th e cl ai m (be in g bu si ne ss co nn ect ed ) rathe r th anit s co ns eque nc es to th e fo rtu ne s o f th e ta xp ay er are d et erm in at iv e. See Un it edSta te s v . Gil m or e, 37 2 U.S. 3 9, 4 9 (1 96 3) . The
se co ndpa rag rap h o f hi s ar gu m en t i s as fol lo ws (c it at io ns of t he reco rdom it te d)
. "Pe ti ti on er cl ai m edleg al an d p ro fes si on al ex pe ns es forhe r ci vi l ca se ag ai ns t h er ho m eo wne rs ass oc iati on an d fo r a cri m in al cas e in whi chsh e was th e d efen da nt . The se ex pe ns es are n otrel at edto he r IT an d Dat ab as e Mana ge m en t b us in es s. Th e ex pe ns es are p ers on al . There fo re, res po nd en t's de te rm in at io n s ho ul d b e su st ai ne d." Pet it io ne r cl ai m eda de du ct io n fo r th e le ga l ex pe ns es on th e IT act iv it y Sch edul e C. Tha t Sc he du le C de sc rib es a bu si ne ss act iv it y an d re po rts a ne t p ro fit of $1 4,8 09 . Bes id es th e le ga l ex pe ns es , pet it io ne r cl ai m edon th e IT Sch edul e C de du ct io ns fora subs ta nt ia l h om e o ffi ce ex pe ns e, car a ndtru ckex pe ns es , a de pr eci at io n e xp en se , an o ffi ce ex pe ns e, an d a n e xp en se forsupp li es . Res po nd en t ha s ch al le ng edno ne of t ho se ex pe ns e d educ ti on s, n orha s h e arg ue d tha t the IT act iv ity was n ota tr ad e o r bu si ne ss . The d is pu te gi vi ng ris e to th e le ga l ex pe ns es aro se pri nc ip al ly on a cco un t o f pe ti ti on er's cla im s o f no is e an d o th er fa ct or s in te rfer in g wi th he r us e an d e njo ym en t o f he r pr op erty . Cert ai nl y , if p et it io ne r's cl ai m s ar e true , th e n oi se an d o th er fa ct or s wo ul d i nt erfe re wi th he r us e an d
en joym en t o f th e co nd om in iu m un itas ares id en ce, an d a ny exp en se s i n- 11 -

[* 11 ] co nn ect io n wi th a le ga l ac ti on to eli m in at e o r m it ig at e th e in te rfer en ce wou ldno t b e d educ ti bl e as ord in ary an d n eces sa ry bu si ne ss ex pe ns es un de r se ct io n 1 62 . Howev er, p et it io ne r rep orte d a50 % bu si ne ss us e o f th e co nd om in iu m

un it , andres po nd en t h as fai le d t o p ro ve th atsh e u se d a ny les se r pe rcen ta ge of the un itforbu si ne ss or t ha t the co m pl ai ne d- of

no is e an d o th er fact or s d idno t af

fecthe r bu si ne ss us e o f th e uni t. Bec au se res po nd en t h as fai le d to m ak e th os e sh owi ng s, we ca nn otsu st ai n h is arg um en t tha t the leg al ex pe ns es were ex cl us iv el y

pe rs on al . On th e b as is of p et it io ne r's rep orti ng a 50 % bu si ne ss us e p erce nt ag e, we wil l s us ta in 50 % ($1 3,1 56 ) of pe ti ti on er's cla im edIT act iv it y Sch edul e C d educ ti on of $ 26 ,31 2 fo r le ga l ex pe ns es . Pet it io ne r's arg um en t tha t, fo r a p rio r y ear, re sp on de ntall owe d h er l eg al
ex pe ns e d educ ti on inful l as a m is cel la ne ou s i te m iz edde du ct io n o n S ch edul e A, Ite m iz edDedu ct io ns , is witho utm eri t. Eachtax y ear s ta nd s b y it se lf, andth e Co m m is si on er i s n otbo un d b y hi s treat m en t o f anit em

for a pr ev io us y ear. Pe ka r v. Co m m is si on er, 1 13 T.C. 15 8, 1 66 (19 99 ). Andwhi le for20 07 an d 2 00 8, we de ni edpe ti ti on er a d educ ti onforleg al ex pe ns es in cu rredinth os e y ears , McM il la n v. Co m m is si on er, at*2 5, we d idso be cau se sh e fai le d t o p ro ve fact s en ti tl in g h er to a de du ct io n. Here , res po nd en t b ears th e b ur de n o f pr oo f, an d h e h as fai le d t o carry th atbu rd en .- 12 -

[* 12 ] II. Equ in e Act iv it y A. Res po nd en t's Argu m en ts Res po nd en t ar gu es th atde du ct io ns rel at edto pe ti ti on er's equi ne act iv it y sh ou ldbe di sa ll owe d fo r two reas on s: (1) th e equi ne act iv it y was n ota go in g co nc ernan d p et it io ne r was th eref or e n otcarry in g o n atra de or b us in es s, an d (2 ) th e equi ne act iv it y

was n otanact iv it y

en ga ge d i n fo r pr of

itwithi n t he m ean in g o f
se ct io n 1 83 . W e res po ndto each arg um en t i n turn. B. Goi ng Co nc ern The Int ern al Rev enue Co de ge ne ral ly allo ws d educ ti on s fo r or di na ry an d
ne ces sa ry ex pe ns es pa idor i nc urredinth e carry in g o n o f a trad e o r bu si ne ss . See, e.g ., sec . 16 2( a). On b rie f, res po nd en t t el ls us th atwhethe r a t ax pa y er i s en ga ge d in a tr ad e o r bu si ne ss is ba se d o n t he fact s an d c irc um st an ces , bu t thr ee fa ct or s ar e in di cat iv e: (1) whet he r th e ta xp ay er u nd ert oo k the act iv it y in te nd in g t o e arna pr of it ; (2 ) whe th er the tax pa y er i s re gu la rly andact iv el y in vo lv edinth e act iv it y ; an d (3 ) whe th er the tax pa y er's act iv it y ha s ac tu al ly comm en ced . See Mc Man us v. Co m m is si on er, T.C. Mem o. 1 98 7- 45 7, 1 98 7 WL 40 51 7, af f'dwitho utpubl is he d op in io n, 8 65 F.2d25 5 (4 th Cir . 19 88 ). Res po nd en t ar gu es th atpe ti ti on er was no t en ga ge d i n atra de or b us in es s be cau se he r equi ne act iv it y was n ota go in g c on cern , app aren tl y us in g t he term- 13 -

[* 13 ] "g oi ng co nc ern " t o c on fla te th e se co ndan d t hi rdfact or s h e rec it edfro m McM anus . In s up po rt, re sp on de ntav ers th atpe ti ti on er (1 ) di d n otownor l eas e a

1 ho rs e in 20 09 , (2) di d n otinth aty ear t rai n any ho rs es , (3) di d n otfro m at l eas t 19 99 th ro ug h 2 00 9 c om

pe te inan y

ho rs e sh ows , and(4) durin g t he same peri od di d n otbre edan y

ho rs es . He con cl ud es : "Wha te ve r pe ti ti on er's act iv it y m ay ha ve be enbe fo re 1 99 9, h er h or se bre ed in g a ndsh owi ng act iv it y was n ota go in g co nc ernin20 09 . There fo re, al l ex pe ns es rel at edto th e act iv ity sh ou ldbe di sa ll owe d." W e h av e fo un d fa ct s s up po rti ng all bu t re sp on de nt 's s eco ndav erm en t: th at pe ti ti on er d idno t i n 2 00 9 t rai n a ny ho rs es . Peti ti on er t es ti fie d t ha t i n 2 00 9 s he di d tra in ho rs es , alt ho ug h h er d oc um en ti ng reco rd s h adbe enlo stby a m ov in g co m pa ny. Res po nd en t h as fai le d t o p ro ve th atpe ti ti on er d idno t dur in g 2 00 9 t rai n an y ho rs es or t rai n t he m

reg ul arl y . Mor eo ve r, res po nd en t d oe s n otap pe ar t o Inth e tr ad e o r bu si ne ss co nt ex t, we h av e in pri or rep orts us edth e te rm 1 "g oi ng co nc ern " t o m os t cl os el y refe r to th e th irdfact or , i.e., whe th er the ta xp ay er's act iv it y

ha s ac tu al ly comm en ced . See, e.g ., Powel l v . Commis si on er, T.C. Mem o. 2 01 4- 23 5, at*7 -* 8; Bark er v . Comm is si on er, T.C. Mem o. 2 01 2- 77 , 20 12 W L 94 71 34 , at * 8; Co nt rera s v . Comm is si on er, T.C. Mem o. 2 00 7- 63 , 20 07 W L 83 18 03 , at * 7. Pe ti ti on er cl ai m s tha t h er equi ne act iv it y co m m en cedde cad es ag o a ndres po nd en t d oe s n otdi rect ly dis pu te th atco nt en ti on , so res po nd en t m ay be us in g t he term

"g oi ng co nc ern " t o re fer o nl y to pe ti ti on er's ev eryday in vo lv em en t i n h er equi ne act iv it y or h e m ay

be su gg es ti ng th ata pr io r equi ne act iv ity ha d a lre ady

be enwou nddo wn. See McM il la n v . Commis si on er, T.C. Mem o. 2 01 3- 40 , at * 22
.- 14 -

[* 14 ] di sp ut e th atpe ti ti on er h as be enco nt in uo us ly inv ol ve d wi th ho rs es inon e fo rm or t he ot he r si nc e th e 1 97 0s . Con se qu en tl y , res po nd en t h as fai le d t o p ro ve th at , in20 09 , pet it io ne r's equi ne act iv it y ha d n otactua ll y

co m m en cedor tha t pe ti ti on er was no t re gu la rly andact iv el y in vo lv edinth e act iv it y . W e m ov e o n t o co ns id er wh ethe r, in20 09 , itwas a n a ct iv it y en ga ge d i n fo r pr of

it
. C. Acti vi ty E ng ag edIn f orPro fit 1. In tro du ct io n Sect io n 1 83 (a) p ro vi de s i n p ert in en t p artth at , if the act iv it y "i s n oten ga ge d in forpro fit , no de du ct io n a tt rib ut ab le to su chact iv it y sh al l b e al lo wed* * *
ex cep t as pro vi de d i n t hi s s ect io n." Sect io n 1 83 (b )(1 ) pr ov id es th atth ere s ha ll be al lo wed"the de du ct io ns whi chwou ldbe all owabl e und er thi s ch ap te r fo r th e ta xabl e y ear wi th ou t re ga rdto whet he r orno t s uc h a ct iv it y is en ga ge d i n fo r pr of it ". The term

"ac ti vi ty noten ga ge d i n fo r pr of it " i s d efi ne d b y

sec ti on 18 3( c)
as "an y act iv ity ot he r th anon e wit h re sp ectto whi chde du ct io ns are al lo wab le for th e ta xabl e y ear u nd er s ect io n 1 62 or u nd er p arag rap h (1 ) or(2) of s ect io n 2 12 ". The U.S. Cou rt o f App eal s fo r th e Nin th Cir cu it , to whi chth is cas e is ap pe al ab le ab se ntwritte n s ti pu la ti on to th e co nt rary, see s ec. 7 48 2( b) (1 )(A), h as he ldth atanact iv ity

is en ga ge d i n fo r pr of

itif the tax pa y er's "p red om in an t, pr im ary orpri nc ip al ob

jecti ve " i n e ng ag in g i n t he act iv it y was t o re al iz e an- 15 -

[* 15 ] eco no mic pro fitin de pe nd en t o f ta x s av in gs , W ol f v. C ommis si on er, 4 F.3d 70 9, 7 13 (9t h C ir. 1 99 3) , aff'g T.C. Mem o. 1 99 1- 21 2. Th e fo cu s o f th e te stis th e ta xp ay er's subjec ti ve in te nt , bu t o bjec ti ve in di ci a m ay be us edto est ab li shth at in te nt . Id. A reas on ab le ex pe ct at io n o f m ak in g apro fitis no t re qu ire d. Se c. 1.1 83 -2 (a), In co m e Tax Reg s. Sect io n 1 .18 3- 2( b) , Inc om e Tax Reg s., s et s fo rth a no ne xc lu si ve li stof n in e fact or s t o b e co ns id eredwhen asc ert ai ni ng a ta xp ay er's pro fitin te nt . Tho se fact or s are: (1) th e m an ne r inwhi chth e ta xp ay er ca rri es on th e act iv it y , (2) th e ex pe rti se of th e ta xp ay er o r hi s ad vi se rs , (3) th e ti m e an d e ffo rt e xp en de d b y th e ta xp ay er i n carry in g o n t he act iv it y , (4) th e expe ct at io n t ha t as se ts us edinth e act iv it y m ay ap pr eci at e in va lu e, (5 ) th e su cces s o f th e ta xp ay er i n c arrying on ot he r si m il ar o r di ss im il ar ac ti vi ti es , (6) th e ta xp ay er's hi st ory of i nc om e o r lo ss es with re sp ectto th e act iv it y , (7) th e am ou ntof o ccas io na l p ro fit s, i f any , whi chare ea rn edby the ta xp ay er, (8 ) th e fi na nc ia l s ta tu s o f th e ta xp ay er, an d (9 ) el em en ts of p ers on al pl eas ur e o r rec reat io n. Altho ug h n o o ne fact oris de te rm in at iv e o f th e ta xp ay er's in te ntto m ak e a pr of it , sec . 1.1 83 -2 (b ), In co m e Tax Reg s., a re co rdof s ub st an ti al lo ss es ov er m an y y ears an d t he un li ke li ho odof a ch ie vi ng a pr of it ab le op erat io n a re i m

po rta nt fact or s b eari ng on th e ta xp ay er's tru e in te nt io n, Go la nt y v. Co m m is si on er, 7 2 T.C.- 16 -

[* 16 ] 41 1, 4 26 (19 79 ), aff'dwitho utpubl is he d o pi ni on , 64 7 F .2d17 0 (9 th Cir
. 19 81 ); s ec. 1 .18 3- 2( b) (6 ), In co m e Tax Reg s.

2. App li cat io n o f th e Pro fitFact or s Res po nd en t re li es onap pl ic at io n o f th e n in e fac to rs setforth insec ti on 1.1 83 -2 (b ), In co m e Tax Reg s., t o s ho w th atth e fac ts an d c irc um st an ces of t hi s cas e supp ort the co nc lu si on th at , in20 09 , pet it io ne r di d n otcarry on th e equi ne act iv ity forpro fit . Res po nd en t h as no t ca rri edhi s b ur de n wi thres pe ctto so m e o f th e fac to rs , bu t, o n b al an ce, we b el ie ve th athe ha s ca rri edhi s b ur de n o f pr ov in g by a prep on de ran ce o f th e ev id en ce tha t, dur in g 2 00 9, p et it io ne r di d n otcarry on th e equi ne act iv it y

forpro fit . The u su al m eas ur e o f pe rs ua si on requi redto pro ve a factinth e Tax Co urt i s " pr ep on de ran ce o f th e ev id en ce" , Merk el v. Co m m is si on er, 1 09 T.C. 46 3, 4 76 (19 97 ), aff'd , 19 2 F .3d84 4 (9 th Cir . 19 99 ), "wh ic h m ean s tha t the pro po ne ntm us t p ro ve th atth e fac t i s m or e p ro babl e th an no t" , id
. a. Man ne r in Whi chth e Tax pa y er Carri es On the Acti vi ty The factth atth e ta xp ay er carri es on th e act iv it y ina bu si ne ss li ke m an ne r m ay in di cat e th e ta xp ay er i s p ro fitm ot iv at ed . Sec. 1 .18 3- 2( b) (1 ), In co m e Tax Reg s. To m ak e th is de te rm in at io n, we ca n l oo k t o wh ethe r th e ta xp ay er m ai nt ai ns co m pl et e an d a ccu rat e b oo ks an d re co rd s, wh ethe r th e act iv it y is carr ie d o n i n a- 17 -

[* 17 ] m anne r si m il ar t o o th er ac ti vi ti es of t he same natur e th atare p ro fit ab le , and whe th er the tax pa y er h as ch an ge d o pe rat in g m etho ds to im pr ov e p ro fit ab il it y . Id. Res po nd en t's arg um en t tha t p et it io ne r di d n otcarry on th e equi ne act iv it y

in a b us in es sl ik e m an ne r pr es en ts a qu es ti on of f act . W e h av e m ad e fi nd in gs of f act with re sp ectto th e equi ne act iv it y co ns is te ntwith t he fin di ng s tha t re sp on de ntha s pr op os ed . Res po nd en t h as no t, h owe ve r, pr op os edfin di ng s as to pe ti ti on er's
reco rdke ep in g p ro cedur es , th e la ckof s im il ari ty betweenhe r equi ne act iv it y an d a pr of it ab le equi ne act iv it y , her fai lure t o c hang e h er o pe rat in g m etho ds to im pr ov e pr of it ab il it y , or o th er fa ct or s d ire ct ly evi de nc in g alac k o f a b us in es sl ik e m an ne r. On b rie f, res po nd en t ar gu es : "Th ere i s n ot hi ng inth e rec or d t o s ho w th at pe ti ti on er m ai nt ai ne d h er h or se act iv it y ina bu si ne ss li ke m an ne r." Th atis tru e, bu t g iv enres po nd en t's bu rd enof p ro of --t o p ro ve by a prep on de ran ce o f th e ev id en ce tha t p et it io ne r di d n otcarry on th e equi ne act iv ity

ina bu si ne ss li ke
m an ne r--i t i s i ns uf

fic ie nt . Res po nd en t h as fai le d t o p ro ve pe ti ti on er's lac k o f a bu si ne ss li ke m an ne r. Pet it io ne r, on th e o th er h an d, h as no t p ro ve d t ha t s he carr ie d
on th e equi ne act iv it y

inbu si ne ss li ke m an ne r. The fa ct oris ne utral
.- 18 -

[* 18 ] b. Exp ert is e o f th e Tax pa y er o r Her Advi se rs Prep arat io n fo r anact iv it y by ext en si ve study

or c on su lt at io ns with e xp ert s m ay in di cat e a p ro fitm ot iv e whe n t he tax pay er ca rri es onth e act iv it y as a dv is ed
. Sec. 1 .18 3- 2( b) (2 ), In co m e Tax Reg s. Res po nd en t ar gu es : "P et it io ne r pr ov id edon ly very ge ne ral in fo rm at io n reg ard in g h er b ack gr ou nd . * * * Th eref or e, th is fact or

fav or s re sp on de ntor i s ne ut ral ." Res po nd en t h as pro po se d n o fa ct s fr om whi chwe m ig htco nc lu de pe ti ti on er l ack edpre pa rat io n. An d wh il e p et it io ne r is pl ai nl y ve ry kn owl ed ge ab le ab ou t dres sa ge , sh e h as no t p ers ua de d u s o f he r pr ep arat io n fo r th e b us in es s as pe ct s o f th e equi ne act iv it y . The fac to r is ne ut ral
.

c. Tim e an d Eff

ort Ex pe nd edby the Taxp ay er i n C arrying On the Acti vi ty The ti m e an d e ffo rt e xp en de d b y th e ta xp ay er i n c arrying on th e act iv it y m ay in di cat e whe th er the tax pay er h ada pr of itm ot iv e wit h re sp ectto th e act iv it y , pa rti cu la rly if th ere a re n o s ub st an ti al pe rs on al or r ecre at io na l el em en ts ass oc ia te d with i t. Sec . 1.1 83 -2 (b )(3 ), In co m e Tax Reg s. Res po nd en t s ta te s tha t p et it io ne r rep orte d s ub st an ti al 20 09 rece ip ts fro m th e IT act iv it y , heron ly hor se di edinJan ua ry 20 08 , andsh e o wne d n o h or se in20 09
. Fro m th os e fac ts , res po nd en t co nc lu de s: "[I]t i s u nl ik el y th atpe ti ti on er s pe nta- 19 -

[* 19 ] si gn ifi can t am ou ntof t im e o n h er h or se bre ed in g a ndsh owi ng act iv it y du rin g 2 00 9. * * * Ther efo re, thi s fa ct orfav or s re sp on de nt ." Fro m th e fac ts th at we ha ve fou nd , we can no t co nc lu de th at , in20 09 , pet it io ne r sp en t an in si gn ifi can t am ou ntof t im e en ga ge d i n t he equi ne act iv ity . Nor fro m pe ti ti on er's tes ti m on y an d t he ev id en ce ca n we c on cl ud e th atsh e sp en t a s ig ni fic an t am ou ntof t im e in th e act iv it y . The fac to r is ne ut ral
.

d. Exp ect at io n Th atAss et s Us edinActi vi ty May App reci at e An ex pe ct at io n t ha t as se ts us edinth e act iv it y wil l ap pr eci at e in va lu e m ay in di cat e a p ro fitob

jecti ve . See s ec. 1 .18 3- 2( b) (4 ), In co m e Tax Reg s. A pr of it
m ot iv e m ay

be in ferr edwher e th ere a re n o o pe rat in g p ro fit s s o l on g a s the ap pr eci at io n i n v al ue of t he act iv it y 's a ss et s ex ceed s the op erat in g e xp en se s. See id . The ap pr eci at io n i n v al ue m us t b e su ffi ci en t, h owe ve r, to reco up th e accu m ul at edlo ss es of p rio r y ears . See Go la nt y v. Co m m is si on er, 7 2 T.C. at42 7- 42 8; Hil lm anv. Co m

m is si on er, T.C. Mem o. 1 99 9- 25 5, 1 99 9 WL 55 85 68 , at * 8. Res po nd en t ar gu es th at , in20 09 , pet it io ne r ha d n o a ss et s re la te d t o t he equi ne act iv it y , and , forth atreas on , th is fact orfav or s h im
. Pet it io ne r di d m ai nt ai n h er t ackin20 09 , whi chwou ldbe ne ces sa ry were sh e to ob ta in a ho rs e. W e d o n otbe li ev e th atsh e ex pe ct edth e ta ckto ap pr eci at e- 20 -

[* 20 ] subs ta nt ia ll y

inva lu e. Sh e o wne d n o h or se in20 09 . There fo re, the re was no ass etin20 09 th atm ig htsi gn ifi can tl y ap pr eci at e an d a ll ow p et it io ne r to reco ve r th e to ta l o f ap pr ox im at el y $1 55 ,00 0 o f lo ss es th at , fro m 20 04 th ro ug h 2 00 9, s he rep orte d o n h er Fo rm s 1 04 0. Th e ab se nc e o f anap pr eci at io n e xp ect at io n fa vo rs res po nd en t i n t he sen se th atiteli min at es a fact orth atm ig htoff se t a c on cl us io n o f a la ckof apro fitm ot iv e to be dra wn fr om th e d em on st rat edstrin g o f lo ss es th at pe ti ti on er i nc urredinth e equi ne act iv ity .

e. Su cces s o f th e Tax pa y er i n C arrying On Othe r Si m il ar o r Dis si m il ar Act iv it ie s The su cces s o f a t ax pa y er i n s im il ar o r di ss im il ar ac ti vi ti es is rel ev an t i n de te rm in in g p ro fitm ot iv e. Sec. 1 .18 3- 2( b) (5 ), In co m e Tax Reg s. Res po nd en t ar gu es th at , bec au se pe ti ti on er h as no t re po rte d apro fitfro m th e equi ne act iv it y

si nc e atlea st20 04 , th is fact orfav or s h im
. Pet it io ne r rep orte d n o p ro fit s o n t he equi ne act iv it y Sch edul es C in cl ud ed with h er 2 00 4- 09 Fo rm s 1 04 0. Sh e cal le d a s a wi tn es s h er fo rm er ac co un tant , who ha d n otpre pa redhe r return fo r 10 or 1 2 years. Whenhe pre pa redhe r returns , th ere wer e so m e y ears when th e equi ne act iv it y m ad e a p ro fitan d s om e whe n i t di d n ot .- 21 -

[* 21 ] W ere we t o c on si de r pe ti ti on er's earl ie r y ear e qu in e act iv it ie s s im il ar t o h er 20 09 act iv it y , we wou ldno t fi ndth atsh e en joy edsu cces s tha t ev id en ces a pr of it
m ot iv e in 20 09 . Her acco un ta nt 's t es ti m on y th atinso m e ear li er y ears sh e m ad e a pr of itan d i n s om e sh e d idno t i s n otin di cat iv e th atth e act iv it y was p ro fit ab le
ex cep t, p erh ap s, s po rad ic al ly. Her rec en t h is to ry is ev id en ce o f fai lu re an d n otof
su cces s. We do no t co ns id er p et it io ne r's su cces s i n turni ng a pr of itinth e IT act iv ity rel ev an t. We see l it tl e si m il ari ty betweenth atact iv it y an d t he equi ne act iv ity ; an d h er s uc ces s i n t he IT act iv it y do es no t co nv in ce u s tha t s he is ge ne ral ly suc ces sf

ul intu rn in g a ro un d b us in es s ac ti vi ti es . This fact orfav or s res po nd en t i n t he sen se th atiteli min at es a cl ai m th atpe ti ti on er's 20 09 lo ss fro m th e equi ne act iv it y

m ig htbe an om al ou s g iv enhe r su cces se s i n re la te d a ct iv it ie s. f. Tax pa y er's His to ry of I nc om e o r Los se s With Res pe ctto th e Act iv it y A reco rdof s ub st an ti al lo ss es ov er s ev eral y ears aft er the st artup pe rio d o f
anact iv it y , if n otexpl ai nabl e as du e to cu st om ary bu si ne ss ris ks or r ev ers es , m ay in di cat e th e ab se nc e o f a p ro fitm ot iv e. Sec. 1 .18 3- 2( b) (6 ), In co m e Tax Reg s. Pet it io ne r cl ai m s tha t s he ha s b eeninth e dres sa ge bu si ne ss si nc e th e m id
19 70 s. Fro m

20 04 th ro ug h 2 00 9, p et it io ne r in cu rredsubs ta nt ia l l os se s i n t he equi ne act iv it y , as re po rte d o n h er Fo rm s 1 04 0 (ane t l os s fo r th e si x years o f- 22 -

[* 22 ] $1 54 ,65 6) . By

20 04 , th e equi ne act iv ity was fa r pa stit s s ta rtup p eri od
. Fro m 20 04 th ro ug h 2 00 8, p et it io ne r own edon ly one ho rs e, Gol drus h, wh ic h s he ha d u ns uc ces sf

ul ly trie d t o b reedsi nc e 1 99 9. Al so si nc e 1 99 9, s he own edno ot he r ho rs e, no r di d s he co m pe te inan y

ho rs e sh ow. Her equi ne act iv it y rece ip ts du rin g t he pe rio d 2 00 4 t hr ou gh 20 09 , $5 88 , were l es s tha n 0 .5% o f he r equi ne act iv ity ex pe ns es du rin g t ha t p eri od , $1 55 ,24 4. Th e m ag ni tu de of h er ex pe ns es in th e equi ne act iv it y

fro m 20 04 th ro ug h 2 00 9 i n c om pa ris on with i ts alm os t no ne xi st en t p ro fit s i nd ic at es th at , du rin g 2 00 9, p et it io ne r di d n otha ve a pr of it
m ot iv e. See M cKeev er v . Comm is si on er, T.C. Mem o. 2 00 0- 28 8, 2 00 0 WL 12 97 71 0, at*1 6. g. Am ou ntof Oc cas io na l Pr of it s, If Any, Whi chAre Earn ed The am ou ntof p ro fit s i n re la ti onto th e am ou ntof l os se s i nc urred , andin rel at io n t o t he am ou ntof the tax pa y er's in ve st m en t an d t he va lu e o f th e as se ts us ed in th e act iv it y , m ay

pro ve us efu l cr it eri a in de te rm in in g t he tax pay er's in te nt . Sec. 1.1 83 -2 (b )(7 ), In co m e Tax Reg s. Anoc cas io na l s m al l p ro fitfro m anact iv it y ge ne rat in g l arg e lo ss es , or fr om anact iv ity

inwhi chth e ta xp ay er m ad e a l arg e in ve st m en t, wo ul d n otge ne ral ly be d et erm in at iv e th atth e act iv it y is en ga ge d i n fo r pr of it . Id.- 23 -

[* 23 ] Pet it io ne r's Fo rm s 1 04 0 s ho w no pro fitfor20 04 th ro ug h 2 00 9. Mo reo ve r, as st at edsupr a, fro m

19 99 th ro ug h 2 00 9, s he own edno ho rs e o th er than Go ldru sh
an d was un su cces sf

ul inbre ed in g h im . W e h av e n o i nf orm at io n abo uthe r in ve st m en t i n the equi ne act iv it y , bu t h er 2 00 9 e qu in e act iv it y Sch edul e C s ho ws no de du ct io n fo r de pr eci at io n, wh ic h i nd ic at es no de pr eci ab le pro pe rty the co stof whi chha s n otalr eady

be enreco ve red . There are n o t ax es sh own , whi chin di cat es no pro pe rty tax an d n o l an d o wne d i n t he act iv it y . Andwhi le he r acc ou nt an t te st ifi edth athe r equi ne act iv it y ha d o ccas io na l p ro fit s years a go , th e ev id en ce we ha ve sh ows a bu si ne ss fai li ng forat l eas t s ix y ears , and , pro babl y , lo ng er (b ecau se of no pl au si bl e so ur ce o f in co m e si nc e atlea st19 99 ). Andalt ho ug h the op po rtu ni ty to ea rna subs ta nt ia l u lt im at e p ro fitina hi gh ly spe cu la ti ve ve ntur e is
or di na ril y su ffi ci en t t o i nd ic at e th atth e act iv it y is en ga ge d i n fo r pr of

itev en th ou gh lo ss es or o nl y

oc cas io na l s m al l p ro fit s ar e actua ll y ge ne rat ed , sec . 1.1 83
- 2( b) (7 ), In co m e Tax Reg s., p et it io ne r's fai lu re s in ce atlea st19 99 to pu rch as e a ho rs e o r to pro fitfro m

th e o ne sh e d idownlea ds us to be li ev e th athe r pl anto pu rch as e a h or se an d t he n t rai n, s ho w, andsel l i t ata pr of itof hun dr ed s o f th ou sa nd s, i f no t m il li on s, o f do ll ars was u nr eal is ti c fo r he r, se e Ake y v. Co m m is si on er, T.C. Mem o. 2 01 4- 21 1, at*1 6 (f in di ng th e ta xp ay er's ex am pl e o f a ba se ba ll cardsel li ng forov er $ 1 m il li on as e vi de nc e th athi s cardco ll ect io n- 24 -

[* 24 ] wou ldap pr eci at e in va lu e as va gu e an d s pe cu la ti ve wher e th e ta xp ay er d id
no t o wn the cardth atso ldforth e h ig h p ric e). All inall , th is fact orin di cat es th at pe ti ti on er d idno t en ga ge inth e equi ne act iv it y to m ak e a p ro fit . As we sa idin Bro ns on v. Co m

m is si on er, T.C. Mem o. 2 01 2- 17 , 20 12 W L 12 98 03 , at * 9, af f'd , 59 1 F ed . App x. 6 25 (9t h C ir. 2 01 5) : "Whi le a se rie s o f lo ss es du rin g t he in it ia l o r st artup st ag e o f anact iv it y m ay no t n eces sa ril y

in di cat e a l ackof p ro fitob jecti ve , a reco rdof l arg e lo ss es ov er m any y ears an d t he un li ke li ho odof a ch ie vi ng pr of it ab il it y are p ers ua si ve ev id en ce tha t a t ax pay er d idno t h av e su chan ob jecti ve ." h. Fi na nc ia l St atus of the Taxp ay er Subs ta nt ia l i nc om e fro m

so ur ces ot he r th anth e act iv it y , parti cu la rly if th e lo ss es fro m

th e act iv it y

ge ne rat e subs ta nt ia l t ax be ne fit s, m ay in di cat e th atth e act iv ity is no t en ga ge d i n fo r pr of it . Sul li va n v . Commis si on er, T.C. Mem o. 19 98 -3 67 , 19 98 WL 71 24 32 , at * 13 , aff'd , 20 2 F ed . App x. 2 64 (5t h C ir. 1 99 9) ; se c. 1.1 83 -2 (b )(8 ), In co m e Tax Reg s. Dur in g 2 00 9, p et it io ne r rep orte d IT ac ti vi ty gro ss rece ip ts of $ 65 ,00 0 a nd
ne t i nc om e o f $1 4,8 09 . Her ne t i nc om e fro m th e IT act iv it y

wou ldha ve be en subs ta nt ia ll y

hi gh er b utforhe r de du ct io n o f ap pr ox im at el y $2 6,0 00 of l eg al
ex pe ns es , whi chwe as su m e was no t a p erm an en t, re cu rri ng ex pe ns e. Sh e- 25 -

[* 25 ] sh el te redap pr ox im at el y $7 ,50 0 o f he r IT act iv it y rece ip ts with t he lo ss sh e cl ai m edfro m

th e equi ne act iv it y . Peti ti on er's reg ul ar an d c om fo rtabl e in co m e fro m ot he r so ur ces , when co m bi ne d wi th he r affi ni ty for dres sa ge , in di cat es th at th e equi ne act iv it y

was n oten ga ge d i n fo r pr of it
. i. Elem en ts of P ers on al Ple as ur e As s ta te d, p et it io ne r de m on st rat edanaffi ni ty for dres sa ge . Her own ers hi p of Gol drus h a ll owe d h er t o re m ai n i nv ol ve d, ev enth ou gh , si nc e 1 99 9, s he no lo ng er co m

pe te d. Th athe lp s ex pl ai n h er i nc urrin g s ub st an ti al ex pe ns es inwhat
was , in20 09 an d fo r fi ve y ears be fo re, a fi nanc ia ll y lo si ng ve ntur e. 3. W ei gh in g t he Fact or s On the ba si s o f pe ti ti on er's hi st ory of s ub st an ti al lo ss es fro m 20 04 th ro ug h 20 09 , we fin d t ha t dur in g 2 00 9 s he di d n otcarry on th e equi ne act iv it y

to m ak e a pr of it . W e wil l, thu s, wi th ou t fu rth er d is cu ss io n s us ta in res po nd en t's di sa ll owa nc e of de du ct io ns forall of t he ex pe ns es th atpe ti ti on er cl ai m edonth e equi ne Sch edul e C o th er tha n t he $5 ,69 0 i nt eres t ex pe ns e (i nt eres t ex pe ns e).

4. In te res t Ex pe ns e The in te res t ex pe ns e rel at es to in de bt edne ss pe ti ti on er i nc urredin20 07 to tra ns po rt Go ldru sh to Aus tra li a. Res po nd en t h as fai le d t o s ho w th atth e in te res t- 26 -

[* 26 ] ex pe ns e is no t d educ ti bl e irres pe ct iv e o f whe th er, i n 2 00 9, the equi ne act iv ity was e ng ag edinforpro fit
. Sect io n 1 63 (a) a ll ows as ade du ct io n " al l i nt eres t p ai d o r acc ru edwithi n t he ta xabl e y ear o n i nd eb te dn es s." Sect io n 1 63 (h ) di sa ll ows anin te res t d educ ti on for pe rs on al in te res t. In te res t p ai d o r acc ru edon in de bt edne ss pro pe rly all oc ab le to a tra de or b us in es s i s, g en eral ly, no t p ers on al in te res t. See sec . 16 3( h) (2 )(A). Fu rth er, i n g en eral , in te res t ex pe ns e o n ade btis all oc at edinth e sa m e m an ne r as th e d eb t t o wh ic h t he in te res t ex pe ns e rel at es is all oc at ed . Sec. 1 .16 3- 8T(a )(3 ), Tem po rary Inco m e Tax Reg s., 5 2 F ed . Reg . 24 99 9 (J ul y 2, 1 98 7) . Debtis al lo cat edby traci ng di sb ur se m en ts of t he de btpro ceed s t o s pe ci fic ex pe nd itur es . Id
. The de bt -fi na nc edex pe nd itur e was forth e tr an sp ort o f Gol drus h t o Aus tra li a in20 07 . Res po nd en t h as fai le d t o p ro ve th atth e equi ne act iv it y was n ot a tr ad e o r bu si ne ss in20 07 or t ha t, ev enif i t was , itwas n otanact iv it y en ga ge d i n fo r pr of itin20 07 . He has , th eref or e, fai le d t o p ro ve th atth e d eb t-f in an ced
ex pe nd itur e to tra ns po rt Go ldru sh to Aus tra li a in 20 07 was n ota tr ad e o r bu si ne ss ex pe nd itur e in anact iv it y en ga ge d i n fo r pr of

it . His p rin ci pa l b as is for di sa ll owi ng pe ti ti on er a 2 00 9 d educ ti on forth e in te res t ex pe ns e is th atth e equi ne act iv ity was n otinth aty ear a n a ct iv it y en ga ge d i n fo r pr of

it , bu t, g iv enth e tr aci ng- 27 -

[* 27 ] rul es ap pl ic ab le to de te rm in in g t he de du ct ib il it y of i nt eres t, we co nc lu de th at , to di sa ll ow the 20 09 de du ct io n, re sp on de ntwou ldha ve to sh ow tha t the equi ne act iv it y

was n oten ga ge d i n fo r pr of itin20 07 , whi chhe ha s n otdo ne . Nor ha s h e arg ue d t ha t i t i s the ch arac te r of th e equi ne act iv it y

in20 09 th atco un ts . It i s tru e th atth e p art ie s h av e st ip ul at ed , andwe rece iv edinev id en ce, a co py of o urrep ort i n M cMi ll anv. Co m m is si on er, T.C. Mem o. 2 01 3- 40 (pr io r rep ort). Re sp on de ntha s n ot , ho wev er, rai se d t he affi rm at iv e d efen se of c ol la te ral
es to pp el , arg ui ng th atou r co nc lu si on inth e p rio r rep ort tha t p et it io ne r was no t i n 20 07 en ga ge d i n t he equi ne act iv it y forpro fitis bi nd in g h ere. In de ed , eve n i f
res po nd en t h adrai se d t he de fen se , itis no t cl ear t ha t o urpri orco nc lu si on wou ld be bi nd in g h ere. Se e 2 Res ta te m en t, J ud gm en ts 2d , sec . 28 (19 82 ) (l is ti ng as a n ex cep ti on to co ll at eral est op pe l s itua ti on s wh ere t he bu rd enha s s hi fte d b etween th e p art ie s i n t he form er an d c urren t ac ti on s)
. The is su e th enis whatweig ht , if an y , we gi ve to ou r fi nd in gs inth e p rio r rep ort. We hav e sa idinth e p as t tha t, wh ena pr io r op in io n o f th e Co urt i nv ol vi ng th e sa m e p art ie s i s i n e vi de nc e, ou r fi nd in gs of f actare en ti tl edto a pr es um pt io n o f
co rrec tn es s, wh ic h p ut s the bu rd enof g oi ng forwardon th e p arty who wou ld ch al le ng e th em . E.g., Goo de ll -Pra ttCo . v. Co m m is si on er, 6 B.T.A. 12 35 , 12 37
- 12 38 (19 27 ); s ee al so Funkv. Co m m is si on er, 1 63 F.2d79 6, 8 02 (3dCir . 19 47 ),- 28 -

[* 28 ] rev 'g 7 T.C. 89 0 (1 94 6) ; 2 Laur en ce F. Ca se y , Fed eral Tax Pr act ic e, se c. 8: 53 , at 8 -1 71 (up da te d M ay 20 11 , curren t as of M ay

20 15 ). In t hi s ca se , ho wev er, p et it io ne r attri al so ug htto cal l wi tn es se s ap pa ren tl y to reb utfin di ng s th atwe m ad e inour pr io r rep ort. Onres po nd en t's ag reem en t tha t h e was no t rel y in g o n tho se fin di ng s, we p recl ud edpe ti ti on er fro m cal li ng th os e reb ut ta l witne ss es . Res po nd en t, thu s, wai ve d a ny reli an ce h e m ig htpl ace o n o urpri or rep ort, an d i t wo ul d b e unf ai r to co ns id er the fact s fo un d t he re as ev id en ce n ow. Andso we do no t co ns id er the m . Fo r th e fo reg oi ng reas on s, we wi ll all ow the in te res t ex pe ns e d educ ti on . III. Accu racy-Rel at edPen al ty By th e an swe r, res po nd en t av ers th at , tak in g i nt o a cco un t the in crea se d de fic ie nc y

th athe ass ert edby w ay

of t he an swe r, pe ti ti on er u nd ers ta te d h er 2 00 9 in co m e ta x b y

$7 ,23 3, wh ic h, h e co nt in ue s, ex ceed s b oth $ 5,0 00 an d 1 0% o f th e ta x, $ 7,8 11 , sh e was requi redto sh ow o n h er 2 00 9 re tu rn . "The refo re," r es po nd en t co nc lu de s, " pe ti ti on er i s l iabl e fo r th e acc ur acy-rela te d p en al ty pur su an t t o I.R .C.
se c. 66 62 (a) and(b) (1 ) fo r ta x year 20 09 ". Sect io n 6 66 2( a) an d (b )(1 ) pr ov id es foranaccu racy-rela te d p en al ty of 20 % of th e p orti on of a n u nd erp aym en t o f ta x a tt rib ut ab le to ne gl ig en ce o r di sr eg ardof
ru le s an d re gu la ti on s (wi th ou t d is ti nc ti on , neg li ge nc e). Sec ti on66 62 (a) and(b) (2 )- 29 -

[* 29 ] pro vi de s fo r th e sa m e p en al ty on t he po rti on of a n u nd erp aym en t o f ta x at tri bu tabl e to an y

subs ta nt ia l u nd ers ta te m en t o f in co m e ta x. In th e cas e o f an in di vi du al , th ere i s a s ub st an ti al un de rs ta te m en t o f in co m e ta x fo r a y ear i f th e am ou ntof t he un de rs ta te m en t ex ceed s the gre at er o f (1 ) 10 % of t he tax requi redto be sh ownon th e return fo r th e ta x year or(2) $5 ,00 0. Se c. 66 62 (d )(1 )(A). Sec ti on 66 64 (c)( 1) pro vi de s a r eas on ab le cau se ex cep ti on to im po si ti on of t he sec ti on 66 62 (a) a ccu racy-rela te d p en al ty if itis sh own th atth ere was reas on ab le cau se for th e und erp aym en t an d t he tax pa y er ac te d i n g oo d fa ith. Be cau se th e acc ur acyrel at edpe na lty

is a ne w m at te r, res po nd en t m us t p ro ve bo th th e g ro un ds forth e pe na lty an d t he ab se nc e o f rea so nabl e cau se or l ackof g oo d fa ith. Se e Ru le 14 2( a); San de rli ng , Inc . v. Co m m is si on er, 6 6 T.C. 7 43 , 75 7 (1 97 6) , aff'dinpa rt, rev 'd i n p arton an ot he r m at te r, 57 1 F .2d17 4 (3 d C ir. 1 97 8)
. Inth e an swe r, res po nd en t av ers fact s s up po rti ng th e acc ur acy-rela te d pe na lty onth e b as is of acla im edsubs ta nt ia l u nd ers ta te m en t o f in co m e ta x, s ee se c. 66 62 (b )(2 ), bu t cl ai m s o nl y th atpe ti ti on er i s l iabl e fo r th e p en al ty on t he ba si s of ne gl ig en ce, u nd er s ect io n 6 66 2( a) an d (b )(1 ). A pu zzl em en t! Onbri ef,
res po nd en t ac kn owl ed ge s tha t re as on ab le cau se an d g oo d fa it h a re a d efen se to th e accu racy-rela te d p en al ty butarg ue s tha t, o nc e h e h as pro du cedev id en ce tha t the pe na lty is ap pr op ria te , see sec . 74 91 (c), " th e b ur de n o f pr oo f at ta ch es to pe ti ti on er,- 30 -

[* 30 ] in cl ud in g the burd enof p ro vi ng th atth e p en al ti es are i napp ro pr iate be cau se of reas on ab le cau se ". He ad ds : "P et it io ne r ha s n otsh own th athe r un de rs ta te m en t fo r ta x year 20 09 was due to reas on ab le cau se ". Res po nd en t h as th e b ur de n o f sh owi ng th e ab se nc e o f rea so nabl e cau se or a la ckof g oo d fa it h. Be cau se he ha s fa il edto do so , we wil l n otsu st ai n t he
accu racy-rela te d p en al ty. IV. Co nc lu si on To re fle ctth e fo reg oi ng , Deci si on wil l b e en te redun de r Ru le 15 5.