T.C. Memo. 1998-397

UNITED STATES TAX COURT

SIDNEY DISHAL AND ANNA DISHAL, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 687-97. Filed November 10, 1998.

Dan L. Shehi, for petitioners. 

Jeremy L. McPherson, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

PARR, Judge: Respondent determined deficiencies in petitioners'

Federal income taxes and penalties as follows:

Accuracy-Related Penalties

Year Deficiency Sec. 6662 (a)

1992 $34,257 $6,851

1993 53,429 10,686

1994 53,432 10,686

All section references are to the Internal Revenue Code in

effect for the taxable years in issue, and all Rule references
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1 Respondent conceded that petitioners were not liable for

the accuracy-related penalty pursuant to sec. 6662 (a) for each

of the years in issue.

are to the Tax Court Rules of Practice and Procedure, unless

otherwise indicated. References to petitioner are to Sidney Dishal.

After a concession,1the issue for decision is: Whether

petitioners engaged in their horse breeding and horse racing

activities during the years in issue with the objective of making a

profit within the meaning of section 183. We hold they did. 

FINDINGS OF FACT

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

stipulated facts and the accompanying exhibits are incorporated

herein by this reference. At the time the petition in this case was

filed, petitioners resided in Piedmont, California.

In 1945, petitioner went to work as a fabric salesman in

southern California and was extraordinarily successful in that

pursuit. In 1958, petitioner left his sales job and started a cotton

processing business which manufactured cotton padding used in

furniture and bedding. By his business and management skills,

petitioner made the business unusually profitable. Petitioner

partially retired from that business in 1990 and fully retired from

it by 1992.

Petitioners were engaged in thoroughbred horse breeding and

racing activities during the taxable years 1992, 1993, and 1994.

Petitioners began their horse activities in 1976 with one horse.
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In each of the years 1988 through 1996, petitioners owned

between 20 and 30 horses. Nearly all of the horses which petitioners

owned between 1976 and 1996 were bred by petitioners. Petitioners

purchased two females and half interests in two stallions during

that 20-year period.

Petitioners have not raised stallions for stud purposes.

Instead, they send their brood mares to stud ranches. When their

brood mares produce male foals, petitioners may have the foals

gelded. Petitioners believe that gelding a horse may improve the

horse's racing performance and earnings. Brood mares may appreciate

in value when their offspring are successful in horse races.

On a regular basis, petitioner personally visits the

facilities where his horses are boarded and trained in order to

inspect the condition of the horses and to consult with the

caretakers and trainers. Including the time spent driving between

his home and the horse facilities, petitioner normally spends at

least 4 hours a day, 6 days a week, inspecting his horses and

conversing with their handlers. Petitioners usually attend races in

which their horses are participating. Petitioners send some of

their horses to Arizona to race. These horses are more capable of

racing successfully in Arizona than in California where the

competition is greater.

 The only physical assets used by petitioners in their horse

breeding and horse racing activities are their horses. Petitioners
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did not use any real estate owned by them in their horse breeding

or horse racing activities in any of the tax years 1976 through

1996. Except for horses which are racing, in training to race, or

boarded at a stud ranch, all of petitioners' horses are boarded at

Rancho del Charro, a commercial horseboarding facility located

approximately 30 miles southeast of petitioners' residence. Elvin

Adams (Adams) is the ranch manager of Rancho del Charro.

 The horses which are racing are trained and boarded at the

racetrack. There are two major racetracks near petitioners' home.

One of the tracks is approximately 10 miles northwest of

petitioners' residence, and the other is about 35 miles southwest

of petitioners' residence. The racetracks do not operate at the

same time of year. Jeff Bonde (Bonde) trains petitioners' horses at

the racetracks.

 Several of petitioners' horses have won more than $100,000

over their racing careers. Petitioners have also been "breeding up"

their horses for higher stakes races by upgrading their brood mares

and the stallions with which they are bred. Petitioners currently

have two horses entered in Breeder's Cup races which have purses

over $1 million.

 Several horses have had their racing careers, and; in some

instances their lives, ended by unforeseen and unfortunate

circumstances which were beyond petitioners' control. Petitioners'

horses, Super High Pockets1, Miss Super Natural, Glorious and Bold,
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Nipsey's Sundance, and Rusty's Lady all died in accidents at the

racetrack. The horse Miss Nipsey Ann died after producing a foal.

The horses Ann's Veil and Lexi's Dream developed tendon problems

which ended their racing careers. Ann's Bold Lady fractured her

knee and Super Clan developed a flesh-eating disease. The horses

Pauli's Dream Girl and Moonlight Glory also had their racing

careers diminished by injuries not specified in the record.

 Petitioners did not have a written business plan for their

horse breeding or horse racing activities at any time between 1976

and 1996. It has been petitioners' policy, however, to race the

horses that are healthy, retire the females for breeding when they

can no longer compete successfully on the racetrack, and race the

males until they are claimed, sold, or given away. Petitioners have

donated horses to the University of California and to the Sonoma

County Horse Association.

 Petitioners did not personally prepare written records of the

income they received from individual race horses or from individual

brood mares for the years 1989 through 1996. This was not

necessary, because the trainers of the race horses maintained

records of the horses' earnings. Professional organizations

maintained records of breeders and owners awards. Statistics for a

particular race horse, including lifetime earnings, the total

number of races entered and the number of wins, places, and shows

are available from professional horse organizations, newspapers,

and racing forms.
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 Petitioners maintained complete records of their expenses

from their horse breeding and horse racing activities during the

years 1988 through 1996. Petitioners personally keep the books

and pay the bills in their horse breeding and horse racing

activities.

 Neither petitioner nor Anna Dishal (Mrs. Dishal) has ever

been engaged in any farming, breeding, or racing business other

than the horse activities in which they have been engaged between

1976 and 1996. Neither petitioner nor Mrs. Dishal rides horses at

all.

 Between 1989 and 1996, petitioners had income from purses

from horse races, sales of horses to third parties, from

breeders' awards, and from owners' awards. 

OPINION

 The Commissioner's determinations are presumed correct, and

the taxpayer bears the burden of proving otherwise. Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933).

 Section 183 (a) generally limits the amount of expenses that a

taxpayer may deduct with respect to an activity "not engaged in for

profit" to the deductions provided in section 183(b). Section 183

(b) (1) provides that deductions which would be allowable without

regard to whether such activity is engaged in for profit are to be

allowed. Section 183(b)(2) further provides that deductions which

would be allowable only if such activity were engaged in for profit 

are to be allowed, but only to the extent that, the gross income
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derived from such activity for the taxable year exceeds the

deductions allowable under section 183(b)(1). An activity is "not

engaged in for profit" if it is an activity other than one with

respect to which deductions are allowable for the taxable year

under section 162 or section 212 (1) or (2) . Sec. 183 (c) .

 In determining whether an activity is engaged in for profit,

the Court of Appeals for the Ninth Circuit, to which this case is

appealable, has stated that the taxpayer must show that he or she

engaged in the activity with the primary purpose of making a

profit. Wolf v. Commissioner, 4 F.3d 709, 713 (9th Cir. 1993).

Petitioners bear the burden of proving the requisite intent. E.g.,

Golanty v. Commissioner, 72 T.C. 411, 426 (1979), affd. without

published opinion 647 F.2d 170 (9th Cir. 1981); Johnson v.

Commissioner, 59 T.C. 791, 813 (1973), affd. 495 F.2d 1079 (6th

Cir. 1974). Whether a taxpayer is engaged in an activity with the

requisite profit objective is determined from all the facts and

circumstances. E.g., Hulter v. Commissioner, 91 T.C. 371, 393

(1988); Taube v. Commissioner, 88 T.C. 464, 480 (1987); Golanty v.

Commissioner, su ra at 426; sec. 1.1832(a) and (b), Income Tax

Regs. More weight is given to objective facts than to the

taxpayer's mere statement of his or her intent: E.g., Dreicer v.

Commissioner, 78 T.C. 642, 645 (1982), affd. without opinion 702

F.2d 1205 (D.C. Cir. 1983); sec. 1.183-2(a), Income Tax Regs.

 The regulations promulgated under section 183 list the

following nine factors that should normally be taken into account
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in determining whether an activity is engaged in for profit: (1)

The manner in which the taxpayer carried on the activity, (2) the

expertise of the taxpayer or his advisers, (3) the time and effort

expended by the taxpayer in carrying on the activity, (4) the

expectation that assets used in the activity may appreciate in

value, (5) the success of the taxpayer in carrying on other similar

or dissimilar activities, (6) the taxpayer's history of income or

loss with respect to the activity, (7) the amount of occasional

profits, if any, which are earned, (8) the financial status of the

taxpayer, and (9) the extent to which elements of personal pleasure

or recreation are involved. Sec. 1.183-2(b), Income Tax Regs. The

list of factors in the regulations is not exclusive, and other

factors may be considered in determining whether. an activity is

engaged in for profit. These factors are not merely a counting

device where the number of factors for or against the taxpayer is

determinative, but rather all facts and circumstances must be taken

into account, and more weight may be given to some factors than to

others. Cf. Dunn v. Commissioner, 70 T.C. 715 (1978), affd. on

another issue 615 F.2d 578 (2d Cir. 1980). Not all factors are

applicable in every case, and no one factor is controlling.

Abramson v. Commissioner, 86 T.C. 360, 371 (1986); Allen v.

Commissioner, 72 T.C. 28, 34 (1979); sec. 1.183-2(b), Income Tax

Regs.

 Respondent determined that during the years in issue

petitioners, were not engaged in horse breeding and horse racing

for profit within the meaning-of section 183. We disagree.
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 Petitioners were very serious about their horse activities

and operated them in a businesslike manner. Petitioners maintained

extensive records and kept complete accounts of their expenses from

their horse activities for the years in issue. Bonde, petitioners'

horse trainer, testified that petitioner checked every piece of

paperwork involved with his horses, including medical charts and

veterinarian bills. Bonde further testified that petitioner expects

a great deal from a trainer, including providing a leading rider to

ride his horses.

 In addition, petitioners had a business plan, which was to

earn money by breeding top horses to run in superior races. This

plan was evidenced by petitioner's actions and attempted changes to

improve profitability. Petitioner consulted with knowledgeable

individuals about horse breeding and began to "breed up" by

upgrading his brood mares and the stallions with which they were

bred. This plan has produced foals which have been performing

better at the racetrack. Based on the facts of this case, we find

that petitioners conducted their horse activities in a businesslike

manner, and this indicates a profit motive. Sec. 1.183-2(b)(1),

Income Tax Regs.

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

as well as his consultation with experts, may be indicative of a

profit motive. Sec. 1.183-2(b)(2), Income Tax Regs. Petitioners

consulted Bonde as the trainer of their racehorses. Bonde has been

training horses for 25 years, at the time of trial had approximately 30

clients, and trains between 20 and 50 horses at one time. Adams, the
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ranch manager of Rancho del Charro, where petitioners board their

horses, supervised approximately 200 racehorses, of which 23 belonged to

petitioners. Prior to coming to Rancho del Charro in 1992, Adams worked

for 20 years for another horse breeder. Petitioner spent a substantial

amount of time consulting and conversing with both Bonde and Adams

regarding his horse activities. Petitioner's consultation with experts

indicates a profit motive.

 Petitioner is retired from his cotton processing business and is

therefore able to devote a substantial amount of time to the horse

activities. Petitioner personally visits the facilities where his horses

are boarded and trained in order to inspect, the condition of the horses

and to consult with the caretakers and trainers. Including the time

spent driving between his home and the boarding facilities, petitioner

spends at least 4 hours a day, 6 days a week; inspecting his horses and

consulting with their trainers. Bonde, petitioners' horse. trainer,

testified "[Petitioner] is very active. He's there very regularly,

probably more than most of the clients I train for, actually. I don't

ever remember him missing a race, and he comes out and inspects his

horses at least five times a week." Adams, petitioners' ranch manager,

testified that petitioner spends much time with his horses and that

petitioner "examines all of his horses and feeds some of them, doctors

them, cleans water troughs, [and] picks up rocks." The substantial

amount of time and effort expended by petitioner in the horse

activities indicates a profit motive. Sec. 1.183-2(b)(3), Income

Tax Regs.

A record of substantial losses over several years may be

indicative of the absence of a profit motive. Sec. 1.1832(b)(6),
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Income Tax Regs. Respondent argues that petitioners' consistent

history of losses in the horse activities is persuasive evidence

that they did not expect to make a profit. The losses petitioners

sustained, however, were in part due to unforeseen and unfortunate

circumstances beyond their control which abruptly ended the racing

careers, and in some instances the lives, of several of their

horses. In addition, petitioners have abated their net losses from

the horse activities in recent years. Furthermore, petitioners are

capable of making up their losses from prior years since their

horses are now entered in high stakes races. We conclude that the

losses sustained are not an indication that the horse activities

were not engaged in for profit.

Occasional profits which are earned from an activity may

indicate a profit motive. Sec. 1.183-2(b)(7), Income Tax Regs. Several

of petitioners' horses have won more than $100,000 over their racing

careers. Furthermore, an opportunity to earn a substantial ultimate

profit in a speculative venture may be sufficient to indicate a profit

motive. Sec. 1.183-2(b)(7), Income Tax Regs. Petitioners have been

"breeding up" their

horses for higher stakes races. Petitioners currently have two horses

entered in Breeder's Cup races which have purses over $1 million. This

indicates a profit motive.

 The presence of elements of personal pleasure or recreation in

carrying on an activity may indicate that the activity is not engaged in

for profit. Sec. 1.183-2(b)(9), income Tax Regs. On the basis of all the
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facts and circumstances, we find that personal pleasure is not a motive

in petitioners' horse activities.

 After reviewing the entire record, we conclude that

petitioners engaged in their horse breeding and horse racing

activities with the primary purpose and dominant intent of making

profit within the meaning of section 183.

 To reflect the foregoing,

 Decision will be 

 entered for petitioners.