T.C. Memo. 1999-326

UNITED STATES TAX COURT

ROBERT BRYAN HUDNALL AND VICTORIA A. HUDNALL, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 8338-97. Filed September 29, 1999.

Robert Bryan Hudnall and Victoria A. Hudnall, pro sese.

Helen F. Rogers, for respondent.

MEMORANDUM OPINION

DEAN, Special Trial Judge: Respondent determined a

deficiency in petitioners' Federal income tax of $3,664 for the

taxable year 1993. Unless otherwise indicated, section

references are to the Internal Revenue Code in effect for the

year in issue, and all Rule references are to the Tax Court Rules

of Practice and Procedure.

The issues for decision are: (1) Whether petitioners'

horse-related activities were engaged in for profit; (2) whether
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petitioners are entitled to take a deduction for real estate

taxes; and (3) whether petitioners are entitled to deduct

mortgage interest.

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

The stipulation of facts is incorporated herein by this

reference. At the time the petition was filed, petitioners

resided in Baltimore, Maryland.

Background

Immediately before moving to Baltimore, Maryland,

petitioners resided in Shelby County, Tennessee. Petitioners

owned two quarter horses and a pony, which they paid to have

boarded at local stables. Their daughters were experienced

riders with trophies earned from competition. Petitioners also

claim to jointly own a house at 4429 Kerwin Drive in Shelby

County, Tennessee, with Mrs. Hudnall's mother, who is also their

tax adviser.

Sometime shortly before 1993, petitioners moved to

Baltimore, Maryland. They rented a dilapidated farm at 315 East

Jarrettsville Road, where, after renovation, they lived and kept

their horses without paying others to care for them. The 68-acre

farm has since been subdivided and developed into town houses. 

Petitioners state that, initially, they were not aware of the

owner's plans to subdivide the property, though they admit it was

common knowledge to at least some of the neighbors. In 1994,
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however, it became clear to petitioners that the lessor had plans

to develop the property.

Mr. Hudnall worked full time as an interstate truck driver

while in Tennessee and continued to do so after the family's move

to Maryland. Mr. Hudnall was away from his family most of the

year at issue and did not actively participate on the farm. He

reported wages of $38,721 from his truck driving in 1993.

Petitioners' stated intent in moving to Maryland was to

launch Victoria Stables, a horse-boarding venture to have been

managed by Mrs. Hudnall. Mrs. Hudnall had no formal training for

horse boarding but asserts that she grew up around and had

knowledge of horses because of her father, a longtime horse hand.

Petitioners do not account for any business preparation

other than selecting and renovating the farm. Petitioners do not

claim that they advertised the business or had any detailed plans

on how to conduct the business. All work on the farm, primarily

cleaning stables, was done by Mrs. Hudnall or by family members

lending a helping hand.

According to petitioners, their clientele consisted of a

polo team, a short-term visitor from Brazil, and an independent

horse trainer. Petitioners claim that their clients handled the

daily maintenance of their horses. Petitioners produced neither

receipts nor averments from any of the clients. Any other
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1On their Schedule C for 1993 petitioners list the $15,720

farm rent on line 20 "RENT OR LEASE--Machinery & Equipment--Other

Business Prop."

records evidencing the existence of the business were, somehow,

lost. Petitioners could not remember the prices they charged.

Of the $1,500 monthly rent for the property, petitioners

contend that $1,200 was attributable to the horse farm, with the

remaining $300 accounting for the residence. Petitioners

continued to rent the farm until sometime in 1994. Petitioners

claim to have moved from the farm to an apartment at some point

in 1993 but produce no lease agreement other than that for the

farm residence. 

Petitioners claim that their barns were full at times. They 

spent a good deal of money in initially repairing the property,

and according to petitioners, bought heavy machinery to

facilitate a horse-boarding business. They reported gross

receipts of only $2,260. Their Schedule C for 1993 lists

expenses of $15,720 in rent,1 only $360 in supplies, and $839 in

utilities.

At trial, petitioners presented a statement by the owner of

the property confirming its rental and rate for the year at

issue, one collection notice for a utility bill against "Victoria

Stables" for $839, a receipt from a local newspaper for

advertising a sale of one of the Hudnalls' quarter horses, and
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2Sec. 183(b)(1) permits a deduction for expenses that are

otherwise deductible without regard to whether the activity is

engaged in for profit, such as personal property taxes. Sec.

183(b)(2) permits a deduction for expenses that would be

deductible only if the activity were engaged in for profit, but

(continued...)

testimony by Mr. Hudnall and a relative as to the functioning of

the boarding operation. 

Petitioners produced property tax receipts from Shelby

County, Tennessee, for 4429 Kerwin Drive addressed to Victoria A.

Hudnall. Petitioners also presented a letter from the Internal

Revenue Service (IRS), dated January 21, 1997, rescinding an

offer to allow a deduction for interest payments on the Kerwin

Drive property as a "second home".

In the notice of deficiency, respondent determined that

petitioners' horse-boarding activity was not engaged in for

profit, disallowing all of the Schedule C expenses. Respondent

also disallowed deductions of mortgage interest and real estate

taxes for the home at 4429 Kerwin Drive because of lack of

substantiation.

Discussion

I. Horse Boarding

Section 183(a) generally provides that if an activity

engaged in by an individual is not entered into for profit, no

deduction attributable to the activity shall be allowed, except

as otherwise provided in section 183(b).2 An "activity not
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2(...continued)

only to the extent that the gross income derived from the

activity exceeds the deductions allowed by sec. 183(b)(1).

engaged in for profit" means any activity other than one for

which deductions are allowable under section 162 or under

paragraph (1) or (2) of section 212. Sec. 183(c).

Deductions are allowed under section 162 for the ordinary

and necessary expenses of carrying on an activity that

constitutes the taxpayer's trade or business. Deductions are

allowed under section 212 for expenses paid or incurred in

connection with an activity engaged in for the production or

collection of income, or for the management, conservation, or

maintenance of property held for the production of income. With

respect to either section, however, the taxpayer must demonstrate

a profit objective for the activities in order to deduct

associated expenses. See Jasionowski v. Commissioner, 66 T.C.

312, 320-322 (1976); sec. 1.183-2(a), Income Tax Regs. The

profit standards applicable to section 212 are the same as those

used in section 162. See Agro Science Co. v. Commissioner, 934

F.2d 573, 576 (5th Cir. 1991), affg. T.C. Memo. 1989-687;

Antonides v. Commissioner, 893 F.2d 656, 659 (4th Cir. 1990),

affg. 91 T.C. 686 (1988); Allen v. Commissioner, 72 T.C. 28, 33

(1979); Rand v. Commissioner, 34 T.C. 1146, 1149 (1960).
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Whether the required profit objective exists is to be

determined on the basis of all the facts and circumstances of

each case. See Hirsch v. Commissioner, 315 F.2d 731, 737 (9th

Cir. 1963), affg. T.C. Memo. 1961-256; Golanty v. Commissioner,

72 T.C. 411, 426 (1979), affd. without published opinion 647 F.2d

170 (9th Cir. 1981); sec. 1.183-2(a), Income Tax Regs. While a

reasonable expectation of profit is not required, the taxpayer's

objective of making a profit must be bona fide. See Elliott v.

Commissioner, 84 T.C. 227, 236 (1985), affd. without published

opinion 782 F.2d 1027 (3d Cir. 1986). In making this factual

determination, we give greater weight to objective factors than

to a taxpayer's mere statement of his or her intent. See

Independent Elec. Supply, Inc. v. Commissioner, 781 F.2d 724, 726

(9th Cir. 1986), affg. Lahr v. Commissioner, T.C. Memo. 1984-472;

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. 

Section 1.183-2(b), Income Tax Regs., sets forth nine

factors we consider to determine whether taxpayers engaged in a

venture with a profit objective. They include: (1) The manner

in which the taxpayers carried on the activity; (2) the expertise

of the taxpayers or their advisers; (3) the time and effort

expended by the taxpayers in carrying on the activity; (4) the

expectation that the assets used in the activity may appreciate
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in value; (5) the success of the taxpayers in carrying on other

similar or dissimilar activities; (6) the taxpayers' history of

income or loss with respect to the activity; (7) the amount of

occasional profits that are earned; (8) the financial status of

the taxpayers; and (9) whether elements of personal pleasure or

recreation are involved. No single factor is controlling, and we

do not reach our decision by merely counting the factors that

support each party's position. See Dunn v. Commissioner, 70 T.C.

715, 720 (1978), affd. 615 F.2d 578 (2d Cir. 1980); sec. 1.183-

2(b), Income Tax Regs. Rather, the relevant facts and

circumstances of the case are determinative. See Golanty v.

Commissioner, supra at 426.

After considering all the factors, we agree with respondent

that petitioners did not have an actual and honest objective of

making a profit because: (1) Petitioners enjoyed substantial

personal pleasure and recreation from their horse-related

activities; (2) they did not have any experience or expertise in

operating a horse-related business; (3) petitioners' clientele

remains unverified; and, (4) petitioners did not carry on their

activities in a businesslike manner. See sec. 1.183-2(b), Income

Tax Regs. Moreover there is no indication that petitioners had

any chance of recovering the loss they suffered. See Bessenyey

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

Cir. 1967); sec. 1.183-2(b)(4), Income Tax Regs. 
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The weight and credibility of the evidence presented

suggests that petitioners may have accepted some income for the

use of their farm which defrayed the cost of their recreational

horse-related activities. Still, the expectation of profit was

lacking.

Petitioners enjoyed substantial personal benefits from the

use of the farm, but that, by itself, does not preclude their

activities from being "for profit". See Jackson v. Commissioner,

59 T.C. 312, 317 (1972). However, the presence of personal

motives may indicate that the activity is not engaged in for

profit. See Glenn v. Commissioner, T.C. Memo. 1995-399, affd.

without published opinion 103 F.3d 129 (6th Cir. 1996).

When petitioners moved to Maryland and rented the farm at

issue, they saved themselves the cost of boarding their own

horses elsewhere and had greater access to the horses for their

daughters. Petitioners' testimony describes activities which did

not exceed what would be necessary to care for their own horses. 

Barns and stables were renovated. Family members helped in

exchange for meals. Mrs. Hudnall cleaned stables. These

activities do not go beyond those related to the care of one's

own horses.

Petitioners did not produce credible evidence that the

horse-related activity had a chance of recovering the losses it

had incurred. See Bessenyey v. Commissioner, supra at 274. The
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landlord had slated the farm for subdivision before it was rented

to petitioners. In addition, the claim that their paying

boarders each assumed the responsibility of feeding, cleaning,

grooming, and providing medical services to their own horses

undercuts the notion that petitioners were experienced

equestrians involved in boarding horses for profit, or that they

expected their receipts to ever exceed the rental expense of the

farm plus supplies and other expenses. From Mr. Hudnall's

testimony, it seems that petitioners had abandoned any hope of

"making it financially" by August 1993, well before the end of

the taxable year.

The absence of any business documentation whatsoever is

indicative that the activity was not engaged in for profit. 

While a taxpayer need not maintain a sophisticated cost

accounting system, the taxpayer should keep records that enable

the taxpayer to make informed business decisions. See Burger v.

Commissioner, 809 F.2d 355, 359 (7th Cir. 1987), affg. T.C. Memo.

1985-523. Petitioners provided no agreements, receipts, or any

other verification of the existence of clients. They presented

no business plan, canceled checks, business bank account, profit

projection, consultants, or record of consultations. Petitioners

state that any and all of these items, if they existed, were

simply "lost", save for a collection notice naming Victoria

Stables as a debtor to Baltimore Gas & Electric. Petitioners
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cannot remember any price they might have charged a customer or

client. 

In sum, on the basis of all the facts and circumstances, we

hold that the record shows petitioners did not engage in their

horse-related activity with the actual and honest objective of

earning a profit. Nor have petitioners properly substantiated

any expenses, other than the farm lease expense, for any

activities which occurred, if at all, during 1993. We find that

petitioners' deductions for their horse-boarding activity are

limited to their reported gross income from the activity. See

sec. 183(b)(2).

II. Real Estate Taxes

Petitioners may not deduct real estate taxes for 1993. 

Under section 164, a deduction is allowed for any State, local or

foreign real property tax. See sec. 164(a)(1). Receipts

produced by petitioners, however, in an attempt to substantiate

their deduction, clearly state that the taxes were paid on

March 17, 1997, not the year at issue. Respondent properly

disallowed this deduction.

III. Mortgage Interest

Petitioners may not deduct mortgage interest for 1993. 

Qualified residence interest is deductible if paid during the

taxable year. See sec. 163(h)(2)(D). Petitioner produced no

documentation of interest paid. Petitioners rely solely on a
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settlement offer sent to them by the IRS which would have allowed

petitioners to deduct interest paid with respect to the property

at issue as a "second home". Petitioners did not respond timely

to the offer. The offer was rescinded by the IRS. Petitioners

did not show at trial that they are entitled to the claimed

deduction. See Rule 142(a); Welch v. Helvering, 290 U.S. 111,

115 (1933). 

To reflect the foregoing,

Decision will be

entered under Rule 155.