T.C. M em o . 2 0 1 9 -7 7

UNITED STATES TAX COURT

SHELDON SAPOZNIK AND M ELISSA M CCROSSEN, Pet i t io n ers v . COM M ISSIONER OF INTERNAL REVENUE, Res p o n d en t .

Do ck etNo . 7 3 3 5-1 7. Fi l edJ u n e 1 8 , 2 0 1 9
.

No rm anD. M cKel l ar, fo r p et i t i o n ers . W i l l i am Ben jam i n McCl en d o n an dW i l l i am W al t er Ki es s l in g , fo r
res p o n d en t.

M EM ORANDUM FINDINGS OF FACT AND OPINION NEGA, Jud g e: By n o t i ce o f d efi ci en cy d at edJ an uary1 0 , 2 0 1 6 , 1 res p o n d en t d et erm i n edd efi ci en ci es i n th e Fed eral i n co m e t ax o f p et i t io n ers an daccu racy 1 Th e p art i es h av e s t i pu l at edth at thi s d at e i s i n co rrect an dth atth e co rrect d at e i s J anuary1 0 , 2 0 1 7
.- 2
-

[* 2 ] rel at edp en al t i es u n der s ect i o n 6 6 6 2 (a) 2 fo r t h e t ax y ears 2 0 1 4 an d2 0 1 5 . Fo r t ax y ear 2 0 1 4 res p o n d en t d et erm i n eda d efi ci en cy o f $ 1 3 ,8 2 4 an dan accu racy rel at ed p en al ty

o f $ 2 ,7 6 5 . Fo r t ax y ear 2 01 5 res p o n d en td et erm i n ed a d efi ci en cy
o f $ 1 9,2 7 0 an dan accu racy -rel at edp en al ty o f $ 3 ,8 54
. OnAp ri l 3 , 2 0 1 7 , p et i t i o n ers t i m el y fi l eda p et i t i o n wi th t h i s Co u rtfo r red et erm i n at i o n . Inres p o n den t ’ s fi rs tam en d m en t t o an s wer fi l ed o n M arch 2 2 , 2 0 1 8 , res p on den ti n creas edp et i t i o n ers ’ d efi ci en cy an daccu racy -rel at edp en al ty fo r each o f t h e y ears . 3 Th e t wo i s s u es rem ai n in g fo r d eci s i o n are: (1 ) wh et h er p et i t i o n ers were
en g ag edi n th ei r h o rs e-rel at edact i v i t i es wi th th e o bject i v e o f m ak i n g a p ro fi t

2 Un l es s o th erwi s e i nd i cat ed , al l s ect i o n referen ces are t o th e In t ern al Rev enu e Co de i n effect fo r t h e t ax ab l e y ears ati s s u e, an dal l Ru l e referen ces are t o th e Tax Co u rt Ru l es o f Pract ice an dPro cedu re. Al l m on et ary am ou n t s are ro u n dedt o th e n eares td o ll ar.

3 Ani n creas e i s du e t o res p o nd en t ’ s d et erm in at io n th atcert ai n ex p en s es d educt edwere n o t o rd i n ary an dn eces s ary

ex p en ses rel at i n g t o p et i t i o n ers ’ h o rs e-rel at edact i v i ty . Ad d i t i o n al t ax o f $ 5 ,3 9 1 u nd er s ec. 7 2 (t ) ap pl i es t o M r. Sap ozn i k o n th e d i s tri b u t i o n fro m ret i rem en t acco un t s o f $ 53 ,9 1 2
. Th e p art i es h av e s ti p u l at edan dthe reco rdco n t ai n s ev i d en ce, i n th e fo rm o f a ci vi l p en al ty ap p ro v al fo rm , thatres p o n d en tco m p l i edwi th t h e req u i rem en t s o f s ec. 6 7 5 1 (b )(1 ) i n the n o t i ce o f d efi ci en cy . See Graev v . Co m m i s s i on er, 1 4 9 T.C. 4 8 5 , 4 9 3 (2 0 1 7), s up p l em en t i n g an do verru l i n g i n p art 1 47 T.C. 4 6 0 (2 0 1 6 ). Fu rt h er, res p o n d en t co nced es the i n creas edaccu racy -rel at edp en al t ies i n res p o n d en t ’ s fi rs t am en d m en tt o an s wer d at edM arch 2 2 , 2 0 1 8, as res p on d en td i d n o tco m pl y wi t h s ec. 6 7 51 (b )(1 ). See Graev v . Co m m i s si o n er, 1 4 9 T.C. 4 8 5 at4 9 3
.- 3
-

[* 3 ] wi th i n th e m ean i n g o f s ect i o n 1 8 3 an d(2 ) wh eth er t h e ex p en s e d edu ct i o n s cl ai m edwere al l o wab le u n der s ect i o n 1 6 2
. 4 FINDINGS OF FACT So m e o f t h e fact s are s t i p u l at edan dare s o fo u nd . Th e s t i p u l at io n o f fact s
an d th e at t ach edex h i b i t s are i n co rp o rat edh erei n b y th is referen ce. When p et i t i o n ers fi l edth ei r p et i ti o n wi t h th i s Co u rt , they res id edi n Ten n es see. I. Pet i t i o ners ’ Back g ro un d M r. Sap o zn i kan dM s. M cCro s s en h av e b een m arri ed o v er n i n e y ears . M s . M cCro ss en wo rk s as a reg i on al s al es m an ag er. M r. Sap ozn i k , aft er res i g n in g i n 2 0 1 4 fro m

h i s jo b o f o v er 2 0 y ears as a h eal th i n s p ect o r, s t art eda wi n ery was t e wat er eq u i p m en t s al es b u si n es s . In th e earl y 1 9 9 0s M r. Sap o zn i kb eg an h o rs e ri d in g as a h o b b y . Inth e m i d
1 9 9 0 s M r. Sap o zn i kp u rch as edh i s fi rs th o rs e, wh ich was s h o wnb y h i s ex -wi fe fo r fi ve o r s i x y ears u nt i l th e p urch as e o f a s eco ndh o rs e, wh i ch M r. Sap ozn i k ro d e i n l o cal s ho ws an d fo r en

jo ym en t . Pet i t i o n ers fi rs trep o rt eda h ors e-rel at edact i v i t y
o n th ei r Sch edu l e C, Pro fi to r Lo s s Fro m Bu s i n es s, fo r 2 0 10 . Si n ce 2 0 1 5

4 Becau s e t h e Co urt fi n d s b el o wthatp et i t i on ers d i d n o tcarry o n th ei r h o rs e-rel at edact i v i t i es wi th th e o bject i ve o f m ak i n g a p ro fi twi th i n th e m ean i n g o f s ec. 1 8 3, th e Co urt n eedn o t deci d e wh et h er t h e ex p en s es were al l o wab l e as d educt i o n s u n d er s ec. 1 6 2
.- 4
-

[* 4 ] p et i t i o n ers h av e n o t rep o rt edan y h o rs e-rel at edact i v i ty

o n thei r Sch edu l e C, b u tth ey cu rren t l y o wna h o rs e 5 wh i ch M r. Sap o zn i kri d es an ds h ows as a h o b b y . II. Ho rs e-Rel at ed Act i v i t ies Fo r each y ear at i s s u e, p et i t i o n ers rep o rt eds ep arat e Sch edu le C h o rs e-rel at edact i v i t i es fo r RS No b l e Hei r an dAl h am bra Val l ey

Arab i an s , LLC (Al h am b ra Val l ey ). No wri t t en b u s i n es s p l anwas creat edfo r ei ther, b u t p et i t i o n ers k ep ta m i l eag e l o g fo r t hei r h o rs e-rel at edact i v it i es i n cl ud i n g trav el , i n v o i ces , an drecei p t s . No o th er b o o kk eep i n g was p erfo rm edfo r ei th er h o rs e-rel at edact i v i ty . A. RS No bl e Hei r In 2 0 1 0 p et i t i o n ers p urch as edRS No b l e Hei r, a s t al l i o n , an d recei v eda b u s i n es s l i cen s e i n th e h o rs e’ s n am e wi th th e i n t en t i o n o f earn in g s tu dfees . RS No b l e Hei r was s en tt o a h o rs e t rai n i ng faci li ty , Ki es n er Trai n in g , In c. (Ki es n er), fo r s ev eral m o nt h s i n 2 0 1 1 b efo re b ei n g retu rn edt o Cal ifo rn ia b y y earen d
. Pet i t io n ers ’ RS No b l e Hei r h o rs e-rel at edact i v i ty ceas edi n 2 01 2 wh en th e h o rs e b ecam e i l l an d u n ex p ect ed l y d iedb efo re t h e earn in g o f an y s tu dfees
.

5 M r. Sap o zn ikp u rch as eda h o rs e, Hap p en edIn Veg as , i n 2 0 1 6 fo r $ 4 8 ,0 0 0 wh i ch h e ri d es i n s h ows an d as a h o b by
.- 5
-

[* 5 ] B. Al h am

b ra Val l ey OnAu gu s t2 3 , 2 0 1 1, p et i t i o n ers p u rch as eda g el d i n g , M ajo r Su g arfi x x , fo r $ 2 5 ,0 0 0 . Th i s p u rch as e l edp et i t i o n ers t o creat e Al ham b ra Val l ey

i n Decem

b er 2 0 1 1
. 6 M r. Sap o zn i kb eg an s h o wi n g M ajo r Su g arfi x x i n 2 0 14 , an di n 2 0 15 th e h o rs e g ai n eda t o p 1 0 p l acem en tatn at i o n al s . At th att i m e, t h e h o rs e was b ei n g ad v ert i s ed 7 fo r s al e atth e s ho ws fo r $ 6 0 ,0 0 0 . Pet i ti o ners s o l dM ajo r Su g arfi x x t o th e o wn ers o f Ki es n er fo r $ 2 5,0 0 0 i n 2 0 1 6. III. Ho rs e-Rel at ed Act i v i t ies Fi nan ci al s Fo r t h e t ax y ears 2 0 1 4 an d2 0 1 5 (y ears ati ss u e) t h e n etp ro fi t s an dl os s es o n p et i t i o n ers ’ h o rs e-rel at edact i v i t i es rep o rt ed o n Sch edul es C are as fo ll o ws :

6 Al h am bra Val l ey

was fo rm edi n th e St at e o f Cal i fo rn i a. Lat er i t was d i s s o l v edan drefo rm ed atthe en do f 2 0 1 3 i n No rt h Caro l i n a.

7 Th i s m ark et i n g was d o n e b y wo rdo f m ou th . M r. Sap o zn i kt es t ifi edt o h av in g a s al es v i d eo m ad e fo r $ 1 0 0. Ho wev er, th ere i s n ot h i ng i n th e reco rd s h o wi n g th atth e v i d eo was actu al l y u sedt o m ark etM ajo r Su g arfi x x .- 6
-

[* 6] Year Sch edu l e C Gro s s i nco m e To tal ex p en s es Netp ro fi t(l o s s ) 2 0 1 4 RS No b le Hei r -0
- $ 1 ,7 7 8 ($ 1 , 7 78 ) 2 0 1 5 RS No b le Hei r -0
- 2 ,6 6 7 (2 , 6 67 ) 2 0 1 4 Al ham

b ra Val l ey 3 ,1 1 4 5 8 ,4 5 0 (5 5 , 3 36 ) 2 0 1 5 Al ham

b ra Val l ey 1 ,1 1 4 4 7 ,7 9 0 (4 6 , 6 76 ) To tal 4 ,2 2 8 1 10 ,6 8 5 (1 06 ,4 5 7 ) Pet i t i o ners ’ h av e n ev er i n an y y ear m ad e a p ro fi tfro m ei th er Sch edu l e C h o rs e-rel at edact i v i ty . OPINION I. Bu rd en o f Pro o f Th e Co m m is s i o n er’ s d et erm i n at i o n s i n a n o t i ce o f d efi ci en cy are g en eral l y p res u m edco rrect , an dth e t ax p ay er o rd in ari l y b ears th e b u rd en o f p ro vi n g t h o s e d et erm i n at i o n s erro n eo u s . Ru l e 1 4 2 (a); W el ch v . Hel veri n g , 2 9 0 U.S. 1 1 1 , 1 1 5 (1 9 3 3). If, h o wev er, t he t ax p ay er p ro du ces cred i bl e ev i d en ce wi th res pect t o an y fact ual i s s u e rel ev an tt o as cert ai n i n g h i s t ax l i ab i l i ty an dm eet s cert ai n o th er req u i rem en t s , th e b u rd en o f p ro o f s h i ft s fro m th e t ax pay er t o th e Co m

m i s s io n er as t o that fact ual i s s u e. Sec. 7 4 91 (a)(1 ) an d (2 ). Th e b u rd en o f p ro o f i s o n th e Co m m i s s i o n er wi th res p ectt o an y n ew m at ter rai s edi n h i s an swer o r am en d m en t- 7
-

[* 7 ] th eret o . Ru l e 1 4 2 (a); s ee Kn u d s en v . Co m m is s i o n er, 1 3 1 T.C. 1 8 5, 1 8 8 -1 8 9 (2 0 0 8), s up p l em en t i n g T.C. M em o . 2 0 0 7 -3 4 0
. II. Sect io n 1 8 3 Tax p ay ers m ay

g en eral l y d edu ctal l o rd i n ary

an dn eces s ary

b us i n es s
ex p en s es p ai d o r i n cu rreddu ri n g a t ax ab l e y ear i n carry i n g o n a t rad e o r b u s i n es s . Sec. 1 6 2(a). In g en eral , n o d edu ct i o n s are al l owab l e fo r ex p en s es i n cu rredi n
co n nect io n wi th act i v i ti es n o t en g ag edi n fo r p ro fi t , s u ch as act i v i ti es carri edo n p ri m ari l y as a s p o rto r h o b by

o r fo r recreat i on , ex cep t t o th e ex t en t p ro v i d edb y
s ect i on 1 8 3 (b ), d i s cu s s edi n fra. Sec. 1 .1 8 3 -2 (a), In co m e Tax Reg s . Sect i o n 1 .1 83 -2 , In co m e Tax Reg s ., s et s fo rt h a n o n ex cl u s i v e l i s t o f rel ev an tfact ors t o b e
co n si d eredi n d et erm i n i ng wh et h er an act i v i ty i s en g ag edi n fo r p ro fi t . To b e
en g ag edi n fo r p ro fi t , th e act i v i ty m u stb e en g ag edi n fo r t h e p ri m ary p u rp o s e an d wi th th e d o m i n an t h o p e an d i n t en to f real i zi n g a p ro fi t . Hay d en v . Co m m i ss i o n er, T.C. M em o . 1 98 8 -3 1 0 , aff’ d, 8 8 9 F.2 d1 5 4 8 (6 th Ci r. 1 9 8 9 ). A t ax p ay er’ s
ex p ect at i o n o f p ro fi tn eedn o tb e reas o n ab le, b uti t m u s tb e i n g o o d fai th . Al l en v . Co m m i s s i o n er, 7 2 T.C. 2 8, 3 3 (1 9 7 9 ) (ci t i ng s ect i o n 1 .1 8 3 -2 (a), In co m e Tax Reg s.); Du n n v . Co m

m i s s i o n er, 7 0 T.C. 7 1 5, 7 2 0 (1 9 7 8), aff’ d , 6 1 5 F.2 d5 7 8 (2 d Ci r. 1 9 80 ); Ch u rch m an v . Co m m i s s i o n er, 6 8 T.C. 6 9 6 , 7 01 (1 9 7 7 ); Ben z v . Co m m i s s i o n er, 6 3 T.C. 3 75 , 3 8 3 (1 9 7 4 ). A m ere d ecl arat i o n o f p ro fi to b ject i v e i s- 8
-

[* 8 ] n o tco n tro l li n g , an dth e Co u rtwi l l g i v e g reat er wei g h tt o al l o b ject iv e fact s
an d ci rcu m s t an ces th an t o a t ax p ay er’ s s t at em en to f i nt en t wi th reg ardt o the act i vi ty . Drei cer v . Co m

m i s s i on er, 7 8 T.C. 6 4 2, 6 4 5 (1 9 8 2), aff’ dwi tho u t p ub l i s h edo p i n i o n, 7 0 2 F.2 d1 2 0 5 (D.C. Ci r. 1 9 8 3 ); s ec. 1 .1 8 3-2 (a), In co m e Tax Reg s. Gen eral ly , s ect i o n 1 8 3 (d ) creat es a p res u m p ti on o f a p ro fi to b

ject iv e i f, fo r th ree o f t h e fi v e t ax ab l e y ears en d i n g wi th the y ear ati s su e, g ro s s i n co m e ex ceed s th e d edu ct i o n s at tri bu t ab le t o the act i v it y . Incas es s u ch as th is o n e wh ere t h e act i vi ty co n s i s ts i n m ajo r p arto f t h e b reed i n g , trai n i n g , s h o wi ng , o r raci n g o f h o rs es , a p res u m

p t i o n o f p ro fi to b

j ect i v e ex i st s i f g ro s s i n co m e ex ceed s the d educt i o n s fo r t w o o f t h e s ev en t ax ab l e y ears en d i ng wi th th e y ear at i s s ue. Sec. 1 8 3 (d ). Pet i ti o n ers ’ h o rs e-rel at edact i v i ti es h av e n o t tu rn eda p ro fi ts i n ce t h ey
were co m m en ced , an dthu s th e p res u m p t i o n creat ed b y

s ect i o n 1 8 3 (d ) d o es n o t ap p ly
. Res p o n d en tal l eg es th atth e l o s s d educt i on s at tri b u t ab l e t o p et i t i o n ers ’ h o rs e-rel at edact i v i t i es are n o t al l owedo n the g ro u n d s t hatth e act i v i t ies g i v i n g ri se t o th e l o s s es were “ n o ten g ag edi n fo r p ro fi t ” wi thi n th e m ean i n g o f s ect i o n 1 8 3 . Pet it i o n ers co nt en dth atth e h o rs e-rel at edact i v i t i es were en gag edi n fo r p ro fi t.- 9
-

[* 9 ] Sect io n 1 .1 8 3 -2 (b ), In co m e Tax Reg s ., p ro v id es a n o n ex cl u s i ve l i s to f fact ors t o co n si d er i n ev al uat i n g a t ax p ay er’ s p ro fi to b ject i v e, s u ch as : (1 ) t h e
m an n er i n wh i ch th e t ax pay er carri edo n the act i vi ty ; (2 ) t h e ex p ert i s e o f t h e t ax p ay er o r h i s o r h er ad v i s ers ; (3 ) t he t i m e an deffo rtex pen d edb y th e t ax p ay er i n carry i n g o n th e act i v i ty ; (4 ) t h e ex p ect at i o n th atthe as s et s u s edi n th e act i vi ty m ay ap p reci at e i n v al u e; (5 ) t h e s u cces s o f th e t ax p ay er i n carry in g o n o th er s i m i l ar o r d i s s i m i lar act i v i t i es ; (6 ) t h e t ax p ay er’ s h i s t o ry o f i n co m e o r l o s s wi th res pect t o the act i vi ty ; (7 ) t h e am ou n to f o ccas i o n al p ro fi t s earn ed , i f an y ; (8 ) t h e fi n an ci al s t atu s
o f t h e t ax p ay er; an d(9 ) wh et her el em en t s o f p ers o nal p l eas u re o r recreat io n were i n v o l v ed
. No s i ng l e fact o r i s d et erm in at i ve o f t he t ax p ay er’ s i nt en t i o n t o m ak e a p ro fi t, an d m ore wei g ht m ay b e g i v en t o s o m e fact o rs th ano th ers . Go l an ty v . Co m m i s s i o n er, 7 2 T.C. 4 11 , 4 2 6 (1 9 7 9 ), aff’ d wi th o u t p ub l is h edo pi n i o n , 6 4 7 F.2 d1 7 0 (9 th Ci r. 1 9 8 1); s ee Du n n v . Co m m i s si o n er, 7 0 T.C. at 7 2 0; s ec. 1 .1 8 3
- 2 (b ), In co m e Tax Reg s . W e an al y ze t h e fact s an dci rcu m s t an ces i n th e l i gh to f th e ap p l i cab l e fact o rs l i st edi n th e reg u l at i o n . A. M an n er i n Wh ich Act i v i ty Is Co n duct ed Th e fact th atth e t ax p ay er carri es o n an act iv i ty i n a b u s in es s l i k e m an n er
m ay i n d i cat e a p ro fi tm ot iv e. Sec. 1 .1 8 3 -2 (b )(1 ), In co m e Tax Reg s. Th is- 1 0 -

[* 1 0 ] d et erm in at i o n req u i res th atwe co n si der wh et h er t h e t ax p ay er: (1 ) m ai n t ai n edco m

p l et e an d accu rat e b o o k s an dreco rd s; (2 ) co ndu ct edth e act i vi ty i n a m an n er res em

bl in g th ati n wh i ch s u cces s fu l p ract it i on ers co n du ct
s i m i l ar b us i n es s act i v i t i es ; (3 ) ch an g ed o p erat i n g m et h o d s , ad o p tedn ew t ech n i qu es , o r ab an d o n edu npro fi t ab l e act i vi t i es i n a m an n er co n si st en twi th an i n t en tt o i m

p ro v e p ro fi t ab i l i ty ; an d(4 ) p rep ared a b u s i n es s p l an . Id .; s ee Keat i n g
v . Co m m i s s i o n er, T.C. M em o . 2 0 0 7 -3 0 9 , 2 0 0 7 W L 2 9 6 2 7 7 4 , at* 4 (“Nu m ero u s
co u rto p i n i o n s m en t io n t h ata b u s i nes s l i k e o p erat i o n o ft en wo u l di nv o l v e a b u s i n es s p l an .”), aff’ d, 5 4 4 F.3 d9 0 0 (8 th Ci r. 2 0 08 ). Pet i t i o ners d i dn o tcreat e wri t t en b u s i n es s p l an s fo r t h ei r h o rs e-rel at ed act i vi t i es , n o r d i d th ey m ai n t ai n co m p l et e b o o k s o r reco rd s . M r. Sap o zn i k t es t i fi ed th ath i s b u s i n es s p l anwas t o h av e M ajo r Su g arfi x x s t ab l edan dtrai n edat Ki es n er i n h o p es o f wi nn i n g o r p l aci n g i n th e t o p 1 0 atn at i o n al s an dth en s el l in g th e h o rs e fo r a p ro fi t . M r. Sap o zn i kb el i ev eds t ab l i n g th e h ors e atKi es n er an d p ers on al l y recei v i ng l es s o n s o n s h o wm an s h i p wo u l d l ead t o s u cces s atn at i o n al s an dg reat l y i n creas e t h e v al u e o f t h e h o rs e. M r. Sap o zn i kt es t i fi edt o h i s d es i re t o rep eatth i s p l an wi th o th er h o rs es s i redb y M ajo r Su g arfi x x ’ s fat h er, M ajes t ei t . 8 Fo r a

8 M r. Sap o zn ikd es cri b edth i s as p ro n g 2 o f a t w o -p ro n g edb u s i n es s p l an . Ho wev er, th e Co u rtfi n d s p ro n g 2 t o b e a co n t i n u at i o n o f t h e al l eg edb u s i n es s p l an (co n ti n u ed ...)- 1 1 -

[* 1 1 ] t ax p ay er’ s b o o k s an dreco rd s t o i nd i cat e a p ro fi t m o t i v e, t h e t ax p ay er s h o u l d
u s e t h e b o o k s an d reco rd s “ as an al yt i c an dd i ag n o st i c t o o l s i n an effo rtt o ach i ev e p ro fi tab il i ty ”. Ni s s l ey

v . Co m m i s si o ner, T.C. M em o . 2 0 00 -1 7 8 , 2 00 0 W L 6 8 8 6 0 0 , at* 6 . Th e o n l y

reco rd s are a m i l eag e l o g , recei p ts , an di n v oi ces . Pet i t io n ers ’ reco rd k eep i ng rep res en t s n o th in g m o re th an an effo rtt o s ub s t an t i at e
ex p en s es rep o rt edo n th ei r retu rn s . Becau s e o f t h e l acko f reco rd k eep i n g , p et i t i o n ers co u l dn ot m ean i ng fu l l y an al y ze p ro fi tab i li ty

an d m ak e i n fo rm ed d eci s i o n s i n a m an n er res em bl in g th ato f a s i m il ar b u s i n es s . Fu rt her, p erh ap s th e m o s ti m p o rt an ti n di cat i o n o f wh et h er an act i v i ty i s b ei n g carri edo n i n a b u s i n es s l ik e m an n er i s wh et h er t he t ax p ay er i m p l em en t s
m et h o ds fo r co n tro l l in g l o s s es , i n cl u d i n g effo rt s t o redu ce ex p en s es an d g en erat e i n co m e. See Do d g e v . Co m m i s s i o n er, T.C. M em o . 1 9 9 8-8 9 , 1 9 9 8 W L 8 8 1 7 5 , at* 5 , aff’ dwi th o utp ubl i s h edo p i n i o n , 1 8 8 F.3 d5 0 7 (6 th Ci r. 1 9 9 9 ). Pet i t i o n ers d i dn o t ch an g e t h ei r h o rs e-rel at edact i v it ies i n an i m p l em en t edeffo rtt o redu ce
ex p en s es o r g en erat e i n co m e. Th e al l eg edp lan was t o m erg e RS No b l e Hei r i n t o

8 (...co n t in u ed ) en act edwi th M ajo r Su garfi x x. Th e p l an was s t i l l t o b u y h o rs es ata y o u n g ag e, s t ab l e th em

atKi es n er, an ds ubs equ en tl y s el l th em atan i n creas edv al u e. M r. Sap ozn i k t es t i fi edth i s p l an en dedup o n th e d eat h o f M ajes tei ti n 2 0 1 5. He d i dn o t h av e a co n tract t o b u y

an o th er h o rs e s i redb y M ajes t ei t an dh adn o tp u rch as eda h o rs e b efo re M ajes t ei t ’ s d eat h i n 2 0 1 5
.- 1 2 -

[* 1 2 ] Al ham

bra Val l ey , b utth e d eat h o f RS No bl e Hei r cau s edth i s p l an t o b eco m e m o o t . Th ere was n o cal cu l at edch an g e; p et i t i o n ers s i m p l y carri ed o n b u s i n es s wi th o u trep l aci n g RS No b l e Hei r wi th a s ub s equ en ts t al l i o n . Acco rd i ng l y , th i s fact o r fav o rs res p on d en t . B. Ex p ert i s e o f Tax p ay er o r Hi s Ad v is ers Prep arat i o n fo r anact i v i ty b y th e ex t en s iv e s tud y

o f i t s accep t edb u s i n es s , eco n om i c, an d s ci en t i fi c p ract i ces , o r co n s u l t at i o n wi th th o s e wh o are ex p ert s th erei n , m ay

i n d i cat e a p ro fi tm o t i v e. Sec. 1 .1 8 3 -2 (b )(2 ), In co m e Tax Reg s .; s ee En g dah l v . Co m

m i s s io n er, 7 2 T.C. 6 5 9 , 6 68 (1 9 7 9 ). Pet i t i o ners arg ue 9 th atb y h av in g h ors es s t ab l edatKi es n er t h ey s o u g h to u t ad v is ers . W e fi n dthi s arg u m en tu n av ai li n g an d ag ree wi th res p o n den t ’ s arg u m en t th atKi es n er was n o ts o u g h to u tt o p ro vi d e ex p ert i s e o n p et i t i o n ers ’ h o rs e-rel at ed act i vi ty . Acco rd i ng l y , th i s fact o r fav o rs res p on d en t . C. Tax p ay er’ s Ti m e an dEffo rtDev o t edt o th e Act i v i ty Th e fact th ata t ax p ay er d ev o t es m u ch o f h i s p ers o n al t i m e an deffo rtt o carry i n g o n an act i v i ty m ay i n d i cat e an i n t en ti o n t o d eri v e a p ro fi t , p art i cu l arl y i f

9 Al l referen ces t o p et it i o n ers ’ arg u m en t s refer t o p et it i on ers ’ t es t i m o n y at tri al an dp et i t i o n ers ’ co u n s el ’ s o p en i ng an dcl o s i n g arg u m en t s .- 1 3 -

[* 1 3 ] th e act i v i ty d o es n o t h av e s ub s t an t i al p ers o nal o r recreat i on al as p ect s . Sec. 1 .1 83 -2 (b )(3 ), In co m e Tax Reg s . If, h owev er, a t ax pay er s p en d s l i t t l e t i m e o n th e act i vi ty b u th i res a co m

p et en tan dqu al i fi edp ers o n t o carry o n t h e act i v i ty , a p ro fi t
m o ti v e m ay

s t i l l b e i n d i cat ed . Id
. Wh i l e M r. Sap o zn i kh adret iredfro m h i s p rev i o u s em

p l o ym en t , h e s t art eda
s i m i l ar b us i n es s i n th e p ri vat e s ect o r. Pet i t io n ers arg u e t h atM r. Sap o zn ik
ex p en d eda t rem en d o u s am ou n to f t i m e an deffo rtcarry i ng o n thei r h o rs e-rel at ed act i vi t i es . Th i s arg um en ti s n o ts up p o rt edb y th e fact s . Th e b u l k , i f n o t al l , o f M r. Sap ozn i k’ s t im e s pen twi th M ajo r Su garfi x x was p ers on al l y b ei n g t rai nedh o w t o b e a b et t er s h o wm an an d part i ci p an ti n s h o ws . Fu rt h er, t h ere i s n o ev i d en ce, o t h er th an p et i t i o n ers ’ t es t i m o n y , t o s h o w th at th e h i ri n g o f Ki es n er was i n t en d edt o h el p p et i t i o n ers carryo n th ei r h o rs e-rel at edact i v i ti es fo r p ro fi t . 1 0 Acco rd i ng l y , th i s fact o r fav o rs res p on d en t . D. Ex p ect at i on Th atAs s et s Us edi n th e Act iv i ty M ay Ap p reci at e Anex p ect at i o n th atas s et s u s edi n th e act i v i ty wi l l ap p reci at e i n v al u e an d th erefo re m ay

p ro duce an o v eral l eco n om i c p ro fi t m ay i n di cat e a p ro fi tm o t i v e
ev en if t h e t ax pay er d eri ves n o o p erat i o n al p ro fi t . Sec. 1 .1 8 3-2 (b )(4 ), In co m e Tax

1 0 M r. Sap o zn i kt es t i fi edt o h i s b el i ef t h atfo r RS No b l e Hei r t o b e a m o re v al u ab l e s i re, t h e h o rs e wo u ld n eedt o g ai n acco lad es , ex p eri en ce, an d ex p o s u re. Ho wev er, n o th i n g i n th e reco rd , o th er t h an t es ti m o n y , s up p o rt s th i s b el i ef.- 1 4 -

[* 1 4 ] Reg s . A p ro fi to b

j ect i v e, h o wev er, m ay

b e i n ferred fro m s uch ex p ect ed ap p reci at i o n o f t h e act i v it y ’ s as s et s o n l y wh ere t h e ex p ect edap p reci at i on ex ceed s th e o p erat i n g ex pen s es an d wo u l db e s u ffi ci en tt o reco up th e accu m u l at edl o s s es
o f p ri o r y ears . Fo s t er v . Co m m i s s i o n er, T.C. M em o . 2 01 2 -2 0 7, 2 0 1 2 W L 3 0 0 0 3 5 0 , at* 7 ; s ee Go l an ty v . Co m m i s s i o n er, 7 2 T.C. at4 27 -4 2 8
. M r. Sap o zn i kt es t i fi edt o h i s b el i ef t h at M ajo r Su g arfi x x ’ s v al u e wo u l d g reat l y i n creas e wi th a p l acem en t i n th e t o p 1 0 at n at i o n al s . Ho w ev er, aft er p l aci ng i n th e t o p 1 0 i n 2 01 5 , M ajo r Su g arfi x x was s ol dfo r $ 2 5,0 0 0 , res u l ti n g i n
n o g ai n o n the s al e. Pet i t i o ners arg ue t h ats i n ce t h e s al e, M ajo r Su garfi x x h as b eco m e a n at i o n al ch am p i o n an dth u s th e ex p ect at i o n o f ap p reci at i on was th ere. Res p o n d en t arg u es th ere i s n o cred i b l e ev i d en ce i n t h e reco rdthatth e ex p ect at i o n o f fu tu re ap p reci at i o n o f M ajo r Su garfi x x ev en b eg i n s t o ap p ro ach th e am ou n t s o f l o s s es rep o rt edo n p et i t i o n ers ’ Sch edu l es C. Th e Co u rtag rees wi th res po n den t. Di s reg ard i ng the fl aws i n co n si d eri n g ap p reci at i o n u n der n ew o wn ers h ip , th e l o s s es at tri b u t ab l e t o M ajo r Su g arfi x x, $ 1 5 6 ,8 3 0, 1 1 s u rp as sedth e h i g h es tal l eg ed
s al e v al u e, $ 12 5 ,0 0 0, b y

$ 3 1 ,8 3 0
.

1 1 Th e Co u rth as Al h am

b ra Val l ey ’ s Sch edu le C i n fo rm at io n fo r 2 0 13 , 2 0 1 4 , an d 2 0 1 5 . In2 0 1 3, a t ax y ear n o tati s s u e, p et i ti o n ers rep o rt eda l o s s o f $ 54 ,8 1 8
.- 1 5 -

[* 1 5 ] Acco rd i ng l y , th i s fact o r fav o rs res p on d en t . E. Tax p ay er’ s Fi nan ci al St atu s A l acko f s ub s t an ti al i nco m e fro m s o u rces o th er t han th e act i vi ty m ay i n d i cat e t h atth e act i v i ty i s en g ag edi n fo r p ro fi t . Sec. 1
. 1 8 3 -2 (b )(8 ), In co m e Tax Reg s. Sub s t an t i al i nco m e fro m s o u rces o th er t h an th e act i v i ty (p art i cu l arl y i f l o s s es fro m

th e act i v i ty

g en erat e s ub s t an t i al t ax b en efi t s ) m ay i nd i cat e t h e act i v i t y i s n o ten g ag edi n fo r p ro fi t , es peci al l y i f p ers o n al o r recreat i o n al el em en ts are i n v o l v ed
. Id .; s ee Go l an ty v . Co m m i s s i o n er, 7 2 T.C. at4 2 9
. Pet i t i o ners arg ue t h atth is m ay b e t h e “ s i n g l e g reat es t fact o r”, o ut s i d e o f M r. Sap ozn i k’ s t es t im o ny , b ecau se p et i t io n ers “ are n ott ax p ay ers wh o co u l dju s t fri v ol o u s l y

p u t$ 5 0 ,0 00 i n t o a h o rs e b u s i n es s b ecau s e i twas a h o b b y .” Th i s arg u m en ti s co nt rad i ct edb y M r. Sap o zn i k ’ s t es ti m o n y th ati n 2 0 1 6 p et i t i o n ers b o u g h tfo r $ 4 8 ,0 0 0 a h o rs e wh i ch M r. Sap ozn ik ri d es as a h o b by
. Pet i t i o ners g en erat ed a co m fo rt ab le g ro s s i n co m e fo r t h e y ears ati s s u e
o u t s i d e o f t h ei r h o rs e-rel at edact i v i t i es . 1 2 Th e h ors e-rel at edact i vi t i es d i d n o t g en erat e p ro fi tan dp ro v id edn o fi n an ci al b en efi t o th er t han th e p o t en t i al fo r g en ero us t ax s av i n g s .

1 2 Onth ei r 2 0 1 4 an d2 0 1 5 Fo rm s 1 0 4 0 , U.S. In d i v i du al In co m e Tax Retu rn , p et i t i o n ers rep o rt edwag es o f $ 7 1 ,7 9 1 an d $ 7 0 ,9 8 7 , res p ect i v el y .- 1 6 -

[* 1 6 ] Acco rd i ng l y , th i s fact o r fav o rs res p on d en t . III. Co n cl u si o n Th e rem ai n i n g fact o rs ei th er d o n otap p l y o r d o n o t fav o r p et it i o n ers ’ p o s i t i on , as p et i t i on ers : (1 ) co n ced e t hatth e carry i n g o n o f s i m i l ar o r d i ss i m i l ar act i vi t i es d o es n o tap p l y i n th e cu rren tcas e; (2 ) d i d n o tg en erat e an y p ro fi t s , o r h av e a h i s t ory

o f p ro fi t s , du ri n g th ei r o p erat i o n o f t h ei r h o rs e-rel at edact i v it i es ;
an d (3 ) co n ced e t h atth ere were el em en t s o f p ers o n al p l eas u re an den jo ym en t . Aft er co n s i d eri n g th e fact o rs l i s t edi n s ect io n 1
. 1 83 -2 (b ), In co m e Tax Reg s ., an d th e fact s an dci rcu m s t an ces o f t h i s cas e, we co n cl u d e t hatp et i t i o ners d i dn o t
en g ag e i n t h ei r h o rs e-rel at edact i v i t i es wi th th e p ri m ary p u rp o s e o f real izi n g a p ro fi t. Acco rd i ng l y , we h o ldth atp et i t i o ners ’ h o rs e-rel at edact i v i t i es du ri ng th e y ears ati s s u e were n otact i v i t i es en g ag edi n fo r p ro fi twi th in th e m ean i n g o f
s ect i on 1 8 3
. W e h av e co n s id eredal l o th er arg u m en t s o f t h e p art i es an d , t o th e ex t en tn o t d i s cu s s edab o v e, fi n dth o s e arg u m en t s t o b e i rrel ev an t , m o o t , o r wi tho u tm eri t . To refl ectthe fo reg o i n g , Deci s i o n wi ll b e en t eredfo r
res p o nd en t .