TAX COURT OPINION

Case: Paula L. Wilson
Docket Number: 22721-05S
Judge: Foley
Opinion Type: summary
Filed: 07/11/2007
Pages: 7

T .C . Summary Opinion 20 7-11 7 UNITED STATES TAX COURT PAULA L . WILSON, Petitioner v . COMMISSIONER OF INTERNAL REVENUE, Responden t MICHAEL EDWARD RYAN, Petitioner v . COMMISSIONER OF INTERNAL REVENUE, Responden t Docket Nos : 22721-055, 22747-055 . Filed July 11, 2007 . Scott P . Hendricks , for petitioners . Catherine S . Tyson , for respondent . FOLEY, Judae : This case was heard pursuant to section 7463 ' of the Internal Revenue Code in effect whin the petitions wer e 1 Unless otherwise indicated, all 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 . SERVED JUL 11 2007 - 2 - filed . Pursuant to section 7463(b), the decisions to be entered are not reviewable by any other court, and this opinion shall not be treated as precedent for any other case . The issue fo r decision is whether petitioners are entitled to certain { deductions relating to their horse-breeding activity for 2002 . Background . At"all relevant times, Paula Wilson and Michael Rya n (collectively, petitioners) have been law enforcement officers . In 1995, petitioners established Wilson Ryaln Quarter Horses, a horse training and breeding operation (the activity) . Ms . Wilso n had significant experience in training horses (i .e ., she began training horses at age 9) and was responsible for the training of petitioners' horses . Petitioners routinely woke .up before 5 :00 a .m . each day to clean the horse stalls and feed-t'tie"horses ; returned from. their respective law enforcement duties at 5 :00 p .m . ; and fed, trained, and cared for the horses late into the night . In addition, petitioners kept continuous watch over the horses during breeding and foaling seasons . From 1995 through 2002, Ms . Wilson attended exhibitions and advertised in trade magazines to promote Wilson Ryan Quarter .Horses . In addition, she consulted with trainers, doctors, and nutritionists to care for the horses properly . Mr . Ryan - 3 - maintained the books and records and tended to the horses when Ms . Wilson was unavailable . Neither petitioners rode the horse s for pleasure . In 1997, petitioners sold five horses for a profit . Petitioners, however, believed that they needed to find a unique type of horse to maximize their profit potential . The y researched several types of horses, concluded that Skipper W 'horses were the'best "all-around performance" horses, and in October of 1996 1- bought Scotchcourt, a champion-bred Skipper W mare . In 1997,,Scotchcourt produced a stallion, Buzz, tha t petitioners anticipated would become a profitable stud . Afte r developing severe medical problems, however, he was not able to do so . - In 2000, petitioners sold their 10-acre farm and purchased a 75-acre farm . On the new farm, they maintained a hayfield to feed the horses ; three additional structures to house the horses , ,and a barn withistalls and a riding are a o facilitate th e breeding and training of the horses . In September 2001, Ms . Wilson was injured while on duty as a ,law enforcement'officer and, as a result, could not train horses for approximately 1 year . In the fall of 2002, Ms . Wilson suffered a broken collarbone and .was unable to train horses fo r another year . In .2002, petitioners purchased a stallion, Scotch - 4 - N Lark, and hoped that he would sire numerojus offspring tha t could be sold for profit . Scotch N Lark, however, died from an t undetectable illness . Despite the setbacks, petitioners' herd f grew from 5 horses in 1997 to 41 horses in 2002 . . On August 30, 2005, respondent . sent each petitioner a notice of deficiency relating to 2002 . Respondent determined that the activity was not. engaged in for profit . On December 1, 2005, while residing in Murphysboro, Illinois, each petitioner filed a petition with the Court . On December 8, 2006, the cases were consolidated for trial, briefing, and opinion . Discussion Section 183 limits the deductions relating to an activity not engaged in for profit . Sec . 183(b) . For purposes of section 183, a taxpayer engages in an activity for profit if he enters into the activity with the actual and honest objective of making a profit . The taxpayer's expectation of profit need not b e reasonable, but he or she must, have a good faith objective of making a profit . Allen v . Commissioner , 72 T .C . 28, 33 (1979) ; . sec . 1 .183-2(a), Income Tax Regs . Section 1 .183-2(b), .Income Tax Regs ., sets forth a nonexclusive list of nine factors to guide courts in analyzing- ) taxpayer's profit objective . The nine fac t ors are : (1) Th e manner in which the taxpayer carries on the activity ; (2) the - 5 - expertise of the taxpayer or his advisers (3) the time an d effort expended by the taxpayer in carrying on the activity ; (4) the expectation that the assets used in the activity may appreciate in value ; (5) the success of the taxpayer in carryin g on other similar or dissimilar activitie s (6) the taxpayer' s history of income or losses with respect to the activity ; (7) the- amount of occasional profits, if any, th a are earned ; (8) the i 'financial status of the taxpayer ; and (9 ) the elements of personal pleasure or recreation involve d in the activity . Having considered the factors listed in section 1 .183-2(b), Income Tax Regs .i, we hold that petitione r s actually and honestly intended to make a profit in the activity Consequently, sectio n 183 does . not limit the deductions claimed by petitioners with respect to the activity .2 . Respondent'contends that because petitioners have incurred 'losses relating,to the activity in each year, they did not have the requisite profit objective . To the contrary, petitioners honestly and actually believed that they ould recoup thei r 2 Pursuant ;to sec . 7491(a), petitioners have the burden of proof unless they introduce credible evidence relating to the !issue that would shift the burden to respondent . See Rule 142(a) . Our conclusions, however, are based on a preponderance of the evidence, ; and thus the allocation of the burden of proof is immaterial . See Estate of Bonnard v . Commissioner , 124 T .C . 95, 111 (2005) . - 6 - losses and ultimately make a profit . Sec . 1 .183-2(b)(6), Income Tax Regs . (stating that losses incurred during the initial phase of a business are not necessarily an indication that the activity was not engaged in for profit) . Respondent contends that the fact that petitioners have never conducted a successful horse- breeding and training business indicates a lack of profit objective . We conclude that this factor is outweighed by the following factors . Petitioners carried on the activity in a businesslike manner . They advertised in trade magazines,, attended seminars , and kept records in a manner consistent with an intent to improve profitability . In addition, they abandoned an unprofitabl e method in a manner consistent with an intent to improve profitability (i .e ., determining that the (kipper W bloodlin e would be more profitable) . See sec . 1 .1832(b)(1), Income Tax Regs . Petitioners did not ride the horses for pleasure . See sec . 1 .183-2(b)(9), Income Tax Regs .(stating that the presence of personal pleasure may indicate the lack of a profi t objective) . Ms . Wilson had significant experience training horses, and petitioners consulted with experts relating to the caring , feeding, and training of horses . In addition, petitioner s I regularly consulted with their accountant with respect to th e activity's books and records . Petitioners,] in addition to their - 7 - law enforcement careers, devoted considerable time to, an d handled all material aspects of, the activity . Sec . 1 .183- 2(b)(3), Income Tax Regs . (stating that the fact that a taxpayer devotes substantial personal time and effort to carrying on an activity may indicate an intention to derive a profit) . Petitioners expected their farm and erd to appreciate : Furthermore, petitioners devoted all of their savings from their law enforcement! salaries to the . activity . They are hardworking, diligent, and levelheaded . We do not believe that they woul d squander their hard-earned money on an extravagant hobby . The fact that the taxpayers do not have substantial incom e or capital from sources other than the activity may indicate that . the activity is engaged in for profit . S e sec . 1 .183-2(b)(8) , e Income Tax Regs .. Although petitioners suffered several setback s (e .g ., the injuries suffered by Ms . Wilso , the death of Scotch N Lark, etc .) that prevented them from making a profit, the y actually and honestly believed that their future earnings an d profit would be substantial . Contentions we have not addressed ar irrelevant, moot, o r meritless . To reflect the foregoing, Decisions will be entere d for petitioners .