TAX COURT OPINION

Case: Laurel Daphne
Docket Number: 8615-19
Judge: Toro
Opinion Type: bench
Filed: 04/16/2021
Pages: 41

United States Tax Court Washington, DC 20217 ) ) ) ) ) ) ) ) ) Docket No. 8615-19. O R D E R Laurel Daphne, Petitioner v. Commissioner of Internal Revenue, Respondent hereby Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit to petitioner and respondent a copy of the pages of the transcript of the trial in the above-referenced case, held before Judge Emin Toro in Los Angeles, California, on March 26, 2021 (remote proceeding), containing the Court's Oral Findings of Fact and Opinion, rendered at the trial session at which this case was heard. In reviewing the transcript containing the Court's Oral Findings of Fact and Opinion, the Court became aware that the discussion in lines 2 through 5 on page 38 of the transcript should be revised to read: "Decision will be entered under Rule 155." It is hereby ORDERED that lines 2 through 5 on page 38 of the transcript are revised to read: "Decision will be entered under Rule 155." It is further ORDERED that, on or before June 15, 2021, the parties shall submit the computations under Rule 155. (Signed) Emin Toro Judge Served 04/16/21 1 bona fide. See Golanty v. Commissioner, 72 T.C. 411, 426 14 2 (1979), aff'd without published opinion, 647 F.2d 170 (9th 3 Cir. 1981); Treas. Reg. sec. 1.183-2(a). 4 Whether the requisite profit objective exists is 5 determined by looking to all the surrounding facts and 6 circumstances. Golanty, 72 T.C. at 426; see also Keanini 7 v.Commissioner, 94 T.C. 41, 46 (1990); Treas. Reg. sec. 8 1.183-2(b). Greater weight is given to objective facts 9 than to a taxpayer's mere after-the-fact statement of 10 intent. Indep. Elec. Supply, Inc., supra; Thomas v. 11 Commissioner, 84 T.C. 1244, 1269 (1985), aff'd, 792 F.2d 1256 12 1259 (4th Cir. 1986); see also, e.g., Faulconer v. ET 13 Commissioner, 748 F.2d 890, 894 (4th Cir. 1984), rev'g, 14 T.C. Memo. 1983-165; Nickerson v. Commissioner, 700 F.2d 15 402,404 (7th Cir. 1983); Treas. Reg. sec. 1.183-2(a). 16 Of relevance in this analysis are the factors 17 listed in Treasury regulation See section 1.183-2(b). 18 Indep. Elec. Supply, Inc., 781 F.2d at 726-727 19 (section 183 generally is not applicable until it is 20 determined the activity at issue is not engaged in for 21 profit, but the factors nonetheless are relevant in 22 conducting the profit-motive analysis under section 162). 23 They include (1) the manner in which the taxpayer carries 24 on the activity; (2) the expertise of the taxpayer or his 25 advisers; (3) the time and effort expended by the taxpayer (973) 406-2 250 I operati�ns@escribers,net 1,,,,,,,,,_ escrib-ers.n et �IIIH 1 she moved in the opposite direction, devoting more time to 27 2 her new career as a nurse. On balance, we therefore find 3 that this factor is neutral in that it weighs neither for 4 nor against a finding in Ms. Daphne's favor. 5 4.Expectation that assets used in activity may 6 7 appreciate in value With respect to this factor, Treasury regulation 8 section 1.183-2 (b) ( 4) provides as follows: 9 10 11 12 13 14 15 16 appreciation in the and may also intend that, even if no is derived, an The term profit encompasses value of assets, such as land, used in the activity. Thus, the taxpayer may intend to derive a profit from the operation activity, profit from current operations overall profit will the value of land used in the activity is realized since income from the activity together with the appreciation expenses of operation. See, however, paragraph (d)of [section] activity in this connection. result when appreciation 1.183-1 for definition of land will exceed of the of an in Paragraph (d) of Treasury regulation section 17 1.183-1 in turn offers guidance on how to separate and 18 aggregate a taxpayer's different undertakings, providing 19 that the most significant facts and circumstances in 20 making this determination "are the degree of interrelationship 21 organizational and economic interrelationships of various ET 22 undertakings, the business purpose which is (or might be) 23 served by carrying on the various undertakings separately 24 or together* * * , and the similarity of various 25 undertakings." By way of example, paragraph (d) (973) 406-2 250 I operati�ns@escribers,net 1,,,,,,,,,_ escrib-ers.n et �IIIH 1 continues: 28 2 3 4 5 6 7 8 9 10 11 12 be considered a single activity Where land is purchased or held primarily with the intent to profit from increase in its value, and the taxpayer also engages in farming on such land, the farming and the holding of the land will ordinarily only if the farming activity reduces the net cost of carrying the land for its appreciation in value. Thus, the farming and holding of the land will be considered a single activity only if the income derived from farming exceeds the deductions which are not directly attributable holding of the land (that is, deductions than those directly attributable of the land such as interest on a mortgage secured by the land, annual property taxes attributable depreciation to the land and improvements, of improvements to the farming activity attributable to the holding to the land). and to the other Based on these rules, Ms. Daphne argues that the significant appreciation in the value of her ranch during 13 the course of her horse activity should be counted in her 14 favor. Our Court, however, has held that a taxpayer 15 generally may not rely on land appreciation that is 16 entirely independent of the taxpayer's activity to 17 establish that the activity was undertaken for profit. 18 See, e.g., Purdey v. Commissioner, T.C. Memo. 1989-657, 19 (stating 1989 WL 150236 stating that ("Petitioner cannot point to ET 20 appreciation of the ranch in support of his claim of 21 profit objective because the ranch would have appreciated 22 regardless of whether or not petitioner conducted his 23 activity there."); see also Dodds v. Commissioner, T.C. 24 (noting Memo. 2013-76, at *19 noting that ("Petitioner * * * 25 failed to provide any evidence linking his 18-acre (973) 406-2 250 I operati�ns@escribers,net 1,,,,,,,,,_ escrib-ers.n et �IIIH 1 property's increase in value to his horse breeding 29 2 activity. Without more information, we cannot conclude 3 that the property increased in value because of 4 5 6 petitioner's horse breeding activity."); Ruben v. Commissioner, T.C. Memo. 1986-260 (reaching the same conclusion), 852 F.2d aff'd without published opinion, 7 1290 (9th Cir. 1988) reaching the same conclusion; LaMusga ET 8 v.Commissioner, T.C. Memo. 1982-742 (same). 9 The purpose of the regulatory factors is to 10 ascertain a taxpayer's intent--that is, whether the 11 taxpayer undertook an activity with the objective of 12 making a profit. One would not expect appreciation 13 anticipated to occur regardless of whether a taxpayer 14 undertakes an activity to influence a taxpayer's 15 motivation with respect to the activity, unless income 16 from the activity assists the taxpayer in maintaining 17 ownership of the land (for example, in the case of a 18 marginally profitable farming operation as referenced by 19 the regulations). This fact pattern clearly is not 20 present in this case, where Ms. Daphne's horse activity 21 incurred losses in every year from its inception through 22 its termination. Additionally, Ms. Daphne did not acquire 23 her ranch for use in the horse activity or for any other 24 business purposes--it was a gift. Ms. Daphne resided on 25 the land for more than 40 years and testified emphatically (973) 406-2 250 I operati�ns@escribers,net 1,,,,,,,,,_ escrib-ers.n et �IIIH