TAX COURT OPINION

Case: George P. Schott
Docket Number: 9488-07
Judge: Colvin
Opinion Type: bench
Filed: 05/14/2009
Pages: 25

UNITED STATES TAX COURT WASHINGTON, DC 2021 7 GEORGE P . SCHOTT, Petitioner , v . ) Docket Nos . 9488-07 15979-08 . COMMISSIONER OF INTERNAL REVENUE , .Respondent O R D E R Pursuant to Rule 152(b), Tax Court .Rules of Practice and Procedure, it i s ORDERED that the Clerk of the Court shall transmit herewith to Petitioner and to respondent a copy of the pages of the transcript of the trial in the above case before Judge David Gustafson at Boston, Massachusetts, on March 20, 2009, containing his oral findings of fact and opinion rendered at the conclusion of the trial . In accordance with the oral findings of fact and opinion, decision will be entered for petitioner . , ', (Signed) David Gustafson Judge Dated : Washington, D .C . May 14, 2009 VED MMNI 2 i Z O R I G I N A L 2 1 P R O C E E D I N G S 2 Bench Opinion by Judge David Gustafson March 20, 2009 3 Schott v . Commissioner Nos . 9488-07, 15979-0 8 4 The Court has decided to render oral Findings of 5 Fact and opinion in this case, ; and the-following 6 represents the Court's oral Findings of Fact an d 7 Opinion . The oral Findings of, Fact and opinion shall 8 not be relied on as precedent in any other case . 9 This Bench Opinion is made pursuant to th e 10 authority granted by section 7459(b) of the Internal 11 Revenue Code of 1986, as amended, and Rule 152 of the 12 Tax Court Rules of Practice and Procedure . 13 By statutory notices of deficiency dated April 3, l4 2007, respondent determined deficiencies in th e 15 Federal income tax of petitioner George Schott fo r 16 over $200,000 in each of the tax years 2002, 2003, and 17 2004, and an accuracy-related penalty under sectio n 18 6662-in each year in an amount over $40,000 . The 19 issue for decision is whether Mr . Schott's horse- 20 breeding activity was an activity not engaged in for 21 profit pursuant to section 183' . We find that, in the 22 -year-s -- :relev-an-t -(cid:127)here(cid:127)= Mr . Schott' s ' horse-breedin g 23 activity was engaged in for profit . 24 Some of the facts have been stipulated and are so 25 found . The stipulation of facts and the attache d Heritage Reporting Corporation (202) 628-4888 3 1 exhibits .1-J through 14-J are' incorporated herein b y 2 this reference . Trial of this case was held i n 3 Boston, Massachusetts, on March 18, 2009 . Mr . Schott 4 testified, as did horse trainer and breeder Richar d 5 Lane and Certified Public Accountant Claire Thompson . 6 All three witnesses were candid and credibl e 7 witnesses, and the IRS called no witnesses . 8 Additional Exhibits 17-R and 18-P were admitted into 9 evidence at the trial . We find the following facts : 10 At the time he filed his petitions, Mr . Schott 11 resided in Maine . 12 Mr . Schott's other business activities . 13 Mr . Schott graduated from high school in 1969, 14 and thereafter worked for his !father in famil y 15 businesses until sometime in the 1980s . Since then h e 16 has succeeded in several businesses on his own . In 17 1986 he acquired from his father a Harley-Davidso n 18 motorcycle franchise and a golf cart business, and in 19 1991 acquired his father's Hon da motorcycle business . 20 He sold the golf cart business, for a substantia l 21 profit in 1997 . The combined Harley-Davidson and 22 Honda motorcycle business was destroyed by fire in 23 1998, but he rebuilt it, made more than a million 24 dollars annually from the business, and sold the 25 business in 2005 and reported a $3 million profit . Heritage ReportinglCorporation (202) 628-4888 4 1 With some of the proceeds of the 1997 sale of the golf 2 cart business, he bought a strip mall (Auburn Plaza ) 3 in 1998, brought its occupancy up substantially, and 4 in 2003 profited substantially (he estimate s 5 $4 million) in a like-kind exchange for a develope d 6 property called Mount Auburn Plaza . When he sold the 7 motorcycle business in 2005, he bought Auburn Mall , 8 and since then he has doubled,its occupancy . 9 For none of these successful ventures did Mr . 10 Schott have a written business plan, nor did h e 11 consult experts or take formal training . He made no 12 written profit or sale projections, and did no t 13 calculate a break-even point . He hired no Chief 14 Financial Officer . He has no college degree in 15 business (or any other subject) and no Master o f 16 Business Administration degree . Rather, he evidently 17 has a wide variety of skills useful in business, i s 18 perceptive of opportunities, and works hard to exploit 19 them . 20 For all of these businesses, Mr . Schott ha s 21 maintained manual books and records, not computerized 22 records . His most formal record-keeping was for the 23 motorcycle business . For that business, in order t o 24 satisfy his franchisors and his bank, he used a one- 25 write check system on which check amounts are entere d Heritage Reporting Corporation (202) 628-4888 it 5 1 by category on a ledger incorporated in the checkbook, 2 so that expenses can be totaled . From this ledger hi s 3 accountant prepared annual financial statements an d 4 profit-and-loss statements . For his other businesses , his expense records consisted of receipts, credit card slips, and cancelled checks that he maintained durin g 7 the year and tabulated at the ;end of the year . 8 gave the totals of his expenses and income to hi s 9 accountant, who used them to prepare his personal tax 10 returns and the returns for his S Corporations . Fo r 11 these businesses, he did not generate monthly or 12 quarterly statements of any kind . At the end of the 13 year, when he tallied his expenses and income, h e 14 assessed how the business was,performing . 15 The initial horse activity . 16 In 1980 Mr . Schott became aware of a piece o f 17 property--a house and afarm of more than 700 acres-- 18 whose owner was going into bankruptcy,-and which Mr . 19 'Schott could acquire for $205,1000 . Without written 20 business plan, profit projections, consultants, or 21 seminars, and without feasibility studies or searche s 22 for financiers or partners, Mr . Schott made the 23 purchase . (From his property tax and othe r 24 information, he believes the property now to be worth 25 $1 .8 million .) He fixed up the property, and in 19,81 Heritage Reporting) Corporation (202) 628-4888 1 he began his horse breeding operation . 2 The operation started small . For about 15 years 3 .(1981 through 1996) he had 5 to 10 horses, and h e 4 experimented with different breeds, including one 5 Morgan horse (the breed he would eventually settl e 6 on) . He grew hay on much of the property, using some 7 for his small herd of horses and selling th e 8 remainder . For these 15 years, the sale of the hay 9 was the main income source o f the farm . In 1983 h e 10 built a riding rink and hired a trainer and an 11 assistant trainer in the hopelof establishing a 12 training barn but he abandoned that plan six months 13 der when he lost money at it . By one measure, the I 14 farm had a positive cash flow ;in each of the years 15 1990 through 1996 (see Exhibit 17-R) ; but the horse 16 activity was largely unprofitable and apparentl y 17 static until 1997 . 18 1997'decision to ramp up the horse activity . 19 In 1997 Mr . Schott had money from the sale of the 20 golf cart business, and decided to use some of it t o 21 increase the horse activity substantially . He went .to 22 trainer and breeder Richard Lane . Mr . Schot t 23 initially went to Mr . Lane to inquire about purchasin g 24 horses of one of Mr . Lane's customers, but he ended up 25 striking up a business relationship with Mr . Lane that Heritage Reporting, Corporation (202) 628-4888 7 1 would be important to the horse activity . Mr . Lane 2 had his own stables, where he ran a showing an d 3 training operation and assisted customers with the 4 breeding of their horses . He advised Mr . Schott about 5 the horse breeding business . Mr . Schott came t o 6 understand that .it takes years of sustained effort to 7 make such an activity profitable . If a mare wer e 8 purchased in 1998, it could first be bred in 1999 an d 9 would foal in 2000 . The foa l would sell best as a 3- 10 or 4-year-old in 2003 or 2004 . Thereafter, th e 11 operation would profit as mares and stallions could be 12 bred rather than purchased . 13 As a result of his discussions with Mr . Lane , 14 Mr . Schott adopted the plan of breeding the bes t 15 Morgan stallions to the best Morgan mares (according 16 to criteria that Mr . Lane recommended) in order to 17 produce and sell high-quality show horses . He hoped 18 to profit through eventual sales of horses, semen, 19 foals, unborn foals, and embryos . 20 Activity after 1997 . . 21 Mr . Schott described his increased horse activit y 22 in some detail, which Mr . Lane generally confirmed . 23 In 1997 to 1999 Mr . Schott acquired . about 1 0 24 nationally renowned mares . He started spending about 25 $60,000 to $100,000 in stud fees to impregnate thos e 1 Heritage Reporting Corporation (202) 628-:4888 8 mares . He then determined that he should instea d 2 purchase three nationally recognized stallions and 3 save those fees . He bought them and did recogniz e 4 those savings (reducing the stud fees he paid to about 5 _ $6,000 to $8,000 per year), as well as-freezing their 6 semen for later use with his own mares and for sale to 7 others . (Frozen sperm is permitted for the breedin g of Morgan horses .) Mr . Schott learned about the us e 9 of artificial reproductive technology and shipped some 10 of his mares to a veterinarian in Missouri who would 11 use frozen semen to inseminate each mare, wait seven 12 days, "flush" the egg out, and implant it in anothe r 13 (less valuable) mare , so that Mr . Schott' s show mare s 14 could have more numerous offspring and be spared th e 15 physical risks of foaling . 16 Mr . Schott's herd increased in size by about 5 17 horses per year . In the years 1997 to 2002 he made 18 substantial purchases of horses ; but by 2002, he was 19 able to stop doing so, because the herd was increasing 20 as a result of his own breeding activity . From time 21 to time he culled the herd byeselling the mares tha t 22 were not producing and the "low- end" horses that di d 23 not show well . He maintained the registrations of hi s 24 Morgan horses . By the suit years, the herd totaled 45 25 or 50 horses . By the suit years, all the hay produced Heritage Reporting Corporation (202) 628-4888 9 1 on his farm was used by his horses, and he had to 2 purchase additional hay . 3 By the end of 2005', the herd reached a maximum of 4 about 75 horses . At that time Mr . Schott and Mr . Lane 5 estimated the value of each horse, and the aggregat e 6 estimated value of the herd was about $2 .1 million . 7 He did not hire a professional appraiser to verif y 8 this estimate . He had a high level of confidence i n 9 their estimates, because they were able to accurately 10 predict the price at which individual horses woul d 11 sell . 12 Starting in 1997, Mr . Schott hired Mr . Lane to 13 train his horses for showing, and Mr . Lane helped him 14 identify the best horses . Mr . Schott arranged for his 15 horses to show at various local and .national shows . 16 By the time of the suit years he drove the horses to 17 and from about five local shows (on the day before and 18 the day after the show), but he usually stayed an d 19 attended only one of those shows a year, since he 20 could not afford to be away from his other businesse s 21 too many days in a given week He did not actuall y 22 show the horses himself, but had another person (ofte n 23 Mr . Lane) to do the showing . When Mr . Schott di d 24 attend , he sat in the reviewing stand . By the time o f 25 the suit years his horses did well at the shows . A t Heritage Reporting Corporation (202) 628-'4888 1 0 1 one show Mr . Schott's horses won 51 ribbons, as 2 compared to the 20 won by horses of a well-know n 3 breeder (H .B . Kohler) . In 2004 one of Mr . Schott's 4 horses ("M .E .M . Shock and Awe") was Grand Champion . 5 His horses won purses totaling $12,000 to $15,000 per 6 year, but the real benefit of the shows was not th e 7 purses, but the exposure of the horses to attract 8 buyers . The Morgan Connection magazine selects a 9 Breeder of, the year . In 20031Mr . Lane was Breeder o f 10 the Year, and in 2004 Mr . Schott was Breeder of the 11 Year . 12 During the years at issue, in addition to th e 13 horse activity, Mr . Schott was running the motorcycle 14 business and Auburn Plaza, but he worked daily at the 15 farm, if only briefly some days . He checked on the 16 horses in the morning and evening , and on the weekends 17 he fed the horses as well . If a horse was sick, he 18 tended it, sometimes late into the night . Afte r 19 consultation with Mr . Lane, Mr . Schott made all the 20 breeding decisions, veterinary decisions, showin g 21 decisions, and selling decisions . Mr . Schott does not 22 himself enjoy riding horses, and he has not ridden a 23 horse in the last 8 or 10 years . He does get 24 satisfaction out of the success of his horses and hi s 25 breeding operation . He is a member of five Heritage Reporting Corporation (202) 628-4888 1 1 1 associations related horse showing and breeding . 2 From 1997 through 2005, the horse-breedin g 3 activity' s gross revenue increased from $33,532 t o 4 $218,600 ; but it had a net loss in each year because 5 expenses (including depreciation on horses) als o 6 increased in that same perio d from $104,733 t o 7 $553,071 (with a high of $758 397 in 2004) . In the 8 period 1997 through 2005 he spent a total of jus t 9 under $5 million on the activity, and it had so fa r 10 generated $ 971,894 in revenue , in that period . 11 However , because he was able to stop purchasing horses 12 in 2002 ( as the herd became self - reproducing), th e 13 activity showed a positive cash flow by the post-sui t 14 year 2005 . ( See Exhibit 18-P In 2006, Mr . Schot t 15 held an auction and sold 26 horses for more than a 16 half million dollars (obviously, not something he 17 could do every year) and, for the first time since 18 1997, turned a profit (of $651615) from the hors e 19 activity . Mr . Schott has never tried to calculate his 20, break-even point from the horse activity . He is less 21 concerned with realizing taxable income or positiv e 22 cash flow in the near term than with increasing th e 23 value of his herd over the long term, which he i s 24 confident he is accomplishing- His estimated value of 25 the herd before the auction was $2 .1 million, an d Heritage Reporting Corporation (202) 628 - 4888 1 2 1 after the sale it was about $1 .6 million . 2 Because he never borrowed money or took on any 3 partner for the horse activity, he never had to 4 justify its finances to a lender or anyone else . 5 kept records for the horse activity in the same manner 6 as his other business activities . 7 Mr . Lane testified convincingly that Mr . Schott 8 has the best horses that Lane~,has trained . Mr . Lan e 9 has customers who are hobbyists , but he sees that 10 Mr . Schott views the activity)" business-wise" . 11 Mr . Schott's activity has been well ordered towar d 12 producing horses that, in Mr . Lane's judgment, ar e 13 better than their parents, which is a mark of true 14 success in horse breeding . Mr .' Lane affirms tha t 15 Mr . Schott is developing a national reputation for .his 16 Morgan horses . 17 OPINION 18 A taxpayer who is carrying on a trade or business 19 may deduct ordinary and necessary expenses incurred in 20 connection with the operation!of the business . Sec . 21 162(a) . However, a taxpayer cannot reduce his taxabl e 22 income by claiming as deductions the expenses he 23 incurs for his hobby or other'non-profit activity . 24 Section 183(a) provides generally that if an activity 25 is not engaged in for profit,'no deductio n Heritage Reporting Corporation (202) 628-;488 8 f 1 3 1 attributable to such activity shall be allowed except 2 as provided in section 183(b) Generally, the IRS' s 3 deficiency determinations set forth in a notice o f 4 deficiency are presumed correct, and the taxpayer 5 bears the burden-of showing the determinations are in 6 error . Rule 142(a ) ; Welch v .' Helvering , 290 U .S . 111 , 7 115 (1933) . Thus, if the IRS determines that a given 8 horse - breeding activity is not engaged in for profit , 9 that determination is presumed correct, and the 10 breeder has the burden to prove otherwise . 11 Section 183(c) defines an "activity not engage d 12 in for profit" as "any activi y other than one wit h 13 respect to which deductions are allowable for th e 14 taxable year under .section 162 or under paragraph (1 ) 15 or (2) of section 212 ." An activity constitutes a 16 "trade or business" within the meaning of sectio n 17 162--and it escapes the limitation of section 183--if 18 the taxpayer's actual and honest objective is t o 19 realize a profit . Osteen v . Commissioner , 62 F .3d 356 , 20 358 (11th Cir . 1995),(cid:127)affg . in part and revg . in part 21 T .C .+ Memo . 1993-519 . The expectation of profit nee d 22 not have been reasonable ; however, the taxpayer must 23 have entered into the activity, or continued it, with 24 the objective of making a profit . Hulter v . 25 Commissioner , 91 T .C . 371, 393 (1988) ; sec . 1 .183- Heritage Reporting Corporation (202) 62814888 1 4 1 2(a), Proced . & Admin . Regs . (29 C .F .R .) Whether the 2 requisite profit objective exists is determined b y 3 looking at all the surrounding facts and 4 circumstances . Keanini v . Commissioner ,, 94 T .C . 41, 5 46 (1990) ; sec . 1 .183-2(b), Proced . & Admin . Regs . 6 Greater weight is given to objective facts than to a 7 taxpayer's mere statement of intent . Thomas v . 8 Commissioner , 84 T .C . 1244, 1269 (1985), affd . 79 2 1 9 F .2d 1256 (4th Cir . 1986) ; sec . 1 .183-2(a), Proced . & 10 Admin . Regs . 11 Horse-breeding may be the quintessential section 12 183 activity . The stereotypical scenario is probably 13 the wealthy businessman who runs a real busines s 14 during the week--with business records, incom e 15 projections, accountability to banks and investors , 16 and so on--and owns a "gentleman farm" as a weekend 17 retreat where he keeps . horses' for the recreation o f 18 himself and his family and friends . But he dabbles in 19 breeding, with no expectationlof ever making a profit , 20 so that he can deduct the expenses of his horses and 21 thereby have Uncle Sam subsidize the weekend farm . 22 Think hobby loss, think hors e breeding . However , 23 there are some horse breeders who really are engagin g 24 in the activity to make a profit . See, e .g ., Mille r 25 v . Commissioner , T .C . Memo . 2 008-224 . Mr . Schott doe s Heritage Reporting Corporation . (202) 628''7 4888 1 5 1 not fit the stereotypical abusive scenario, and he i s 2 instead engaged in horse breeding to make a profit . 3 Section 1 .183-2(b) of the regulations provides a 4 list of factors to be considered in the, evaluation of 5 a taxpayer's profit objective! (1) The manner i n 6 which the taxpayer carries on the activity ; (2) the 7 expertise of the taxpayer or his advisers ; (3) th e 8 time and effort expended by-the taxpayer in carrying 9 on the activity ; (4) the expectation that assets use d 1 10 in the activity may appreciate in value ; (5) th e 11 success of the taxpayer in carrying on other simila r 12 or dissimilar activities ; (6) the taxpayer's histor y 13 of income or losses with respect to the activity ; (7 ) 14 the amount of occasional profits, if any, from th e 15 activity ; ( 8) the financial status of the taxpayer ; 16 and (9) elements of personal pleasure or recreation . 17 This list is nonexclusive, and the number of factors 18 for or against the taxpayer i,s not necessaril y 19 determinative, but rather all facts and circumstances 20 must be taken into account, and more weight may b e 21 given to some factors than to others . Id . ; see Dunn 22 v . Commissioner , 70 T .C . 715,! 720 (1978 ), affd . 615 23 F .2d 578 (2d Cir . 1980 ) 24 We now address these 9 . f actors . 25 1 . Manner in Which the, Activity Is Conducted . Heritage Reporting Corporation (202) 628L4888 16 1 The fact that a taxpaye r carries on the activity 2 in a business-like manner and maintains complete an d 3 accurate books and records may indicate a profit 4 objective . 29 C .F .R . sec . 1 .183-2(b)(1) . Th e 5 evidence established that Mr . Schott kept accurat e 6 records that were adequate for his purpose . 7 Respondent emphasizes their low-tech informality , 8 which in some circumstances might indeed be a sign 9 that serious profit motive is lacking . However, in 10 this instance Mr . Schott's record-keeping for the 11 horse-breeding activity is equivalent to his record- 12 keeping for his other business activities that are 13 unquestionably profit-motivated--and profitable . 14 While Mr . Schott had no written business plan fo r 15 the horse breeding activity, the evidence established : 16 that he certainly did have a plan, which was worked I 17 out through his own business sense with the technica l 18 equine help of Mr . Lane, that he followed through i n 19 carrying out that plan, and that he has seen that plan 20 start to show signs of success . See Phillips v . 21 Commissioner , T .C . Memo . 1997-128 (holding that a 22 business plan need not be in written form and can be 23 evidenced by the taxpayer's actions) . Mr . Schot t 24 registered his horses with the Morgan association, and 25 has become conspicuous in Morgan circles . He has been Heritage Reporting Corporatio n (202) 628L 4888 1 7 1 diligent about taking his horses to . shows, and both 2 they and he have won awards . 3 We conclude that this factor--the manner in whic h 4 the activity is conducted--i s in Mr . Schott's favo r 5 and indicates that he had the requisite profit motive . 6 2 . Expertise of the Taxpayer and His Advisers . 7 A taxpayer's expertise, research, and study of an 8 activity, as well as his consultation with experts , 9 may be indicative of a profit intent . Sec . 1 .183- 10 2(b)(2), Proced . & Admin . Regs . Mr . Schott ha s 11 enlisted Richard Lane, an expert in the training and 12, breeding of Morgan horses, to assist him i n 13 successfully building an excellent herd and has 14 engendered Mr . Lane's loyalty, enthusiasm, and 15 commitment to Mr . Schott's opration . 16 Respondent correctly points out that Mr . Lane's . 17 particular expertise is not in the business end of th e 18 activity--how to make a profi with Morgan horses--bu t 19 ' rather in the breeding, showing, and selling o f 20 horses . Admittedly, one could be good at Mr . Lane' s 21 specialty but be a failure in the business . However , 22 Mr . Schott's success in various other ventures show s 23 that he already possessed the generic skills and 24 knowledge to run a business, and in enlisting 25 Mr . Lane's help he got what h e lacked in order to mak e Heritage Reporting Corporation (202) 628 1-4888 1 8 1 his horse breeding activity a success . 2 We conclude that this factor--expertise--is in 3 Mr . Schott's favor and indicates that he had th e 4 requisite profit motive . 5 3 . Time and effort expended . I 6 Mr . Schott does clearly spend substantial amounts 7 of time on the horse-breedingliactivity, in his dail y 8 checks on the horses, his weekend-feeding of the 9 animals, his driving of them to shows, hi s 10 consultations with Mr . Lane, and so on . However, h e 11 also clearly limits his time spent .on the horse 12 breeding activity so as not to harm his othe r 13 ventures . This factor is neutral in assessing hi s 14 profit motive . 15 4 . The Expectation That Assets May Appreciate 16 in Value . 17 Mr . Schott's goal was to create a self- 18 perpetuating herd that would increase in value ove r 19 time . In early 2006, his estimate of the value of his 20 herd was $2 .1 million . Whilel he is not an appraiser, 21 his estimate was reasonable and--more pertinent here-- 22 was his genuine subjective assessment of the value his 23 activity was generating and would continue t o 24 generate . 25 We conclude that this factor--expectation that Heritage Reporting Corporatio n (202) 628'i-4888 1 9 1 assets may appreciate--is in Mr . Schott's favor and 2 indicates that he had the requisite profit motive . 3 Mr . Schott does not urge--and we, do not take int o 4 account--any expectation that he may have entertaine d 5 about the increase in the value of the-real estate . 6 In fact, in the 29 years he has owned it, it increased 7 in value from $205,000 to an estimated $1 .8 million . 8 However, as in many other instances, it is possibl e 9 here to consider the holding of the real estate to be 10 an activity distinct from . thehorse breeding tha t 11 takes place on it . Here the horse activity take s 12 place on a distinct 65- to 70Lacre parcel on one sid e 13 of the road, and the . horses are not permitted on the 14 650 acres on the other side of the road (where th e 15 house and the fields are located) . A genuine belief 16 that the entire property might increase in value does 17 not necessarily show that the horse activity tha t 18 takes place on a relatively small, distinct piece o f 19 it is engaged in for a profi t 2 0 21 The Taxpayer's Success in Similar or Dissimilar Activities . 22 Mr . Schott is a canny and successful businessman . 23 He has purchased, developed, operated and sol d 24 successful ventures in varied fields . We conclude 25 that this factor is in Mr . Schott's favor and Heritage Reporting Corporatio n (202) 628L4888 . 2 0 1 indicates that he had the requisite profit motive . 2 6-7 . History of Income or Loss / Amount of Gain . 3 In the years at issue, and in the prior decades , 4 Mr . Schott has reported on his tax returns . a n 5 impressive string of losses from the horse activity . 6 This factor must weigh against Mr . Schott, to som e 7 extent, in assessing his profit motive . A record of 8 substantial losses over several years may b e 9 indicative of the absence of a .profit motive . Golant y 10 v . Commissioner , 72 T .C . 411, 426 (1979), affd ., 64 7 11 F .2d 170 (9th Cir . 1981) . However, section 1 .183- 12 2(b)( 6) provides that a series of losses during th e 13 startup phase of an activit y ay not necessarily be an 14. indication that the activity s not engaged in fo r 15 profit . This Court has recognized that the startup 16 phase of an American horse breeding activity is 5 to 17 ~10 years . Engdahl v . Commissioner , 72 T .C . 659, 669 18 (1979) . We conclude that the period beginning in 1997, 19 when Mr . Schott received the proceeds of the sale o f 20 his golf cart business and began to get serious about 21 horse breeding, constituted, in effect, a start-up 22 period . See Phillips v . Commissioner , T .C . Memo . 23 1997-128 . Mr . Schott's hors e -breeding activity i s 24 . trending toward profitability (with positive cash flo w 25 in 2005 and a ,modest profit in 2006), and the negativ e Heritage Reporting Corporation (202) 628 ; 4888 2 1 1 weight of this factor--a history of losses--is thus 2 largely mitigated . 3 8 . Financial Status of the Taxpayer . 4 A lack of income . from sources other than th e 5 activity in question may indicate that-an activity is 6 engaged in for profit . Substantial income from sources 7 other than the activity in question, particularly i f 8 offset by substantial tax benefits, ma y 9 indicate the activity is not engaged in for profit . 10 Sec . 1 .183- 2(b)(8), Proced . Admin . Regs . 11 Mr . Schott had substantial income from his othe r 12 business activities . Without the claimed losses from 13 the horse breeding activity, Mr . Schott ' s income would 14 have been higher . Although this factor may tend 15 against .Mr . Schott's claim of a profit motive, it i s 16 but one factor and is not determinative of. th e 17 outcome . 18 '9 . Elements of Personal Pleasure . 19 The absence of personal pleasure or recreation 20 relating t o 21 the activity in question may indicate the presence of 22 a profi t .23 objective . Sec . 1 .183-2(b)(9i), Proced . & Admin . Regs . 24 Mr . Schott does not ride horses himself, and there wa s 25 no evidence that any relative s or friends o f Heritage Reporting Corporation (202) 628 1-4888 of a profit motive, it is but one factor and is not determinative of the outcome . 9 . Elements of Personal Pleasure .) The absence of personal pleasure orI recreation relating to the activity in question may indicate tle presence of a profit objective . 29 C .F . R . sec . 1 .183 - 2(b)(9) .I. Mr . Schott does not ride horses himself , and there was no evidence that any relative s or friends of Mr . Schott's ever rides his horses . Mr . Schott does not personally show his horses at shows, and he declines to attend most of the shows . Riding horses is not Mr . Schott' s hobby . We conclude that this factor--lack of elements of persona l pleasure--is in Mr . Schott's favor and indicates that he had the requisite profit motive . Respondent emphasizes that Mr . Schott does enjoy seeing his horses succeed at shows, that there is .a social aspect to the shows, and that there was social enjoyment in hosting the 200 6 auction . We consider such satisfaction with one's work to be completely beside„the point in this analysis . Fortunate people choose, as their principal profit-making activity, an activity they enjoy and that gives them a feeling of satisfaction . The mere fact that a taxpayer derives personal pleasure from a particular activity does not, per se, demonstrate a lack o f profit motive . 18 Conclusio n We conclude that Mr . Schott engaged in the horse breedin g activity during 2002, 2003, and 2004 with the actual and honest objective of making a profit, and that section 183 is inapplicable in this case . To reflect the foregoing, decision will be entered for the petitioner .. This concludes the Court's oral Findings of Fact and Opinio n in this case . 19 2 2 1 Mr . Schott's ever rides his horses . Mr . Schott ,doe s not personally show his horses at shows, and he declines to attend most of the shows . Riding horses is not Mr . Schott's hobby . . We conclude that this fa for--lack of elements o f personal pleasure--is in Mr . )chott's favor an d 7 indicates that he had the requisite profit motive . . 8 Respondent emphasizes th~t Mr . Schott does enjoy . seeing his-horses succeed at hows, that there is, a 10 social aspect to the shows, and that there was socia l 11 enjoyment in hosting the 2006 auction . We conside r 12 such satisfaction with one's work to be completely 13 beside the point in this analysis . Fortunate people 14 choose, as their principal profit-making activity, a n 15 activity they enjoy and that rives them a feeling of 16 satisfaction . The mere fact :hat a taxpayer derives 17 personal pleasure from,a-part icular activity does not, 18 per be, demonstrate a lack of profit motive . 19 Conclus ion 20 We conclude that Mr . Schott engaged in the horse 21 breeding activity during tax years 2002, 2003, and 22 2004 with the actual and honest objective of making a 23 profit, and that section 18 3 s inapplicable in thi s 24 case . 25 To reflect the foregoing decision will b e Heritage Reporting Corporation (202)_62844888 23 1 entered for 2 the petitioner . 3 This concludes the Court s oral Findings of Fac t 4 ' and opinion in this case . 5 (Whereupon , at 1 :34 p .m . the bench opinion i n 6 the above - entitled matter was concluded . ) 7 8 9 10 11 12 13 14 15 16 17 / / 18 19 20 2 1 .22 23 // 2 4 25 Heritage Reporting Corporation (202) 628,-4888