TAX COURT OPINION

Case: Estate of Richard M. Hitchcock, Deceased, Dixie Hitchcock, Personal Representative and Dixie Hitchco
Docket Number: 1832-10S
Judge: Whalen
Opinion Type: bench
Filed: 02/22/2012
Pages: 22

UNITED S TATES.TAX COURT WASHINGTON, DC 20217 ESTATE OF RICHARD M. HITCHCOCK, DECEASED, DIXIE HITCHCOCK PERSONAL REPRESENTATIVE AND DIXIE.HITCHCOCK, ) ) ) ) Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. . ) ) ) Docket Nå. 1832-10S ) ) ) ) ) . ORDE R Pursuant to Rule 152(b), Tax ourt Rules of Practice and Procedure, it is 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 proceedings in the above case before the undersigned a Seattle, Washington, sontaining oral findings of fact and opinion rendered on January 27,.2012. In accordance withsthe oral findings of fact and öpinion, decision will be entered under Rule 155. (Signed) Laurence J. Whalen Judge Dated: Washington, D.C. February 22, 2012 1 2 3 4 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BENCH OPINION BY SENIOR JUDGE LAURENCE J. WHALEN RICHARD M. & DIXIE HITCHCOCK V. COMMISSIONER 3 DOCKET NO.: 1832-10S JANUARY 27, 2012 THE COURT: The Court has decided to render oral findings of fact and opinion in this case and the following represents the Court's oral findings of fact and opinion. II. This proceeding was heard as a Small Tax Case pursuant to the:provisions of section 7463 of the Internal Revenue CodÅ of 1986, as amended, and Rules 170 through 175 of tl e Tax Court Rules of Practice and 1 Procedure. Hereinaf er in this opinion, all section references are to the Internal Revenue Code, as amended and in effect for 2003, 2004, and 2005, the taxable years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. The decision to be entered in this case is not reviewable by any other court, änd this opinion should not be cited as authority. Sec . 7463 (b) . III. This bench opinion is made pursuant to the authority granted by section 7459(b) and Rule 152. Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5. 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 IV. 4 Michael D. Hunsinger, Esquire, appeared on behalf of petit ïoners, and John R. Gordon, Esquire, appeared on behalf of respondent . V- Respondent determined deficiencies in petitioners' Federal income taxes for the taxable years 2003, 2004, and 2005. in the amotints of $1,159, $6,495, and $1,392, respectively. Respondent also determined that petitioners are liable for a penalty under section 6662 (a) for 2004 in the amount of $1,299. . V.L.. There are four issues for decision by the Òourt . First, whether petitioners' taxable income for taxable year 2003 should be increased by $729, the amount of unreported qualified dividends received by petitioners during 2003. We refer to this as the "dividend issue. " Second, whether the net operating loss carryover of $13,425 claimed as a deduction on petitioners' return :!or 2004 should be allowed. We refer to this as the "net operating loss issue." Third, whether the activity, "Racing TB Horses, " reported on the Schedules C, Profit or Loss From Business, that were submitted with petitioners' tax Heritage Reporting Corporation 202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 5 returns for each of the years in issue was an "activity not engage in for profit" within the meaning of that phrase as set forth in section 183. We refer to this as the "thoroughbred horse issue." Fourth, whether peti ioners are liable for the accuracy-related penalty under section 6662(a) for 2004. We refer to this as the "accuracy-related penalty issue." VII. Facts: Some of the facts have been stipulated by the parties and the stipulation of facts and attached exhibits are hereby taken into evidence. Petitioners resided in Bonney Lake, Washington, at the time they filed the petition in this case. Petitioner Richard M. Hitchcock died on July 19, 2011, after 55 years of marriage to Dixie Hitchcock. He was 74 years of age at the time. References to "petitioner" are references to Mr. Ri hard M. Hitchcock. Petitioner was a lumberman. His family owned and operated a lumber company, White Swan Lumber Company. His principal occupation was working for and running that business. He had retired from that business before the years in issue. Mrs. Hitchcock was a full-time mother. She raised four children. Both petitioners grew up on a farm and rode Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 horses as children. iPetitioner's interest in thoroughbred horse racing began, circa 1972, when he went to a thoroughbrèd race for the first time. In the following year, etitioner and his father purchased a four-yea¼ old thoroughbred horse called Silver Mallet. They paid approximately $40,000 for the horse. In short order, Silver Mallet won the Longacres Mile, the premier race run at Longacres Race Track, in Renton, Waèhington. Petitioner's share of the purse was approximately $25,000. Unfortunately, Silver Mallet died of shipping sickness within the year, after being shipped to Santa Anita, California. From that point forward, it appears that petitioner's interest in and involvement with thoroughbred racing became an important part of his life. Petitioner began acquiring thoroughbred horses, or an interest in thoroughbreds, and working with trainers to prepare the horses to race, principally stakes or claims races. In 1977, petitioners saw their friends, Mickey and Karen Taylor, reach the pinnacle of horse racing after a horse they purchased, seattle Slew, won the Triple Crown. Petitioners were part of the owners' entourage in the winner's circle at Churchill Downs when Seattle Slew won the Kentucky Derby. Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 7 Several years later, in 1981, petitioners purchased a horse called Poppy at a yearling sale for $50,000. Poppy provëd to be a good investment. During the three years that petitioners raced Poppy, he won approximatelyl$205,000. After three years of racing, petitioner syndicated ppy for use as a stud. Petitioner L Vd received very little from the syndication and Poppy proved to be a poor stud. He was either sold for a little money or given away. During the 1980s, petitioner continued to run the family lumbe mill, but he also continued his racing activities. e became a member of the Washington Thoroughbred Breeders and Owners Association, WTBOA, and he became the president of the WTBOA for one year. He also joined the Board of the Washington Thoroughbred Foundation. Mrs. Hitchcock was also actively involved in the Washington Thoroughbred Foundation helping to put on events to raise money for the Foundation's scholarship fund. During this time, petitioners' racing activities had their "ups and downs," according to Mrs. Hitchcock. Circa 1992k the Longacres Race Track closed. This caused a reduction in petitioners' racing activities until 1997, or so, when a new thoroughbred Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 8 racetrack, Emerald Downs, opened in Auburn, Washington. Petitioner had retired from his occupation as a lumberman by that time. Shortly be ore Emerald Downs opened, petitioner had met M . David Bennett, a trainer of thoroughbred horses. Mr. Bennett had recently retired as an air traffic co troller, and he was trying to establish himself as a full-time trainer. Beginning at a young age and c ntinuing during the time that he had been employed as an air traffic controller, over 20 years, Mr. Bennet had trained thoroughbred race horses on a part-timë basis in Las Vegas, Houston, Colorado, Portland, and Renton, Washington. Before the two men met, Mr. Bennett knew of petitioner as Tamarack Stables, and he thought highly of the horses that petitioner raced. When petitioner's trainerileft the State of Washington, Mr. Bennett approached petitioner, and asked to be his trainer. After discussions with Mr. Bennett, petitioner agreed to work with Mr. Bennett on the condition that Mr. Bennett consult with petitioner closely on all decisions, such as what horses to acquire, how the horses would be trained, and in what races the horses would enter. It was understood that Mr. Bennett retained the final say on those decisions. Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Beginning with the second season at Emerald Downs, in 1997 or so, Mr. Bennett trained all of petitioner's horses. The two men formed a close working relationship that lasted until petitioner's death in 2011. Petitioner and Mr. Bennett had a similar concept of how the b siness should be run. Their plan included purchasing ost of their horses at the yearling sales condu ted by the Washington Breeders Association at Emera d Downs. Their plan was to buy horses that could ru at the race tracks where they could obtain stable facilities, including Emerald Downs in Washington, Turf Paradise in Phoenix, and Santa Anita, Bay Mea ows, and Golden Gate in California. Petitio ers' and Mr. Bennett's plan wÎas to acquire horses, as cheaply as possible, train them, and hope to produce ¼ big winner. As Mr. Bennett stated during the testimony, petitioner and he had placed bids of $4,500 to $10,000 on horses that went on to win $500,000 or more and, thus, had been close "to scoring big." Petitioner and Mr. Bennett would purchase horses at the yearling sale and syndicate them at a certain percentage per share, say ten percent. The two partners would share equally the remaining portion Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 10 of each horse that was not syndicated. They wanted other owners for each horse in order to maximize their ability to buy horse , and to minimize the risk of a particular horse bei g unable to race . Mr . Bennett received compensatioü of approximately $45 to $50 per day for each horse hë trained. A key element of their plan was to dispose of any horse that did not produce earnings in four starts. In each such case, they would attempt to sell the horse to a lower class race track, such as Boise, Idaho, or sell it as a jumper, or even give the horse away in order to cut off the expenses of feeding and maintaining the horse. Petitioner was an extremely active owner. During the season at Emerald Downs, which lasted from April through September, he went to the race track five or six days per week and spent four or five hours a day with Mr. Bennett watching horses workout and discussing various aspects of the business. Similarly, during the off-season when Mr. Bennett returned to Phoenix, Arizona, petitioner telephoned him on most days to discuss the business. Mr. Bennett's wife did his bookkeeping and kept his business records. She kept most of his records by computer. The records recorded all income Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 and expenses on a ho¼se-by-horse basis. Mr. Bennett recorded all expenses for each horse and sent invoices 11 to each of the owners. VIII. The principal issue before us in this case is whether petitioner's thoroughbred horse activity constituted "an activity not engaged in for profit" within the meaning of section 183 during 2003, 2004, and 2005. Se,ction 183(a) provides that if an activity is not engaged in for profit, then no deduction attributable to the activity shall be allowed, except as provided in secti5n 183 (b). Section 183 (b) (1) allows those deductiöns whic;h otherwise are allowable regardles:s of profit objective. Section 183 (b) (2) allows those deductions which would be allowable if the activity were engaged in for profit, but only to the extent that gross income attributable to the activity exceeds theldeductions permitted by section 183(b) (1). Section 183(c) defines "activity not engaged in for profit" as "any activity other than one with respect to which deductions are allowable for the taxable year under section 162 or under paragraph (1) or (2) of section 212." Deductions;are allowable under section 162 for the expenses of carrying on an activity which Heritage.Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 12 constitutes a trade or business of the taxpayer. See sec. 162; sec. 1.183 2(a), Income Tax Regs. To be engaged in a trade or business with respect to which deductions are allowable under section 162, "the taxpayer must be involved in the activity with continuity and regularity," and "the taxpayer's primary purpose for engaging in the activity must be income or profit." Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987); nee also Warden v. Commissioner, T.C. Memo. 1995-176, affd. without published opinion 111 F.3d 139 (9th Cir. 1997). This case :.s appealable to the Court of Appeals for the Ninth Circuit, which applies a primary purpose standard to test whether an alleged business activity has the regiiisite profit motive under sections 162 and 183 That standard is "whether the activity was entered into. with the dominant hope and intent of realizing a profit." Vorsheck v.· Commissioner, 933 F.2d 757, 758 (9th Cir. 1991), affg. in part and revg. in part T.C. Memo. 1994-281; see also Wolf v. Commiss.oner 4 F.3d 709, 713 (9th Cir. 1993) ("Profit must he the predominant, primary or principal objective), affg. T.C. Memo. 1991-212; Machado v. Commissioner, T.C. Memo. 1995-526, affd. without published op:.nion 111 F.3d 139 (9th Cir. 1997); Heritage Reporting.Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 lo 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 13 Warden v.. Commissioner, supra. We apply that standard here. Whether the requisite profit objective exists is to be resolved on the basis of all the surrounding facts and circumstances of the case. See Golanty v. Commissioser, 72 T..C. 411, 426 (1979), affd. without publis ed opinion 647 F.2d 170 (9th Cir. 1981); sec. 1.183-2( ), Income Tax Regs. The taxpayer's expectation of profit need not be reasonable, but it must be bona fide. See Golanty v. Comm1ssloner, supra at ·426. Although our analysis focuses on the subjective intention of the taxpayer, greater weight is gi en to objective facts than to a taxpayer's mere statement of intent. See Independent Elec. :Supply, Inc. v Commissioner, 781 F.2d 724 (9th Cir. 1986), affg. La r 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( ), Income Tax Regs. For purposes of section 183, the term "profit" means economic profit, independent of tax savings. Drobny v. Commissioner, 86 T.C 1326, 1341 (1986), affd. 113 F.3d 670 (7th Cir. 1 97). Petitioners bear the burden of proving that they had the requisite profit objective. See Rule 142(a); Golanty v. Commissioner, Heritage Reporting Corporation 202) 628-4888 14 1 2 3 4. 5 6 7 8 9 10 11 12 13 14 13 16 17 18 19 20 21 22 23 24 25 supra at 426. Section 1.183-2 (b), Income Tax Regs., sets forth a nonexclusive list of factors that normally should be taken into account in determining whether the requisite profit intent has been shown. The factors are: (1) The manner in which the taxpayer carries on the activity; (2) the expertise of the taxpayer or his advisers; (3) the time and effort expended by the taxpayer in carrying on the activity; (4) the expectation that assets used in the activity may appreciate in value; (5) the success of the taxpayer in carry1ng on other similar or dissimilar activities; (6) the taxpayer's history of income or loss with respect to the activity; (7) the amount of occasional profits, :f any, which are earned; (8) the financial status of the taxpayer; and (9) elements of personal pleasure or recreation. No single factor is determinative, see sec. 1.183-2(b), Income Tax Regs., and not all factors are applicable in every case; see Allen v.. Commissioner, 72 T.C. 28, 34 (1979). We now turn to reviewing the above factors in order to determine whether the requisite profit intent exists in thin case. 1. Manner in Which Activity Conducted: Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 15 In deciding whether a taxpayer has conducted the activity in a businesslike manner, we consider whether complete and accurate books and records were maintained, whether the activity was conducted in a manner substantially similar to other activities that were profitable, and whether changes in operating methods, adoption of new techniques, or abandonment of unprofitable methods were made in a manner consistent with an intent to improve profitability. See Engdahl v. Commissioner, 72 0.C. 659, 666-667 (1979); sec. 1.183-2(b) (1), Income Tax Regs. In this case, it is.evident that petitioner did not maintain a sophisticated cost accounting system. He relied upon Mr. Bennett to provide invoices for the expenses incurred by each of their horses, to send his share of any purses, and to provide the informat:.on that he needed to prepare his tax returns. It is apparent that those records were sufficient. Petitioner knew how each horse was doing by its race results and whether it had earned a purse. Petitioner and Mr. Bennett had an understanding that any horse that failed to earn money in four starts would be sold cn: otherwise disposed of. In this way, they would continual:.y prune non-productive horses Heritage Reporting Corporation (202) 628-4888 1. from their stable and improve overall performance. 16 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 The real work of pet tioner's business was in selecting the horses to purchase, deciding on the training regimen for each horse, deciding how best to classify each horse, and deciding in what races the horse should.run. As to this work, petitioner devoted a great deal of attention and effort.. 2. The Expertise of Petitioners or Their Advisors: Preparation for an activity by extensive study of its accepted business, economic, and scientific practices. or consultation with industry experts, may indicate a profit motive where the taxpayer carries on the activity in accordance with such practices. See sec. 1.183-2(b) (2), Income Tax Regs. In this case, petitioner had been involved in thoroughbred racing for many years prior to 2003, and he had enjoyed some success as Tamarack Stables. In addition, Mr. Bennett had trained horses for over 20 years, at least on a part-time basis, and he had had some success. 3. Petitioners' Tine and Effort: The fact that a taxpayer devotes personal time and effort to carry on an activity may indicate an intention to derive a profit, particularly where Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 17 there are no substantial personal or recreational elements associated ith the activity. See Daley v. Commissioner, supra; sec. 1.183-2(b) (3), Income Tax Regs. In this case, the time and effort expended by petitioner on his horse activity supports a finding of profit motivation notwithstanding the fact that petitioner, undoubtedly, enjoyed the activity. 4. Expectation That Assets Used in the Activity Would Appreciate in yalue: "The term 'profit' encompasses appreciation in the value of assets, such as land, used in the activity." Sec. 1.183-2(b) (4), Income Tax Regs, In this case the analysis of the net gain on horses sold that was presented by petitioners shows that, during the three years at issue, petitioners realized a net gain from horses sold, less depreciation, of $329. Certainly, petitioners' analysis does not show appreciation of the value of the horses during the years in issue. What it does show is that, during that time period, petitioners did not suffer a net loss on their capital investment in the horses. (We discuss their operating losses below.) This is in accord with petitioners' and Mr. Bennett's plan to acquire horses, as cheaply as Heritage Reporting Corporation (202) 628-4888 18 1 2 3 4 5 6 7 8 9 10 11 12 13 ,14 15 16 17 18 19 20 21 22 23 24 possible, train themj and hope to produce a big winner. 5. Petitioners' Past Successes in Other Activities: That a taxpayer has engaged in similar activities in the past and converted them from unprofitable to profitable enterprises may indicate that the taxpayer is engaged in the present activity for a profit, even though the activity is presently unprofitable. See sec. 1.183-2(b) (5), Income Tax Regs. It appears that petitioner;had enjoyed success in the past ith Silver Mallet and Poppy. 6. Petitioners' Hi tory of Income or Loss: A taxpayer s history of income, losses, and occasional profits w th respect to any activity may indicate the presence or absence of a profit objective. See Golanty v. Commissioner, 72 T.C. at 426; sec. 1.183-2(b) (6), Income Tax Regs. A horse racing and breeding activity may be engaged in for profit despite consistent losses during the initial startup phase. See Golanty v. Commissioner, supra at 427. We previously have found that the startup phase for an activity involving horses may be between five and ten years. See Engdahl v. Commissioner, 72 T.C. 25 . at 669; Phillips v. Commissioner, T.C. Memo. 1997-128. Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 19 Losses sustained beyond the period normally required to generate profits nay indicate the lack of profit motive unless such losses occurred because of unforeseen or unfortuitous circumstances. ~ As conceded by petitioners, this factor makes finding a prof:t motive for petitioner's thoroughbred activity difficult. Respondent's counsel emphasized effective y at trial that petitioners reported no profit on their Schedules C for the last ten years. We note, however, that petitioner's relationship with Mr Bennett started circa 1997 or 1998. Therefore, during the years in issue,.they had been conducting the activity for less than ten years and those years might be considered part of the startup years for the activity. 7. Amount of Occas onal Profits: The amount of profits earned in relation to the amount of losses incurred, the amount of the investment, and the value of the assets in use may indicate a profit ob ective. See sec. 1.183-2(b) (7), Income Tax R.egs. Thé opportunity to earn substantial profits in a highly speculative venture may be sufficient to indicate that the activity is engaged in for profit even though only losses are produced. See id. In determining hether the taxpayer entered into Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 20 the activity for pro it, a small chance of making a large profit may indicate the requisite profit objective. See id. Over the course of petitioner's career as an owner of thoroughbred horses, he had had occasional winners. It is also evident that the experience of petitioners' friends, Mickey and Karen Taylor, who purchased Seattle Slew, one of the greatest horses of all time, influenced petitioner. 8. Financial Status of Petitioners: That:the táxpayer does not have substantial income or capital from sources other than the activity in question may indiðate that the ;activity is engaged in for profit. : See sec. 1.183-2(b) (8), Income Tax Regs. SubstantÊial income from sources other than the activity may be indicative of a lack of profit motivation, particularly where there are elements of personal pleasure or;recreation involved. See id. A tax benefit resulting from an activity does not prove the absence of a profit motive. See Engdahl v. Commissioner, 72 T.C. at 670. It is, however, a factor to be considered. See Golanty v. Commissioner, 72 T.C. at 429. In this case, petitioner had some income or capital from sources other than thoroughbred horse Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 21 racing, but we do not believe that petitioner was motivated by tax benefits to engage in the activity. 9. Element of Personal Pleasure or Recreation: The existence of personal pleasure or recreation relating to the activity may indicate the absence of a profit objective. See sec. 1.183- 2(b) (9), Income Tax Regs. We agree with respondent that substantial elements of personallpleasure and recreation were present in petitioners' horse activity. However, "We also note that a business will not be turned into a hobby merely because the owner finds it pleasurable; suffering has never been made a prerequisite to deductibility. 'Sucéess in business is largely obtained by pleasurable interest therein.'" Jackson v. Commissioner, 59 .C. 312, 317 (1972) (quoting Wilson V. Eisner, 28 F. 38, 42 (2d Cir. 1922). The elements of personal pleasure are only one factor to be considered in determining whether the activity is engaged in for profit. See sec. 1.183-2(b) (9), Income Tax Regs. Furthermore, we believe that respondent's counsel overstates t e personal pleasure derived by petitioner. For example, counsel suggested that petitioner derived the same excitement and pleasure from watching his ho ses workout as he did from Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 22 watching them competé in a race. X. Conclusion: This is a close case. Some of the nine factors enumerated in section 1.183-2(b) of the operative regulation favor petitioner and some of those factors favor respondent. On balance, however, we conclude that the:scales tip in petitioner's favor. We conclude that petitioner carried on his horse activity during the years at issue with the requisite profit objective and that it was an activity with respect to which deductions are allowable under section 162. In reaching our decision, we have considered the factots listed in section 1.183-2(b), Income Tax Regs., all contentions presented by the parties, and the facts and circumstances of this case. XI. Before con luding, we feel obliged to say that petitioners shoûld understand that the Court's decision in this casë applies only to the three taxable years in issue. Accordingly, they should draw no inference from this bench opinion concerning the deductibility of losses in other years, particularly in years subsequent to those in issue in this proceeding. // Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 XII. 23 To give effect to the foregoing, the notice of deficiency is not sustained as to the thoroughbred horse issue. As to the dividend issue, the net operating loss issue, and the accuracy-related penalty issue, we note that petitioners made no mention of, and thus conceded, those issues at trial. Accordingly, we sustain the adjustments made in the notice of deficiency as to the dividend issue, and the net operating loss issue. As to the accuracy-related penalty, the penalty will apply to any underpayment for taxable year 2004, as recomputed on the basis of this bench opinion. To effect the foregoing, decision in this case will be entered under Rule 155. XIII. This concludes the Court's oral findings of fact and opinion in this case. (Whereupon, at 8 : 3 8 a . m. , the bench opinion in the above-entitled matter was concluded.) // // // // // // Heritage Reporting Corporation (202) 628-4888