t c memo united_states tax_court richard h daley and estate of anne h daley deceased richard h daley executor petitioners v commissioner of internal revenue respondent docket no filed date gregory a robinson for petitioners thomas s dileonardo for respondent memorandum findings_of_fact and opinion wright judge respondent determined deficiencies in an addition to and penalties on petitioners’ federal income taxes as follows 1unless otherwise indicated all section references are to the internal_revenue_code in effect for the years at issue and all rule references are to the tax_court rules_of_practice and continued year deficiency dollar_figure big_number big_number addition_to_tax and penalties sec_6661 sec_6662 dollar_figure --- --- --- dollar_figure big_number after concessions the issues for decision are whether petitioners' horse activity during the taxable years at issue was engaged in for profit we hold that it was not whether petitioners are liable for the addition_to_tax under sec_6661 for a substantial_understatement for taxable_year we hold that they are whether petitioners are liable for the accuracy-related_penalty under sec_6662 for a substantial_understatement for taxable years and we hold that they are findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and attached exhibits are incorporated herein at the time the petition was filed petitioner2 resided in phoenix arizona all references to petitioner in the singular are to richard h daley continued procedure 2anne h daley died during taxable_year and petitioner richard h daley is the executor of anne h daley's estate petitioner has practiced medicine as a surgeon in arizona since his medical practice requires between and hours of his time each week during the 12-year period ending with petitioner's average wage income from his medical practice was dollar_figure similarly during the taxable years at issue petitioner's average wage income from his medical practice was dollar_figure petitioner has always relied on a professional accountant to manage the books_and_records of his medical practice during the years through petitioner was a partner in m l leasing a partnership engaged in the leasing of various types of goods in this partnership was dissolved and petitioner began operating m l leasing as a sole_proprietorship petitioner continued to operate m l leasing as such through at least date m l leasing's books_and_records were managed by a professional bookkeeping service during taxable years through petitioner reported the following profits and losses from his interest in m l leasing year profit loss dollar_figure big_number big_number big_number big_number big_number 3until m l leasing was a partnership accordingly the amounts reflected for years prior to indicate petitioner's share of partnership profit and losses big_number big_number big_number big_number petitioner grew up in rural nebraska and spent much of his time on the farm he developed an interest in horses at a young age and retained that interest into adulthood sometime during the 1970's petitioner developed an interest in cutting horses historically a cutting horse was a horse bred and trained to serve as a tool for separating cutting cattle from a herd generally speaking cutting horses are now assets that are used by their owners to compete against other cutting horse owners in organized cutting competitions for prize money competitions featuring cutting horses are held at both national and local levels and entrants are judged on their ability to cut a single steer from a herd of steers petitioner began engaging in cutting horse activities in this activity has continued uninterrupted since its commencement and has involved breeding and training horses to compete in organized events petitioner entered his horse activity without the aid of a written market study and he has not relied on a formal profit or business plan at any time in managing the affairs of his activity petitioner used a ledger to record various transactions and events he also maintained a separate drop file for most of his horses the ledger and drop files however are not completely accurate and some significant discrepancies and omissions exist in each during the course of the 14-year period ending with petitioner owned in excess of horses these horses were either purchased by petitioner or born to horses that he already owned in either event most were eventually sold during this 14-year period although some died and others were donated to various people or organizations throughout the entire course of his horse activity petitioner never experienced a net profit although he did generate some income income was generated from several sources including prize winnings foal sales and stud fees expenses from petitioner's horse activity however always exceeded such income boarding and training costs have constituted the majority of such expenses petitioner rode his horses in the evenings and on weekends he also rode his horses at numerous organized cutting horse events although petitioner's spouse had little interest in horses petitioner's two children occasionally rode certain horses for various reasons on the average petitioner devoted to hours each week to his horse activity 4in any one year petitioner owned as few a sec_2 and as many a sec_11 horses petitioner owned an average of approximately eight horses per year petitioner boarded his horses at a local stable and relied extensively on the services of a david costello costello to maintain and train his horses the maintenance performed by costello consisted of typical physical labors associated with horse ownership costello is a professional horse trainer and has a national reputation in the cutting horse industry he owned and operated the stables and training facility used by petitioner during the taxable years at issue petitioner began deducting expenses associated with his horse activity in its year of inception the following table lists the income expenses and losses reported by petitioner during the 12-year period ending with year gross_receipts expenses loss total dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number ______ big_number dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number _______ big_number dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number _______ big_number respondent determined that petitioner did not operate his horse activity with the intent of earning a profit and disallowed the claimed expenses to the extent such expenses exceed the income generated by the activity for each taxable_year at issue opinion we must decide whether sec_183 applies to petitioner's horse activity respondent maintains that sec_183 limits the amount of expenses petitioner is entitled to deduct to an amount equal to the amount of gross_income earned from his horse activity in contrast petitioner contends that sec_183 is inapplicable because he conducted his horse activity with the requisite profit_motive we agree with respondent sec_183 allows only specified deductions unless an activity is engaged in for profit sec_183 defines an activity_not_engaged_in_for_profit as any activity other than one with respect to which deductions are allowable under sec_162 or under paragraphs or of sec_212 an activity engaged in for profit is one in which the taxpayer has an actual and honest objective of making a profit 78_tc_642 affd without opinion 702_f2d_1205 d c cir this profit expectation need not have been reasonable but the activity must have been either entered into or continued with a bona_fide objective of making a profit 88_tc_464 dreicer v commissioner supra pincite sec_1_183-2 income_tax regs profit in this context means economic profit independent of tax consequences 91_tc_686 affd 893_f2d_656 4th cir the determination of profit objective is factually based and requires a consideration of all the surrounding facts and circumstances 86_tc_697 sec_1_183-2 income_tax regs although the purpose of the inquiry is to ascertain the taxpayer's subjective intent greater weight is given to objective facts than to self-serving statements of intent 85_tc_557 sec_1_183-2 income_tax regs in conducting the profit objective analysis courts have relied on a nonexclusive list of nine factors enumerated in the regulations under sec_183 see 32_f3d_94 4th cir affg tcmemo_1993_396 781_f2d_724 9th cir affg lahr v commissioner tcmemo_1984_472 90_tc_960 affd without published opinion 899_f2d_18 9th cir no single factor is determinative of the issue however 72_tc_411 affd without published opinion 647_f2d_170 9th cir the nine factors set forth under sec_1_183-2 income_tax regs are the manner in which the taxpayer carries on the activity the expertise of the taxpayer or his advisers the time and effort expended by the taxpayer in carrying on other similar or dissimilar activities the expectation that the assets used in the activity may appreciate in value the success of the taxpayer in carrying on other similar or dissimilar activities the taxpayer's history of income or losses with respect to the activity the amount of occasional profits if any that are earned the financial status of the taxpayer and the elements of personal pleasure or recreation involved in the activity a careful review of the entire record in this case convinces us that petitioner has failed to carry his burden in proving that his horse activity was motivated by an actual and honest objective of making a profit the objective facts indicate that most of the above-enumerated factors weigh in favor of respondent issue profit_motive businesslike manner adequate_records the fact that an activity is carried on in a businesslike manner and complete and accurate books_and_records are maintained is a factor indicating the existence of a profit objective with respect to such activity sec_1_183-2 income_tax regs respondent argues that petitioner failed to operate his horse activity in a businesslike manner in support of this argument respondent advances several contentions first respondent argues that petitioner failed to conduct a formal market study 5to the extent that such arguments are not addressed herein we have found them to be without merit prior to undertaking his horse activity respondent also contends that petitioner's failure to formulate a credible business or profit plan indicates that his actions were not businesslike and that he lacked a profit_motive we agree with both of these contentions while the law does not require a taxpayer to engage in extensive formalities prior to undertaking a venture it does require that the taxpayer conduct a basic investigation of the factors that would affect profit golanty v commissioner supra pincite although petitioner testified that he started his horse activity after consultation with various professionals within the industry such testimony was not credible and it appears that petitioner did little else in terms of an investigation petitioner undertook his horse activity with no concept of what his ultimate costs might be or how he might achieve any degree of cost efficiency similarly petitioner entered and conducted his activity not knowing the amount of revenues he could expect or what risks might impair the generation of such revenues it is quite likely that this stems from his failure to consider any type of financial planning instrument during the course of his activity moreover at trial petitioner was asked whether he was aware of the amount of losses_incurred since the inception of his horse activity not only was petitioner unaware of the amount of total losses_incurred but he was also unaware of the amount of losses_incurred during the year immediately prior to trial it seems to us peculiar that someone claiming a particular activity is motivated by profit would not know simple but significant information such as this with respect to that activity respondent also points to numerous omissions in petitioner's records as further support for her contention that petitioner lacked the requisite profit_motive with respect to his horse activity we agree while maintaining less than precise records does not conclusively establish the lack of a profit objective see 72_tc_659 petitioner's records are so fraught with omissions and inconsistencies that it is difficult to imagine how they served any beneficial purpose petitioner's records do not reflect the income and expenses associated with each individual horse and petitioner testified that he could not otherwise tell from his records whether any one horse was profitable in any particular year similarly as noted earlier petitioner's records do not reflect the activity's past losses furthermore petitioner testified that the ledger contained various data pertaining to each horse however respondent has shown that much of such data is lacking from the ledger petitioner's drop files are equally incomplete in fact petitioner failed to maintain a drop file on several of his horses the drop files are supposed to contain information pertaining to registration and breeding among other things but such information is lacking from several of the files that do exist not only are petitioner's records incomplete some contain inconsistencies of a significant nature inconsistencies also exist between petitioner's records and the information contained on some of his tax returns in light of the facts before us we find that petitioner did not operate his horse activity in a businesslike manner we also find that he maintained inadequate and insufficient records with respect to such activity accordingly we find that this factor weighs in favor of respondent taxpayer expertise the expertise of the taxpayer or his or her advisers is another factor relevant to the determination of whether such taxpayer possessed the requisite profit_motive with respect to the activity in question sec_1_183-2 income_tax regs petitioner lacked any meaningful degree of expertise with regard to his horse activity and we are not convinced that he was developing an expertise merely as a result of his associations with professionals within the cutting horse industry however petitioner relied extensively on costello an individual possessing much expertise involving horses because of the extent costello was involved in petitioner's horse activity we conclude that this factor favors petitioner time and effort expended the time and effort expended by the taxpayer in carrying on the activity at issue is an indication of whether a profit_motive existed with respect to such activity particularly if there are no substantial personal or recreational elements associated with such activity sec_1_183-2 income_tax regs petitioner maintains that he spent to hours each week engaged in his horse activity yet he failed to produce credible_evidence explaining the type of work he performed the available evidence indicates that petitioner spent much of his time riding his horses petitioner contends however that such riding was not recreational instead petitioner maintains that his riding served several business purposes including exercising and training petitioner also maintains that the reason he rode his horses during competitive events was to develop a better appreciation for his business and illustrate to perspective purchasers that his horses were suitable for novice riders the record does not support petitioner's arguments essentially by relying on costello to maintain and train his horses petitioner avoided the rigors of his horse activity and indulged himself with its pleasantries petitioner's testimony otherwise is simply not credible and we are reluctant to accept costello's testimony as corroboration in light of his business relationship with petitioner we conclude that petitioner's horse activity contained substantial elements of a recreational and personal nature accordingly we find that this factor favors respondent expectation that assets will appreciate an expectation that assets used in the activity in question may appreciate in value may also be an indication of the taxpayer's motive with respect to such activity sec_1 b income_tax regs petitioner contends that a principal factor underlying his motivation for engaging in his horse activity was the expectation that he would experience appreciation in the value of his horses we recognize that appreciation in the horse industry often requires the passage of many years and is frequently dependent upon on a successful breeding and training program it is not enough however that petitioner maintained the objective that his horse activity would eventually become profitable as a result of appreciation in the value of his horses it is necessary that the objective be to realize a profit on the entire operation 45_tc_261 affd 379_f2d_252 2d cir this presupposes not only future net_earnings but also future net_earnings sufficient to recoup the losses which have been sustained in prior years id petitioner failed to produce credible_evidence that would suggest that his activity had any realistic chance of recovering the enormous losses previously incurred in light of this record we are not convinced that petitioner maintained a good_faith belief that his horses would appreciate over time and that such appreciation would eventually be sufficient to account for the losses experienced prior to such appreciation accordingly we find that this factor favors respondent other activities the success of the taxpayer in carrying on other activities can also be some indication of whether the taxpayer had a profit_motive for the activity in question sec_1_183-2 income_tax regs petitioner has no experience in similar activities however both his medical practice and his leasing business are successful profit-oriented activities in any event we find that this factor neither supports nor weakens either party's position income losses and occasional profits a history of income losses and occasional profits with respect to an activity can be indicative of whether a profit objective exists with respect to such activity sec_1 b income_tax regs respondent contends that the history of losses relating to petitioner's horse activity suggests that he lacked the requisite profit_motive necessary to render sec_183 inapplicable we agree petitioner's contention that he expected to eventually experience a profit is self-serving unsupported by the record and otherwise unrealistic the uninterrupted series of losses has been sustained beyond the period which is customarily necessary to bring a similar operation to profitable status see 72_tc_659 in light of the instant facts we find that petitioner's history of losses suggests that he lacked a profit_motive in carrying on his horse activity accordingly we find that this factor favors respondent amount and frequency of occasional profits the amount and frequency of occasional profits earned from the activity at issue may also be indicative of a profit objective sec_1_183-2 income_tax regs petitioner's horse activity had several sources of income yet none proved fruitful while an opportunity to earn a substantial ultimate profit in a highly speculative venture may be sufficient to indicate that the activity is engaged in for profit even though only losses are generated sec_1_183-2 income_tax regs we are convinced that such a likelihood was too remote in the instant case accordingly we find that this factor favors respondent petitioner's financial status the lack of substantial income from sources other than the activity in question may indicate the existence of a profit_motive with respect to such activity sec_1_183-2 income_tax regs as petitioner is a successful orthopedic surgeon earning in excess of dollar_figure per year there is little doubt that this factor favors respondent personal pleasure or recreation the absence of personal pleasure or recreation relating to the activity in question may indicate the presence of a profit_motive sec_1_183-2 income_tax regs as noted earlier in this opinion we are convinced that petitioner's horse activity contained significant recreational aspects that gave rise to many personal pleasures we find that the personal pleasure derived from petitioner's horse activity was the principal factor motivating his decision to enter into and carry on such activity accordingly we find that this factor favors respondent having considered the facts and circumstances of this case in light of the factors set forth in sec_1_183-2 income_tax regs we conclude that petitioner did not engage in his horse activity with an actual and honest objective of making a profit within the meaning of sec_183 issue addition_to_tax sec_6661 respondent determined that petitioners are liable for the addition_to_tax pursuant to sec_6661 for taxable_year due to a substantial_understatement_of_income_tax this determination is benefited by a presumption of correctness rule a the addition_to_tax i sec_25 percent of any underpayment attributable to a substantial_understatement sec_6661 a substantial_understatement is one that exceeds the greater of percent of the tax required to be shown on the return or dollar_figure sec_6661 if a taxpayer has substantial_authority for the tax treatment of any item on the return the understatement is reduced by the amount attributable to such authority sec_6661 similarly the amount of the understatement is reduced for any item adequately disclosed either on the taxpayer's return or in a statement attached to the return sec_6661 because petitioner has presented no argument on this issue other than to deny the underlying deficiencies respondent's determination is sustained issue accuracy-related_penalty sec_6662 respondent determined that petitioners are liable for the accuracy-related_penalty pursuant to sec_6662 for taxable years and because the underpayment of income_tax for such years was attributable to a substantial_understatement again respondent's determination is benefited by a presumption of correctness rule a the accuracy-related_penalty is equal to percent of the portion of an underpayment to which sec_6662 applies sec_6662 sec_6662 provides that sec_6662 applies to an underpayment attributable to any substantial_understatement_of_income_tax a substantial_understatement is one that exceeds the greater of percent of the tax required to be shown on the return or dollar_figure sec_6662 petitioner has presented no argument on this issue other than to deny the underlying deficiencies because the understatements at issue are substantial and neither is subject_to reduction pursuant to sec_6662 sec_6662 or sec_6664 respondent's determination is sustained to reflect the foregoing decision will be entered under rule


t c summary opinion united_states tax_court scott w denniston petitioner v commissioner of internal revenue respondent docket nos 22157-05s filed date scott w denniston pro_se steven i josephy for respondent dean special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code unless otherwise indicated all section references are to the internal_revenue_code in effect for the year at issue and all rule references are to the tax_court rules_of_practice and procedure pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case respondent determined for a deficiency in petitioner’s federal_income_tax of dollar_figure the sole issue for decision is whether petitioner made alimony payments of dollar_figure during background the stipulation of facts and the exhibits received into evidence are incorporated herein by reference at the time the petition in this case was filed petitioner resided in denver colorado petitioner and christina denniston ms katcher were married on date they had three children from the marriage in september of ms katcher filed a petition for divorce with the el paso county district_court in colorado state court by a temporary order dated date the state court ordered petitioner to pay to ms katcher alimony of dollar_figure retroactive to date payable on the first of each month until further order temporary order petitioner filed separately from ms katcher for a form_1040 u s individual_income_tax_return prepared by h_r block petitioner claimed an alimony deduction of dollar_figure on his return but ms katcher failed to report any alimony income on her return by order dated date the marriage between petitioner and ms katcher was dissolved in the marriage settlement agreement which was attached to the decree of dissolution of marriage petitioner agreed that his child_support payments were in arrears in april of petitioner owed back child_support payments of dollar_figure on date respondent issued to petitioner a notice_of_deficiency disallowing the alimony deduction determining that petitioner failed to substantiate that he made any alimony payments during discussion petitioner bears the burden of proving that respondent’s determinations in the notice are erroneous rule a 290_us_111 sec_215 allows a deduction for the payment of alimony during a taxable_year sec_215 defines alimony as a payment that is includable in the gross_income of the recipient under sec_71 sec_71 provides that gross_income includes amounts received as alimony or separate_maintenance payments under the temporary order petitioner was obligated to pay to ms katcher alimony payments of dollar_figure per month although not specified in the temporary order petitioner claims that the 1petitioner has not raised the issue of sec_7491 which shifts the burden_of_proof to the commissioner in certain situations this court concludes that sec_7491 does not apply because petitioner has not produced any evidence that establishes the preconditions for its application duration of the alimony payments wa sec_1 year petitioner therefore argues that he was entitled to claim an alimony deduction of dollar_figure on his return respondent disagrees contending that petitioner has failed to provide any evidence to show that alimony payments of dollar_figure were actually paid to ms katcher during at trial petitioner testified that a total of dollar_figure was taken out from his paychecks during to satisfy his alimony obligation under the temporary order respondent requested petitioner to produce pay stubs showing that moneys were taken out for alimony or a statement from ms katcher acknowledging receipt of alimony petitioner however was unable to provide the requested documentation claiming that both his former employer and ms katcher were uncooperative therefore other than his testimony petitioner has not offered any evidence to show that alimony was paid in moreover during this period the evidence shows that petitioner did not meet his child_support obligation the court is not required to accept petitioner’s self-serving testimony 440_f2d_688 9th cir affg per curiam tcmemo_1969_159 see 112_tc_183 petitioner contends that h_r block determined that he was entitled to claim an alimony deduction of dollar_figure based on the documentation that he had presented to them at the time of the return preparation it is well established that the duty_of filing accurate returns cannot be avoided by placing the responsibility upon an agent 63_tc_149 50_tc_909 petitioner has the burden_of_proof see rule a petitioner has failed to show that he made alimony payments of dollar_figure in accordingly petitioner is not entitled to claim an alimony deduction of dollar_figure for to reflect the foregoing decision will be entered for respondent