Court Opinion

ID: 9377760
Source: CourtListenerOpinion
Date Created: 2023-03-08 18:00:27.896131+00
Date Added: 2024-06-11T17:17:16.455012
License: Public Domain

PRECEDENTIAL

   UNITED STATES COURT OF APPEALS
        FOR THE THIRD CIRCUIT
             ____________

     Nos. 22-1501, 22-1502, and 22-1503
               ____________

 MITCHEL SKOLNICK; LESLIE SKOLNICK,
                    Appellants in No. 22-1501

                     v.

 COMMISSIONER OF INTERNAL REVENUE
           ____________

MITCHEL SKOLNICK; BRIANNA SKOLNICK,
                     Appellants in No. 22-1502

                     v.

 COMMISSIONER OF INTERNAL REVENUE
           ____________

             ERIC FREEMAN,
                       Appellant in No. 22-1503

                     v.

 COMMISSIONER OF INTERNAL REVENUE
           ____________
       On Appeal from the United States Tax Court
        (IRS Nos. 16-24649, 16-24650, 16-24980)
       Tax Court Judge: Honorable Albert G. Lauber
                     ____________

       Submitted Under Third Circuit L.A.R. 34.1(a)
                   January 30, 2023

  Before: HARDIMAN, KRAUSE, and MATEY, Circuit
                     Judges.

                 (Filed: March 8, 2023)

Bryan E. Bloom
Kevin H. DeMaio
Faegre Drinker Biddle & Reath
600 Campus Drive
Florham Park, NJ 07932

B. Paul Husband
Law Offices of B. Paul Husband
101 South First Street
Suite 202
Burbank, CA 91502

Richard W. Craigo
10724 Wilshire Boulevard
Suite 406
Los Angeles, CA 90024

      Counsel for Appellants

                               2
David A. Hubbert
Janet A. Bradley
Joan I. Oppenheimer
United States Department of Justice
Tax Division
Room 4738
950 Pennsylvania Avenue, N.W.
P.O. Box 502
Washington, DC 20044

       Counsel for Appellee

                        ___________

                 OPINION OF THE COURT
                      ____________

HARDIMAN, Circuit Judge.

       Mitchel Skolnick, Leslie Skolnick, Brianna Skolnick,
and Eric Freeman (collectively, Taxpayers), appeal an order of
the United States Tax Court. They argue the Court clearly erred
when it held their horse activity—undertaken through
Bluestone Farms, LLC (the Company)—was “not engaged in
for profit” under § 183 of the Internal Revenue Code.
Taxpayers also claim the Court erred when it held they could
not carry forward net operating losses (NOLs) allegedly arising
from their horse activity in prior years. After scrutinizing the
Tax Court’s comprehensive opinion, the record, and the briefs,
we perceive no reversible error. We will affirm.

                               3
                               I

                               A

        During the tax years at issue, 2010–2013, Mitchel
Skolnick and Eric Freeman owned the Company, a horse farm
in New Jersey. They bought, sold, bred, and raced
Standardbred horses. Mitchel’s first wife, Leslie, and his
second wife, Brianna, are parties to the case only because they
filed tax returns jointly with Mitchel. So we focus on the
activities of Mitchel and Eric.

        Mitchel received an undergraduate degree from Emory
University in 1976 and an MBA from Adelphi University in
1986. He remained in Atlanta after college and worked briefly
as an engineer in training. In 1978, he joined Solgar Co., Inc.,
a successful vitamin company his father Allen Skolnick
operated. That same year, Allen took an interest in
Standardbred horses, which led him and his wife to found
Southwind Farms to start a breeding operation. In 1986,
Mitchel started his own consulting firm and became involved
in the Standardbred industry when Allen asked him to manage
three horses. By 1996, Mitchel had retired from his consulting
business and was working full-time at Southwind with Allen.

       Eric graduated from Cornell in 1966 and earned an
MBA from the University of Virginia two years later. His
career focused mainly on insurance. Eric’s clients included
Southwind and Allen’s other ventures. Allen introduced Eric
to Standardbred horse breeding.

       Around 1993, Eric asked Allen if he could get involved
in the horse breeding industry. Allen invited Eric to join him,
along with Mitchel, in the Chancery Equine Group, a syndicate

                               4
that enabled investors to purchase Standardbred horses. When
Allen invited Eric to invest, he cautioned Eric that though he
might lose all his money, he would at least meet people he
would never meet otherwise. Eric called the predictions
“prophetic.”

       Following disputes with his father, Mitchel left
Southwind and the Chancery Group in 1998. Mitchel had
discussed with Eric starting their own horse farm and they had
created a business plan and a budget for the Company. They
planned to buy and breed a stallion and to board other horses.
To that end, they acquired 61 acres in Hopewell, New Jersey,
not far from Southwind. They paid $559,000 for the property
and called it Bluestone Farms.

       By 2000, Mitchel did not have the money to pay for the
Company’s expenses, so Eric paid most of the bills while
Mitchel returned to his consulting firm. That year, Mitchel and
Eric crafted a second business plan, hoping to supplement the
Company’s income by winning horse races and breeder’s
awards. In 2001, the Company received $325,000 from a
passive investor, Frank Russo, in exchange for a 15 percent
interest. In 2002, the Company bought a 30-acre property,
Wert Farm, for $850,000.

       In 2003, the Company sold a conservation easement at
Bluestone for $869,640. The same year, Mitchel retired from
the consulting business again, and he and Eric developed a
third business plan. They wrote a fourth (and final) business
plan in 2004. Soon after, Mitchel began receiving millions of
dollars from an irrevocable trust his parents created. In 2007,
the Company purchased 200 acres near Bluestone (the
Rosenthal Farm) for $4 million. Mitchel and Eric planned to
expand operations with more broodmares at Rosenthal Farm,

                              5
but that effort was halted after New Jersey ceased using
Atlantic City casino funds to subsidize racetracks. The
Company was audited in 2008, but the Commissioner of
Internal Revenue took no adverse action. By 2009, Mitchel had
received about $10 million from his parents’ trust.

                              B

       During the tax years at issue (2010–2013) between 15
and 25 horses lived at Bluestone, Wert, and Rosenthal Farms
at any given time. Other horses were boarded at out-of-state
farms. The Company employed between seven and ten
employees who assisted with the horses and organized the
Company records. None of the employees had a budget.
Taxpayers do not contest that they lost more than $3.5 million
during the years at issue and more than $11.4 million between
1998 and 2013. See Skolnick v. Comm’r, 2021 WL 5936986,
at *20 (T.C. Dec. 16, 2021).

       Mitchel handled daily operations for the Company,
including paying bills and monitoring the horse breeding
process. Eric split his time between Florida and New Jersey,
and handled the Company’s insurance needs, but had little
involvement in its day-to-day operations. Eric did, however,
accompany horses to races and attended “pretty lavish parties.”
App. 972. Taxpayers contributed capital and made loans to the
Company without differentiating between the two.

       Over the years, Taxpayers increasingly focused on
winning studs. The Company owned a 35% interest in a
successful stallion, Always A Virgin, stabled in Indiana. In
2013, the Company bought for about $50,000 a 35 percent
interest (later increased to 55 percent) in a horse sired by
Always A Virgin called Always B Miki. Always B Miki earned

                              6
purses totaling $2.7 million from racing through his retirement
in 2016 and generated substantial stud fees. In 2016, the
Company sold interests in Always B Miki for nearly $1.2
million, enabling it to report a modest overall profit in that
year.

       During the tax years at issue, the Company responded
to changes in the horse market. New Jersey stopped subsidies
to racetracks and decreased the purse structures for breeder’s
awards. Meanwhile, Pennsylvania had tightened its
requirements for awards by requiring breeders to locate mares
in Pennsylvania for 180 days to maintain eligibility for state-
sponsored races. So the Company continued its previous
partnership with a Kentucky operation, Cane Run Farm, to
board horses outside Kentucky, including in Pennsylvania, to
capitalize on breeder’s awards.

        The Wert and Rosenthal Farms were never expanded to
include additional mares, as originally planned. Mitchel and
Eric tried to sell those properties in 2012 to a publicly traded
home builder, Toll Brothers, but negotiations failed. When
Mitchel and Eric were approached in 2013 about a purchase of
the building rights on Wert and Rosenthal Farms, they declined
the offer.

       The Company also paid for many of Mitchel’s personal
expenses. Mitchel moved to Bluestone in 2008 after he
separated from Leslie. Brianna began staying with him around
2009. Beginning in 2010, and for the rest of the years at issue,
Mitchel and Brianna lived together rent-free in a renovated
farmhouse at Bluestone. The Company paid to tear down and
rebuild the farmhouse. By 2011, Brianna had a Company credit
card that she sometimes used for personal expenses. The
Company also paid for Brianna to keep her horses at Bluestone.

                               7
In 2013, Mitchel divorced Leslie and married Brianna. Mitchel
admitted at trial that Company funds “definitely” paid for
wedding expenses, including extensive landscaping. App. 790.

                               C

       Mitchel filed joint tax returns with Leslie for 2010–
2012, and with Brianna for 2013, claiming Company losses
substantial enough to eliminate any income tax liability for
those years. Eric also claimed losses and reported owing little
or no taxes for the years at issue.

       In 2016, the Internal Revenue Service sent notices of
income tax deficiencies and penalties to Mitchel and Leslie for
2010–2012, Mitchel and Brianna for 2013, and Eric for 2010–
2013. Taxpayers timely filed amended petitions in the United
States Tax Court for a redetermination of the deficiencies and
penalties.

        After a five-day trial, the Tax Court sustained the
deficiency determinations, holding that Taxpayers could not
deduct Company losses because their horse breeding activity
was not engaged in for profit under § 183 of the Internal
Revenue Code. Skolnick, 2021 WL 5936986, at *22. The Court
also held that Taxpayers failed to substantiate net operating
loss carryforwards that allegedly arose from Company activity.
Id. at *23. The Court further held that Mitchel and Leslie were
liable for the late-filing penalty, but Taxpayers were not liable
for the accuracy-related penalties. Id.

       Under the final orders, the Skolnicks were liable for tax
deficiencies for 2010–2013 of $282,036, $230,141, $189,077,
and $174,664, respectively. Eric Freeman was liable for tax
deficiencies of $52,421, $38,514, $39,478, and $21,385 for

                               8
those years. Mitchel and Leslie were also ordered to pay
$67,026 for filing late in 2010. Taxpayers filed timely appeals
and we consolidated the cases.

                               II

       The Tax Court had jurisdiction under 26 U.S.C. §§ 6214
and 7442. We have jurisdiction under 26 U.S.C. § 7482(a)(1).
Venue was proper because, at the time they filed their petitions,
Mitchel and Brianna resided in New Jersey, and Leslie resided
in Pennsylvania. Eric resided in Florida, but the parties
stipulated to venue in the Third Circuit for his appeal.

                               III

        The key issue on appeal is whether Taxpayers’ horse
activity was not engaged in for profit under § 183 of the
Internal Revenue Code during 2010–2013. We review that
factual determination for clear error. Keating v. Comm’r, 544
F.3d 900, 903 (8th Cir. 2008); Comm’r v. Duberstein, 363 U.S.
278, 291 & n.13 (1960). “[W]e affirm the court’s finding so
long as it is ‘plausible’; we reverse only when ‘left with the
definite and firm conviction that a mistake has been
committed.’” Cooper v. Harris, 581 U.S. 285, 309 (2017)
(citation omitted).

        Section 183(a) of the Internal Revenue Code provides
that “[i]n the case of an activity engaged in by an individual or
an S corporation, if such activity is not engaged in for profit,
no deduction attributable to such activity shall be allowed. . .
.” 26 U.S.C. § 183(a). Treasury Regulation 1.183–2(b) lists
nine non-exclusive factors to consider in determining whether
an activity is engaged in for profit. They are: (1) the manner in
which the taxpayer carries on the activity; (2) the expertise of

                               9
the taxpayer or his advisors; (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 carrying on other similar or
dissimilar activities; (6) the taxpayer’s history of income or
losses with respect to the activity; (7) the amount of occasional
profits, if any; (8) the financial status of the taxpayer; and (9)
elements of personal pleasure or recreation. 26 C.F.R. § 1.183–
2(b). The inquiry is fact-driven and we give greater weight to
objective facts than to intent. 26 C.F.R. §§ 1.183−2(a), (b). No
one factor is determinative and the analysis does not depend on
a preponderance of the nine factors. 26 C.F.R. § 1.183–2(b).

       The Tax Court considered these factors and determined
that Taxpayers did not conduct the Company’s horse activity
during 2010–2013 with a genuine intent to make a profit.
Skolnick, 2021 WL 5936986, at *12–22. Section 183 thus
disallowed as deductions the losses that the Company passed
through to them. In its analysis, the Court found that five
factors—1, 6, 7, 8, and 9—favored the Commissioner. Three
factors—3, 4, and 5—were neutral. And only factor 2 favored
Taxpayers. We review these three groups in turn. Taxpayers
dispute the Tax Court’s analysis of every factor.

             A. Factors Favoring the Commissioner

                                1

       Because the history of income and losses (factor 6) was
“by far” the most important to the Tax Court’s analysis, we
begin with that factor before discussing the other four that
favored the Commissioner. Skolnick, 2021 WL 5936986, at
*20. And it weighed heavily against Taxpayers. Id. Between
1998 and 2013, the Company lost more than $11.4 million. The

                               10
Tax Court has held the start-up phase for horse activity is five
to ten years. Engdahl v. Comm’r, 72 T.C. 659, 669 (1979). But
the Company’s losses continued essentially unabated after that
timeframe. By 2010 the Company had been in operation for
twelve years. Yet from 2010 through 2013, the Company lost
more than $3.5 million.

       Taxpayers point to profits the Company earned after the
years at issue, emphasizing the success of Always A Virgin.
But as the Tax Court noted, those profits occurred after the IRS
selected Mitchel and Leslie’s tax return for examination. So
Taxpayers were motivated to generate a profit. Skolnick, 2021
WL 5936986, at *20. Taxpayers’ arguments about their gross
receipts also fall flat because they failed to measure them
against their expenditures. See Faulconer v. Comm’r, 748 F.2d
890, 901 (4th Cir. 1984).

       Taxpayers try to excuse the Company’s lack of profit by
citing adverse events beyond their control. The Tax Court
acknowledged that the economic environment for
Standardbred horses had declined and that a financial crisis
occurred in 2008. Skolnick, 2021 WL 5936986, at *20. But the
elimination of the New Jersey subsidy to the horse industry in
2012 “d[id] not explain the magnitude of [the Company’s] loss
in 2012 ($993,066) or the magnitude of its losses in earlier
years when the subsidy existed.” Id. Likewise, the Company’s
losses during the severe downturn in the economy from 2008–
2010 ($3,063,893) were barely greater than its losses in 2011–
2013 ($2,993,873), when the economy was recovering. Id. So
the Tax Court did not clearly err when it found that adverse
market conditions did not explain the Company’s sustained
unprofitability. The substantial history of losses strongly
weighed against Taxpayers.

                              11
                               2

        The Tax Court found that the way Taxpayers conducted
their horse activity (factor 1) also strongly favored the
Commissioner. Skolnick, 2021 WL 5936986, at *12–15.
Taxpayers challenge this finding by citing their voluminous
business records. The Tax Court acknowledged the records but
identified significant inaccuracies and gaps in them. Id. at *12.
For example, although the Company was founded in 1998, the
initial operating agreement between Mitchel and Eric was
dated 2001. At trial, Mitchel could not recall how much he or
Eric had initially contributed to the Company or if their
contributions were equal. Mitchel also testified that he and Eric
did not distinguish between capital contributions and loans. In
the same vein, important changes in the ownership interests of
the Company were not memorialized until after the IRS began
its examination.

       Taxpayers claim the Court erroneously found that the
regulation “requires” a plausible business plan. Taxpayers Br.
26 n.11. But the Court said no such thing. Skolnick, 2021 WL
5936986, at *12. The lack of a business plan after 2004, plus
the lack of employee budgets, supported a finding that the
horse activity was not conducted in a businesslike manner.
Mitchel did not help his case either when he testified that cost-
saving options suggested by staff were not a priority because
he approached the Company “not so much in income and
expenses.” App. 910.

       If that were not enough, the Company paid for personal
expenses, including the Bluestone farmhouse reconstruction
and landscaping for Mitchel’s wedding. Brianna used a
Company credit card for her personal expenses. Mitchel set
aside the bills for the cost of boarding Brianna’s horses and

                               12
Company staff widened the walking path for her. At trial, when
asked about some of these costs, Brianna called them her “bar
tab,” but she could not say how much she owed. App. 1514–
1515. Mitchel likewise testified: “it sounds like a lot of money,
but . . . [Brianna is] my wife,” although he was still married to
Leslie when many expenses were incurred. App. 803, 806–
811. The Tax Court did not err when it said that piling these
costs onto Bluestone “sits uneasily” with claims that the
Company operated with a profit motive. Skolnick, 2021 WL
5936986, at *14.

        Taxpayers argue persuasively that the Court should not
have substituted its own business judgment in evaluating how
Mitchel and Eric responded to losses. See Skolnick, 2021 WL
5936986, at *15. Under the regulation, changing operating
methods to respond to losses is evidence of a profit motive. 26
C.F.R. § 1.183–2(b)(1). Taxpayers responded to changes in
breeder’s award requirements, including by partnering with
Cane Run and boarding their horses in other states. Even so,
those actions were minor cost-saving measures that are not
quite the “abandonment of unprofitable methods”
contemplated by this part of the regulation. 26 C.F.R. § 1.183–
2(b)(1). Despite the Tax Court’s slight misstep, there remained
sufficient evidence that the Company was not run in a
businesslike manner. So the Court did not clearly err in
weighing this factor in favor of the Commissioner.

      Mitchel’s and Eric’s financial status (factor 8) also
weighed strongly in the Commissioner’s favor. Skolnick, 2021
WL 5936986, at *21. The Tax Court correctly considered
Taxpayers’ substantial income from sources other than the
Company as evidence that their horse breeding activity was not
engaged in for profit. Both the Skolnicks’ and Eric’s returns

                               13
during the years in question reported six-figure gross income
from sources other than the Company.

       Mitchel insists he did not invest in the Company for tax
benefits, but the record suggests otherwise. The Company
produced substantial tax benefits. Mitchel’s income totaled
$3.5 million, some $1.5 million of which was taxable. Mitchel
argues that if he had been motivated by tax savings, “surely”
he would have been “savvy enough” to switch his tax-exempt
bonds to another investment. Taxpayers Br. 51. But the
substantial annual Company losses for 2010–2013 reduced
Taxpayers’ income tax liabilities for those years to zero or
close to it.

       Taxpayers argue that any tax benefits were not
dispositive. That’s true, but the Tax Court did not rely on this
factor alone. The tax benefits were real, they were significant,
and the Court did not err in finding that factor 8 favored the
Commissioner.

                               3

       The last two factors that favored the Commissioner are
the amount of occasional profits (factor 7) and the elements of
personal pleasure or recreation (factor 9). Though we perceive
some weaknesses in the Court’s analyses of these factors, it
placed little weight or emphasis on either one.

       Taxpayers raise some persuasive challenges to the Tax
Court’s analysis of factor 7—the amount of occasional profits.
There is some evidence the Court did not acknowledge. For
example, Frank Russo’s purchase of a 15 percent interest in the
Company for $325,000 in 2001, although not generating an
overall profit, was significant. Though Russo’s investment did

                              14
not put the Company in the black that year, the Court could
have cited the sale as evidence that the Company was a
business. There was also the 2003 sale of a conservation
easement for $869,640, which offset a $652,453 loss. Finally,
there were profits in 2016 from the sale of the interest in
Always B Miki. But even had the Court noted this income, it
would not have tipped the balance in favor of Taxpayers. The
income was appreciably less than the Company’s consistent
losses, which often exceeded $1 million a year. As the
regulation states: “[a]n occasional small profit from an activity
generating large losses . . . would not generally be
determinative that the activity is engaged in for profit.” 26
C.F.R. § 1.183–2(b)(7). And the profit generated from Always
B Miki is tempered by the fact that it occurred after the tax
years at issue and after Taxpayers received the notices of
deficiency.

        Factor 7 also accommodates speculative investments.
The Tax Court acknowledged that it had “previously found
certain horse activities—especially racing activities—to be
highly speculative ventures, even likening them to wildcat oil
drilling ventures.” Skolnick, 2021 WL 5936986, at *20 (citing
Annuzzi v. Comm’r, 2014 WL 5904717, at *12 (T.C. Nov. 13,
2014)). The Court then emphasized that the Company’s efforts
are in breeding, not racing. Id. Yet the Court ignored the
possibility that breeding might be a speculative industry. At
Southwind, for example, one horse drove farm profits. Mitchel
also testified that “you raise several horses in the expectation
that one of them will go on to be what Always B Miki is.” App.
620. Still, the Court did not err in ultimately finding no hope
of a big payout. The net profit from the sale of Always B Miki
in 2016, for example, was $281,450, far below what was
needed to offset the millions of dollars lost in prior years.

                               15
        Taxpayers make another good point when they claim
the Tax Court applied the wrong legal standard to factor 7. 26
C.F.R. § 1.183–2(b)(7). The Court did not think Taxpayers
“entertained a reasonable belief, during 2010–2013, that the
outsized success of a few horses would make Bluestone
profitable overall.” Skolnick, 2021 WL 5936986, at *21. But a
“reasonable expectation of profit is not required.” 26 C.F.R.
§ 1.183–2(a). The applicable standard is not whether
Taxpayers had “a bona fide expectation” of profit, but whether
they engaged in the activity with the “objective” of making a
profit. See Dreicer v. Comm’r, 665 F.2d 1292, 1299–1300
(D.C. Cir. 1981) (quoting 26 C.F.R. § 1.183–2(a)). The statute
bars deductibility of losses emanating from “‘activities not
engaged in for profit,’ not activities lacking an expectation of
profit.” Id. (quoting 26 U.S.C. § 183). Despite this
misstatement, the Tax Court did not clearly err in finding that
factor 7 favored the Commissioner. As explained above, any
profits, real or expected, were minimal compared to losses,
even characterizing horse breeding as speculative. Although
Taxpayers valiantly mined the record to show that the Court
could have weighed the evidence differently, their evidence
does not convince us that the District Court clearly erred.

        Factor 9—elements of personal pleasure or recreation—
favored the Commissioner. As the Tax Court has previously
recognized, “[s]uccess in business is largely obtained by
pleasurable interest therein.” Jackson v. Comm’r, 59 T.C. 312,
317 (1972) (citation omitted). Still, “if the chance for profit is
small relative to the potential for gratification, the latter may
emerge as the primary motivation.” Annuzzi, 2014 WL
5904717, at *13. Here, Taxpayers do not meaningfully resist
the Court’s analysis about Eric. But as to Mitchel, they insist
there is no evidence he enjoyed the horse activity because he

                               16
never rode horses or had parties at Bluestone. The
Commissioner argues that the Court based its finding on the
opportunity to socialize. We agree with Mitchel on this point.
The record does not support that the prospect of social
opportunities mattered to Mitchel, notwithstanding his
wedding party at Bluestone. We also agree with Mitchel that
his enjoyment of the analytical approach to breeding supported
the Company’s profit motive.

       We are unpersuaded, however, by Mitchel’s argument
that any benefits of his residence at Bluestone somehow
discount his pleasure in living on the property. The record
supports the Court’s finding that the personal pleasure Mitchel
derived from living at Bluestone outweighed the benefits that
accrued to the Company. Mitchel moved to the farm in 2008
after he separated from Leslie. By 2010, he and Brianna were
living together rent-free in the renovated farmhouse. Mitchel
allowed Brianna to use the property to ride her horses and to
use a Company credit card for personal expenses. He also
arranged for substantial improvements to Bluestone before
their wedding and derived pleasure from residing on the 61-
acre estate. These personal motives suggest that Mitchel’s
operation of the Company was not for profit. On balance, we
agree with the Court’s finding that factor 9 favored the
Commissioner.

                       B. Neutral Factors

        The Court deemed factors 3, 4, and 5 neutral. The Court
and the parties spent more time evaluating factor 4—the
expectation that the assets used in the activity may appreciate
in value—so we focus on that factor first.

                              17
        The Court found that the horse breeding operation and
real estate holdings at Bluestone were interrelated. Skolnick,
2021 WL 5936986, at *18. It follows that Taxpayers’
expectation that the original property would appreciate
supported their profit motive. The same is not true, however,
of the Wert and Rosenthal Farms. There was little horse
activity on those farms. They were almost sold to Toll Brothers
for housing development, but whatever appreciation might
have occurred in that respect could not have supported the
notion that the Company bred horses for profit.

       As for the horses, the Court did not err when it found
there was no plausible basis to find the Company’s herd would
meaningfully appreciate in value. Skolnick, 2021 WL 5936986,
at *19. Even accepting Taxpayers’ belief that Always B Miki
would succeed, the Company lost more than $11 million on
horse ownership between 1998–2013. Weighing the evidence
of Mitchel’s testimony against that of the IRS experts and the
actual losses, we hold that the Court did not clearly err in
discounting any expectation of the horses appreciating in
value.

       We agree with the Tax Court that this factor was neutral
because that expectation does not support a finding that the
horse activity as a whole was conducted with a genuine intent
to make a profit.

        We address factors 3 and 5 only briefly. Factor 3—the
time and effort expended—was not meaningfully disputed by
Eric, presumably because his involvement in the Company was
minimal. Not so for Mitchel, who worked eight to nine hours a
day, five to six days a week. Taxpayers rightly note that
considerable hours spent on an activity might reflect a profit
motive. But hours alone are not necessarily enough to find that

                              18
this factor must favor a taxpayer. See, e.g., Betts v. Comm’r,
2010 WL 2990300, at *9 (T.C. Jul. 27, 2010) (although Betts
spent a “significant amount of time on her horse activity,” the
“many personal and recreational aspects” made the factor
neutral). Here the Tax Court acknowledged Mitchel’s time, but
also credited the testimony of Company employees that he was
not much of a hands-on manager. Skolnick, 2021 WL 5936986,
at *16. The evidence here is equivocal, so the Court did not
clearly err.

       Taxpayers rightly note that “withdrawal from another
occupation to devote most of his energies to the activity” may
suggest that the activity is engaged in for profit. 26 C.F.R.
§ 1.183–2(b)(3). Mitchel and Eric stopped working at their
other jobs before working for the Company. And even after
Mitchel went back to work at his consulting firm to help pay
the Company’s bills, his second retirement coincided with his
anticipated receipt of millions of dollars of trust funds. The
Court did not clearly err in finding factor 3 to be neutral either.

       As for factor 5—success in similar activities—
Taxpayers showed no meaningful synergy between their past
business activities and their horse breeding operation. The
Court did not err in finding this factor neutral.

                  C. Factor Favoring Taxpayers

       Factor 2—the expertise of Taxpayers and their
advisors—was the only one that favored Taxpayers. Skolnick,
2021 WL 5936986, at *16. Both Mitchel and Eric had
experience in the horse breeding industry dating back to their
work with Southwind and the Chancery Equine Group. The
Tax Court credited that experience. Skolnick, 2021 WL
5936986, at *16. Taxpayers argue that their experience should

                                19
have been given more weight. But the case they cite did not
give this factor significant weight. See Den Besten v. Comm’r,
2019 WL 6312955, at *9 (T.C. Nov. 25, 2019).

       Mitchel and Eric also consulted experts in the industry.
But for § 183 purposes, that counts only if the expert advice
advances the profit motive. See Whatley v. Comm’r, 2021 WL
289333, at *7 (T.C. Jan. 28, 2021). Taxpayers did not reveal
what type of advice they sought from their advisors. So the
Court did not err in giving little weight to the consultation of
experts. As the Court noted, hobbyists “often seek expert
advice” about their interests. Skolnick, 2021 WL 5936986, at
*16. And even if this factor were afforded more weight, it
would have done little to alter the balance of all the other
factors.

                        *      *       *

        In sum, the Tax Court did not clearly err in finding that
Taxpayers’ horse activity during 2010–2013 was “not engaged
in for profit” under § 183.

                               IV

       Taxpayers also sought to carry forward net operating
losses generated by the Company in the years prior to 2010 to
shelter future investment income, including the deficiencies at
issue. See 26 U.S.C. § 172(b)(1)(A). Contrary to Taxpayers’
unsupported claim that the NOL determination is a legal
question, we consider it a matter of fact and agree with our
sister courts that we review the sufficiency of evidence
submitted for tax deductions for clear error. See, e.g., Buelow
v. Comm’r, 970 F.2d 412, 415 (7th Cir. 1992) (“The tax court’s
determination that a taxpayer has failed to come forward with

                               20
sufficient evidence to support a deduction is a factual
finding”); Thompson v. Comm’r, 631 F.2d 642, 646 (9th Cir.
1980), cert. denied, 452 U.S. 961 (1981).

       The first two pieces of evidence submitted—the income
tax returns—are insufficient because Taxpayers cannot rely
solely on their own returns to establish losses. Roberts v.
Comm’r, 62 T.C. 834, 837 (1974).

        Taxpayers insist that their third piece of evidence—the
IRS’s No Change letter submitted in 2010 after the audit of
their 2008 tax returns—makes this case unique. We disagree.
The audit and letter did not address whether Taxpayers
operated the Company intending to make a profit. The letter
simply says the Internal Revenue Agent proposed no changes
to their 2008 tax return. App. 5633. Again, tax returns cannot
establish losses on their own. And the claimed NOLs were
from more years than just the audit year (2008), and each tax
year stands on its own. United States v. Skelly Oil Co., 394 U.S.
678, 684 (1969).

       Taxpayers also failed to submit ledgers from the years
prior to 2010 in which the asserted NOLs occurred. The last
piece of evidence Taxpayers submitted were the general
ledgers from the years 2010–2013. Recognizing their error in
not submitting more evidence, Taxpayers moved to add
evidence five months after the record was closed. The Tax
Court denied that motion as untimely and Taxpayers have not
challenged that order.

       For the reasons stated, the Tax Court did not clearly err
in denying the NOL carryforward deductions.

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                               V

       Mitchel and Leslie claim that any finding in their favor
on the prior two issues will eliminate their late-filing penalty
for 2010 under 26 U.S.C. § 6651(a)(1). They forfeited this
argument by only raising it in a footnote. See United States v.
Centeno, 793 F.3d 378, 388 n.9 (3d Cir. 2015). They also cited
no law to support their legal claim. So Mitchel and Leslie
remain liable for the penalty.

                        *      *      *

        The Tax Court adeptly conducted the five-day trial and
issued a comprehensive opinion. At most, Taxpayers have
shown that the Tax Court could have weighed the evidence
differently. Because more is necessary to show clear error, we
will affirm the decision.

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