T.C. Memo. 2014-253



                         UNITED STATES TAX COURT



          RAYMOND PRICE, III AND LYNN M. PRICE, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket Nos. 4301-13, 8470-13.                Filed December 16, 2014.



      Bertram P. Husband, for petitioners.

      Jonathan E. Behrens and Brian S. Jones, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      NEGA, Judge: Respondent determined deficiencies of $75,802, $69,836,

and $61,667 in petitioners’ Federal income tax for the taxable years 2009, 2010,

and 2011 (years at issue), respectively, and accuracy-related penalties of $15,160,
                                        -2-

[*2] $13,967, and $11,920 under section 6662(a)1 for the taxable years 2009,

2010, and 2011, respectively. The issues for decision are (1) whether petitioners’

horse activity and their automobile dealership activity should be characterized as a

single activity for purposes of section 183, (2) whether petitioners’ horse activity

was engaged in for profit for purposes of section 183, and (3) whether petitioners

are liable for the accuracy-related penalty pursuant to section 6662(a).

                               FINDINGS OF FACT

      Some of the facts have been stipulated and are so found. The stipulation of

facts and the attached exhibits are incorporated herein by reference. At the time

the petition was filed, petitioners Raymond Price III and Lynn M. Price resided in

Pennsylvania.

I.    Automobile Dealerships

      Mr. Price is a third-generation automobile dealer whose family has been

selling cars in the Poconos since 1913. Mr. Price began working at his father’s

Lincoln Mercury dealership, begun in 1940 by his grandfather, in June 1981 after

graduating from college. Mr. Price purchased the Lincoln Mercury dealership


      1
       Unless 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 Procedure. All monetary amounts are rounded to
the nearest dollar.
                                         -3-

[*3] from his mother and father’s estate in or about 1982. Mr. Price purchased a

Honda-Mazda dealership in 1990, a Stroud Ford dealership in 1994, and Ford,

Chevrolet, and Volvo-Suzuki dealerships in 2007. The 2007 Ford and Chevrolet

dealerships were purchased from Mr. Price’s cousins and were originally owned

by Mr. Price’s uncle.

      Petitioners’ automobile dealerships (dealerships) are operated through four

Pennsylvania corporations: (1) Ray Price Chevrolet, Inc., which sells Chevrolets;

(2) Ray Price Motors Imports, Inc., which sells Hondas, Mazdas, and Volvos; (3)

Ray Price Ford Sales, Inc., which sells Fords and Lincolns; and (4) Ray Price

Ford, Inc., which sells Fords (collectively, corporations). Petitioners are the sole

shareholders of Ray Price Chevrolet, Inc., Ray Price Motors Imports, Inc., and Ray

Price Ford Sales, Inc. Mr. Price owns 51% of Ray Price Ford, Inc. Mr. Price also

owns a 49% shareholder interest in Asheboro Ford, Inc., a corporation selling

Fords in Asheboro, North Carolina. The corporations are taxed as S corporations

for Federal income tax purposes. For each of the years at issue, all the

corporations filed Form 1120S, U.S. Income Tax Return for an S Corporation.

      Petitioners’ automobile business is highly successful. Mr. Price has worked

hard to grow the automobile dealerships and still works over 60 hours per week at

his various dealerships, including holding weekly meetings at each. When he
                                        -4-

[*4] purchased the Lincoln Mercury dealership from his father in 1981, it was

selling fewer than 100 cars per year. The dealerships now sell approximately

5,000 cars per year to retail customers and approximately 3,000 cars per year at

wholesale or dealer auctions. In 2012 the dealerships’ gross receipts totaled more

than $96 million. Additionally, Mr. Price has transformed several unprofitable

dealerships into profitable enterprises. However, he failed to transform the Volvo-

Suzuki dealership into a profitable enterprise.

      The economic downturn in 2008 and 2009 affected the automobile industry

nationwide. Mr. Price’s dealerships did suffer a drop in sales, but they managed to

avoid laying off a single employee. After General Motors declared bankruptcy in

2009, Mr. Price received notice that the dealership agreement for the Chevrolet

dealership he had purchased in 2007 would be terminated. Following

negotiations, General Motors instead set sales objectives for the Chevrolet

dealership. If these sales objectives were not met, the dealership agreement for the

Chevrolet dealership would be terminated at the end of 2011 or 2012. The sales

objectives were met, and Mr. Price retained the Chevrolet dealership.

      Mr. Price analogized his business philosophy to a stool with three legs

representing margin, volume, and expense. Mr. Price believes that, as long as

these three factors are controlled, the stool will be strong enough to support the
                                        -5-

[*5] weight of whatever is placed on top of it, be it “a Ford or a Chevy or a Honda

or a Volvo”.

      Petitioners’ gross income, excluding the losses attributable to the horse

activity, discussed infra, totaled $2,484,136 for tax year 2009, $1,212,419 for tax

year 2010, and $1,989,222 for 2011.

II.   Petitioners’ Property

      Petitioners purchased 150 acres in Shawnee on Delaware, Pennsylvania, in

1985 for $150,000 (property). Petitioners have improved the property extensively,

clearing heavy growth, fencing between 90 and 100 acres, installing two septic

systems and two wells, and constructing various outbuildings, including a 42-by

60-foot pole barn, a 53-by 76-foot barn, a large main barn discussed in further

detail below, and a mobile 25-by 30-foot shed. In or around 1986 petitioners

began renovating a dilapidated farmhouse on the property that they have used as

their principal residence since 1987 (farmhouse). An appraisal dated November

19, 2013, by Thomas G. McKeown estimated the value of the entire property to be

$1,500,000, with the farmhouse valued at $335,000.

      In 1997 petitioners sold approximately 27 acres of the property for

approximately $400,000. The property was originally scheduled to be sold in

1994 for $271,000, but the buyer encountered difficulties and the closing was
                                          -6-

[*6] delayed until 1997. Mr. Price stated that the difference in the selling price

was due to the buyer’s paying prime interest retroactive to the original closing

date. The acreage sold in 1997 is now part of a golf course.

III.   Horse Activity

       Mr. Price grew up around horses. His family became involved with Arabian

horses in 1964 when he was four years old. Mr. Price began training horses for his

family’s clients at the age of 13, and by age 17 he was a member of the

Pennsylvania State championship 4-H judging team. His mother, Margaret Price,

was a very accomplished rider who was a member of the U.S. Equestrian Team

and received the Pegasus Medal of Honor from the U.S. Equestrian Foundation in

recognition of her work with horses. Margaret Price also was a bronze and silver

medal winner while on the U.S. Equestrian Team. There are aspects of training

and caring for horses that Mr. Price enjoys, and he takes pride in seeing his horses

excel in competition. Petitioners’ daughter is an accomplished rider who rode

during the years at issue although she has not ridden in three years. Both Mr.

Price and his daughter competed in horse shows during the years at issue. Mrs.

Price did not testify at trial, but Mr. Price stated that Mrs. Price and petitioners’

son do not like horses.
                                        -7-

[*7] Petitioners began their horse activity in or about 1993. Petitioners formed

Rock Ledge Arabians, LLC (Rock Ledge), on September 22, 2011, and have since

operated their horse activity under this name.2 The goal of Rock Ledge is to

operate as a full-service horse farm with breeding, boarding, training, hauling, and

showing of horses. Additionally, Mr. Price believes that breeding-only farms are

no longer profitable within the Arabian horse industry and that a trainer-centric

model is required for success. As a result, Mr. Price sought to offer a variety of

services at Rock Ledge, including breeding, training, boarding, and

showing/hauling horses to horse shows.

      Petitioners have built several structures to accommodate horses on the

property. There are a number of “run-in” sheds on the property, which are three-

sided sheds that horses can enter and exit on their own. Additionally, the property

contains a 42-by 60-foot barn used for equipment storage and a five-stall barn with

an indoor training pen. In 2006 and 2007 petitioners constructed a large barn with

19 stalls, a lounge area, restrooms, and workrooms.




      2
        Although Rock Ledge was not formed until 2011, the Court will refer to
petitioners’ horse activity for all years, including those not at issue, as “Rock
Ledge”.
                                        -8-

[*8] A.      Rock Ledge’s Business Plan

      Petitioners submitted as part of the record in these cases a business plan

pertaining to Rock Ledge. The business plan is undated but contains the heading

“Business Plan: 2008-2010”. The business plan is not paginated, but it contains

three pages and outlines the objectives related to Rock Ledge. Specifically, the

plan discusses five main goals listed on the first page: (1) breed Half-Arabian

horses; (2) breed the stallion Reflection RL; (3) generate clients through trainer

Justin McManus for boarding, training, and showing/hauling fees; (4) sell horses

through “in barn marketing”; and (5) sell vehicles through “relationship

marketing”. The first three goals are discussed in further detail on the first and

second pages of the business plan, and the second page calculates that the first

three goals would produce an income stream of $240,700 “with 10 horses”,

$414,700 “with 20 horses”, or $588,700 “with 30 horses”. It is unclear how

petitioners calculated the anticipated income from “20 horses” and “30 horses”

since the business plan does not contain calculations with respect to these figures.

Additionally, it appears that the “total income” figure is one of gross income,

rather than net income, since the business plan does not contain any reference to

expenses, such as veterinary care or feed costs. The third page of the business

plan includes “additional income” that discusses petitioners’ goals with respect to
                                         -9-

[*9] (1) vehicle sales to “horse-related customers”, and (2) petitioners’ expectation

that the property would significantly increase in value, which was not included as

one of the five main goals listed on the first page of the business plan. Petitioners’

goals are discussed in further detail herein.

             1.     Breeding Half-Arabian Horses

      Mr. Price chose to breed Half-Arabians instead of purebred Arabians

because he believed the market for Half-Arabian horses to be competitive with

purebred Arabians. As part of Rock Ledge’s goal of selling Half-Arabian horses,

the business plan called for selling three Half-Arabian foals per year at a price of

$15,000 each for gross income of $45,000.

      Rock Ledge maintains equipment to facilitate breeding services, including a

phantom mare equipped with an artificial vagina for stallion semen collection,

microscopes used to evaluate sperm motility, and cooled semen shipping

containers. Additionally, Ray Price Motors Imports, Inc., accepts shipments of

cooled stallion semen collected offsite for use at Rock Ledge. At the time of trial

Rock Ledge maintained a Web site listing horses available for sale. Each listing

contains information relating to a particular horse’s dam, sire, and type of

performance and any accomplishments the horse might have achieved, such as

major awards.
                                       - 10 -

[*10] Petitioners denote horses bred at Rock Ledge with the suffix “RL” at the

end of the horses’ names, a practice they adopted from Sheila Varian of Varian

Arabians, a top breeder. Petitioners sold the horse Prego RL on September 15,

2008, although the price at which Prego RL was sold was not submitted to the

Court. Petitioners sold several horses in 2012 and 2013, including Enoree RL on

December 23, 2012, for $1;3 Gianna RL on December 23, 2012, for $1; Khody RL

on January 11, 2013, for $13,000, which included a $1,000 credit for use at Rock

Ledge; Villanova RL on June 5, 2013, for $10,000; Jason El Jamaal RL on July 6,

2013, for $17,000; Gunners Moon RL on August 10, 2013 for $4,750; and

Evidence RL on August 11, 2013, for $10,000.

      Rock Ledge also facilitates sales of client horses by acting as a sales agent.

As an example petitioners cite the sale of Ggrand Slam in or about August 2012

for $15,000, for which they received a 15% commission. Following the August

2012 sale of Ggrand Slam, Rock Ledge purchased the horse from the original

buyer for $6,000 because the buyer had encountered financial difficulties

following her purchase of the horse. Petitioners sold Ggrand Slam on


      3
       Petitioners stated that the horses Enoree RL and Gianna RL were sold for
$1 as culls. Culling horses allows the buyer to shoulder the expense of the horse;
therefore, petitioners argue it is a profit-motivated practice since it reduces the
ongoing expense of caring for the horse.
                                        - 11 -

[*11] December 27, 2013, for $8,000. Petitioners did not sell any horses during

the years at issue.4

      Petitioners believe that their horses have the potential to be sold for very

high prices. Petitioners stated that the stallion *Aladdinn was syndicated for

$6,300,000 with 42 shares sold at $150,000 each. It appears that at some point

Rock Ledge owned a daughter of *Aladdinn, the mare Evensong AH, but it was

unclear at the time of trial whether Rock Ledge still owned Evensong AH.

Evensong AH was not on the list of horses appraised by petitioners’ expert

witness, discussed infra, although she did appear on inventory lists for the years at

issue. Additionally, Evensong AH was diagnosed with mild chronic degenerative

endometritis, which reduced her value as a broodmare, the “only function” for

which petitioners purchased her. Apart from the alleged value of *Aladdinn, Mr.

Price was influenced by family friends of his parents, Leonard and Jean Skeggs,

who had sold horses for up to $500,000 each.




      4
        Petitioners’ 2009 Schedule F, Profit or Loss From Farming, reflects income
of $19,500 due to sales of “livestock, produce, grains, and other products”.
Petitioners did not file any Forms 4797, Sales of Business Property, for the years
at issue. Schedule F instructs taxpayers to report income derived from the sale of
livestock held for breeding or sport on Form 4797. In the light of the fact that
petitioners’ briefs are silent as to any sales of horses occurring in 2009, the Court
concludes that the 2009 sales income was not due to the sale of horses.
                                       - 12 -

[*12] Petitioners submitted the report of an expert witness to corroborate their

beliefs concerning the future value of Rock Ledge’s horses. William Hughes

(Professor Hughes) is professor emeritus at California State Polytechnic

University at Pomona and also serves as the treasurer of the U.S. Equestrian

Foundation. Professor Hughes evaluated petitioners’ horses on December 10,

2013. Professor Hughes appraised the herd at a total value of $575,000, with

individual horses ranging in value from $7,500 to $75,000. Seven of the twenty

horses evaluated were sired by Reflection RL, discussed in further detail infra,

with values ranging from $7,500 to $70,000. Professor Hughes’ report includes an

evaluation sheet for each horse that contains 17 conformation categories and three

different outlines of a horse’s profile that can be used for marking down any

unique characteristics. In 19 of the 20 evaluation sheets submitted with Professor

Hughes’ report, the horses received a “good” rating in all 17 conformation

categories. One horse, Midnight Magnum, received a “very good” rating in the

“present condition” category; Professor Hughes appraised Midnight Magnum as

the most valuable horse in the herd at $75,000.
                                       - 13 -

[*13]         2.    Breeding Stallion Reflection RL

        Apart from breeding Half-Arabian horses with its own broodmare band,

Rock Ledge aimed to generate fees by offering the stud services of Reflection RL,

a purebred Arabian horse. Petitioners’ business plan calls for breeding Reflection

RL 15 times per year at a price of $1,200 per breeding for total gross income of

$18,000. Reflection RL sired either 14 or 15 foals before he suffered a leg injury

in August 2009 that ultimately resulted in his having to be euthanized in either late

2009 or early 2010.

              3.    Trainer-Generated Income

        Petitioners also sought to increase Rock Ledge’s income by offering the

services of a professional trainer, which they believed would generate income

from boarding, training, and showing/hauling fees. Petitioners initially employed

Justin McManus as the trainer at Rock Ledge. Mr. McManus did not bring in the

number of clients petitioners expected, and as a result petitioners terminated his

employment in late 2010. Petitioners replaced Justin McManus with two

professional trainers, Chris and Nicole Hall, in September 2011. Mr. Price is

satisfied with their performance and indicated that they have met Rock Ledge’s

expectations in terms of generating clients. Specifically, Mr. and Mrs. Hall have

generated some new clients who pay boarding, training, and showing/hauling fees
                                        - 14 -

[*14] to Rock Ledge. In addition to employing Mr. and Mrs. Hall as trainers,

petitioners employ Terry Steckel as the barn manager of Rock Ledge and

employed her during the years at issue. Mr. and Mrs. Hall and Ms. Steckel are

covered under the same policies as dealership employees for worker’s

compensation and employer’s liability insurance and health insurance;

additionally, they are paid from the same ADP payroll account used for dealership

employees. Petitioners did not deduct the cost of paying any Rock Ledge

employees on their 2009-11 Schedules F.

      Petitioners submitted invoices from 2009, 2010, and 2011 that purport to

show trainer-generated income for the years at issue. The 2009 invoices reflect

fees charged to clients for boarding and some hauling fees. Petitioners reported

$22,726 in boarding income and $2,292 in show winnings on their 2009 Schedule

F. Petitioners deducted $28,577 in training expenses for 2009. The 2010 invoices

reflect boarding fees charged to clients and one instance of a trailering fee.

Petitioners reported $12,550 in boarding income and $490 in show winnings on

their 2010 Schedule F. Petitioners deducted $50,599 in training expenses for

2010. The 2011 invoices reflect boarding fees, training fees, hauling fees, and

show fees. Petitioners reported $56,807 in boarding income and $600 in show
                                       - 15 -

[*15] winnings on their 2011 Schedule F. Petitioners deducted $20,265 in

training expenses on the 2011 Schedule F.

      Petitioners assert that Rock Ledge currently leases horses, which obligates

the lessee to pay the expenses of feeding and training the horse and may also bring

additional income in the form of showing and hauling fees paid to Rock Ledge if

the lessee chooses to enter the horse into shows. There are only two horse leases

in evidence, both of which are signed by the same lessee, both of which are

unsigned by a Rock Ledge representative, and both of which contain suspect dates

for the periods the leases purportedly cover. The lessee in both contracts is the

same person, Sheila Curley. One contract (2012 contract) covers the period from

April 1, 2012, to July 31, 2012, and is for the horse Grady Afire. Sheila Curley

signed as the lessee. It appears the 2012 contract was originally dated April 1,

2013, but the “3” in 2013 has been crossed out and a “2” written in its place so as

render a contract date of April 1, 2012. The 2012 contract is not signed by anyone

from Rock Ledge as the lessor. The other contract (2013 contract) covers the

period from May 1, 2013, to July 1, 2013, and is for the horse Kaptn Bravado.

Sheila Curley signed and dated the 2013 contract on June 29, 2013, two days

before the end of the contract period. As with the 2012 contract, the 2013 contract

is not signed by anyone representing Rock Ledge as the lessor. These two
                                       - 16 -

[*16] contracts lack any probative value, considering that there are defects in the

dates on both contracts and that they are unsigned by the lessor, and we find it

suspicious that both contracts relate to the same person. Consequently, the Court

does not find that Rock Ledge currently leases horses. There is no evidence in the

record that Rock Ledge leased horses during the years at issue.

      Petitioners also claim that Rock Ledge currently offers riding lessons. As

evidence, petitioners offered a one-page handwritten document containing

estimated revenues from Rock Ledge during 2013. The document is undated, but

petitioners stated that it was prepared in December 2013, less than one month

before trial in these cases. The document estimates that Rock Ledge will have

earned $1,300 from riding lessons during 2013 but contains no information as to

how this number was calculated, such as the price of a riding lesson or the number

of lessons sold. Considering the lack of evidence on the record, the Court

concludes that Rock Ledge does not currently offer riding lessons. There is no

evidence that Rock Ledge offered riding lessons during the years at issue.

             4.    In Barn Marketing

      Petitioners’ business plan also calls for “in barn marketing”. The business

plan does not elaborate on what is meant by in barn marketing, but Mr. Price

explained at trial that horses bred by Rock Ledge were to be marketed to existing
                                       - 17 -

[*17] clients who used other services at Rock Ledge. In this manner, clients could

“upgrade” to a horse already in the barn at Rock Ledge. Mr. Price referred only to

“farm bred” horses when he discussed those to be marketed through in barn

marketing. Thus, it appears to the Court that in barn marketing is an extension of

part 1 of the business plan, to breed and sell Half-Arabian horses.

             5.    Vehicle Sales

      Petitioners’ business plan for Rock Ledge also calls for vehicle sales

through what Mr. Price labels “relationship marketing”. Mr Price sought to

market cars sold at his dealerships to “horse customers”, by which he meant not

just Rock Ledge clients but also people he met at horse shows. Attendees of horse

shows who knew that Mr. Price owns several dealerships ask him about various

trucks or cars in “the same way doctors get asked when they’re out socially about

what to fix”. Mr. Price realized that people who own horses also need trucks that

are capable of pulling trailers. Further, Mr. Price needed to know the vehicle

towing capacities to determine the best fit for a particular customer’s towing

needs, depending on the type and size of the trailer to be pulled. “Horse

customers” trust Mr. Price because of the “relationship” developed through the

horses, which is why he terms the marketing of vehicles through horse-related

activities “relationship marketing”. To implement “relationship marketing”,
                                       - 18 -

[*18] petitioners engaged in a small amount of cross-marketing between the

automobile dealership activity and Rock Ledge, used a dealership employee to

design Rock Ledge advertising, and arranged for another dealership employee to

be available for car sales on the days of horse shows.

      Petitioners sought to cross-market the automobile dealership activity and

Rock Ledge. Specifically, Mr. Price designed the Rock Ledge Arabians logo to

mimic the design and colors of the Ford logo. Mr. Price placed two magnetic

signs on each vehicle he transported to horse shows. One sign bore the Rock

Ledge logo, and the other sign advertised RayPriceCars.com, with the slogan “99

Years of Doing It Right” below the Web site address. Exhibit 117-P shows the

two signs together. It is unclear when the photograph of the signs was taken

although it appears that the RayPriceCars.com sign would not have been used until

at least 2012, considering that Mr. Price’s grandfather began his first automobile

dealership in 1913.5

      Petitioners also placed advertisements in various horse magazines and

newsletters. In some instances, these advertisements advertised only the


      5
       Although signs featuring “99 Years of Doing It Right” do not reference the
year 2012, Exhibit 47-P contains the slogan “100 Years of Doing It Right” and
displays “1913” and “2013”. Therefore, we conclude that signs with “99 Years of
Doing It Right” would have been used in advertising during 2012.
                                       - 19 -

[*19] dealerships, whereas in others they advertised only Rock Ledge. Petitioners

submitted various exhibits to the Court purporting to be samples of advertising

where the same advertisement covered both the dealerships and Rock Ledge.

However, Exhibit 24-P, showing an advertisement for the Region 15

Championship Omnibus to be held in 2012, does not mention either Rock Ledge

or any of the dealerships. Exhibit 25-P, which is a copy of a 2000 print

advertisement appearing in the publication Horse News, advertises Ray Price Cars

and lists various “elite rider[s] & trainers” who are customers of Mr. Price’s

dealerships but does not mention Rock Ledge or petitioners, except insofar as the

name “Ray Price” is used in reference to the automobile group. Only one exhibit

submitted to the Court actually advertises both Rock Ledge and

RayPriceCars.com, with the slogan of “99 Years of Doing It Right” and the slogan

“We Know Horsepower!”. As with the magnetic sign depicted in Exhibit 117-P, it

appears to the Court that the slogan “99 Years of Doing It Right” would have been

used in 2012, after the years at issue. Before beginning Rock Ledge, Mr. Price

was aware that automobile dealerships advertised in journals and magazines read

by horse enthusiasts. There is no evidence that there was cross-advertising during

the years at issue.
                                        - 20 -

[*20] As of the time of trial Rock Ledge maintained a Web site advertising

services offered and horses available for sale. The Web site contains a button

labeled “We Know Horsepower” that, when clicked, takes the visitor to

RayPriceCars.com. It is unclear whether the Web site existed during the years at

issue.

         Petitioners used some dealership employees in conjunction with Rock

Ledge. Petitioners submitted Exhibit 118-P as support for their assertion that

dealership employees worked on behalf of Rock Ledge. Exhibit 118-P contains

26 pages of handwritten notes in Mr. Price’s handwriting. The pages were from a

notebook Mr. Price kept at the Stroud Ford dealership. Many of the pages are

undated, but those that are dated bear dates from 2000 and 2001. One page directs

a dealership employee, Pat Adelmann, to email information to a person who had

shown interest in one of Rock Ledge’s horses. Additionally, petitioners arranged

for a dealership employee, Michael Brotzman, to be available by cell phone during

horse shows to answer questions related to the dealerships’ inventory. Mr. Price

would tell Mr. Brotzman the dates and times of horse shows and direct him to be

available during those times. Mr. Brotzman usually received one to five calls per

weekend from Mr. Price, and he would arrange for the delivery of a vehicle if

someone at a horse show decided to purchase a car or truck. Mr. Brotzman
                                        - 21 -

[*21] directly assisted only in the sales of Ford vehicles; for Chevrolet sales he

would refer Mr. Price to a different salesman at Ray Price Chevrolet, Inc.

      Petitioners assert that Rock Ledge has generated a significant number of

customers for the dealerships. Petitioners submitted a two-page list of “horse

customers” purporting to list the names of individuals and organizations who have

purchased vehicles from the dealerships. The list is undated and contains the

names of 82 “customers” although some entries do not appear to be complete. For

example, the entry “Sussex - N.J. - Ford F-250 (Traded Horse Trailer)” could be a

customer with the last name Sussex or a customer in Sussex, New Jersey. In either

case, this entry does not name a “horse customer” with any specificity. The list

denotes with asterisks 23 customers who bought multiple vehicles and denotes

with double asterisks 5 customers who bought more than 10 vehicles. Petitioners

were unable to provide an exact number of vehicles bought by the people

appearing on the list. But in slower years the dealerships sell 40 to 60 cars per

year to “horse customers”, and in better years they sell 60 to 70 cars per year to

“horse customers”. Rock Ledge’s business plan states that gross sales of vehicles

to horse-related customers have averaged more than $500,000 annually for more

than 10 years. Petitioners submitted a number of contracts that they claim

represent sales to “horse customers”. However, the contracts do not specifically
                                        - 22 -

[*22] identify the buyers as “horse customers”, and at least five contracts that

petitioners submitted involved sales or trades to other dealers or auto auctions.

      Separate and apart from the list of “horse customers”, petitioners have loyal

customers in the Kanavy family. Valerie and Lawrence Kanavy were friends of

Mr. Price’s mother and owned at least one horse in partnership with Mr. Price’s

parents. Valerie Kanavy rode horses with Margaret Price, and the Kanavys’ son,

Timothy Kanavy, has known Mr. Price since childhood. The Kanavys operate

Trevdan Building Supply (Trevdan), a building materials business for commercial

residential buildings. Trevdan has purchased 300 to 400 vehicles from Mr. Price

beginning in 1982 when he founded his first dealership. Additionally, Timothy

Kanavy stated that his family members purchase their personal vehicles from Mr.

Price. Mr. Price stated that the Kanavys, along with other customers, switched

from buying Fords to buying Chevrolets in order to help the Chevrolet dealership

achieve its 2011 and 2012 sales objectives, which helped the Chevrolet dealership

avoid termination of its dealership agreement. When asked about the business

relationship between Trevdan and Mr. Price, Timothy Kanavy gave the following

testimony:
                                         - 23 -

[*23]
        Q:    Why does your family do business with Ray Price?

        A:    Through the horses. My parents met his mom and that’s the
              only reason because they rode a lot together.

        Q:    And why does Trevdan do business with Ray Price?

        A:    Because of the relationship my mom and his mom had and my
              father, through the horses.

              6.     Appreciation in Land Value

        Appreciation in land value is not listed as one of the five main goals on

Rock Ledge’s business plan. However, it is listed as a source of “additional

income” on the third page of the business plan. As previously discussed, the

property on which the farmhouse and Rock Ledge are situated has been appraised

at $1.5 million. Petitioners assert that when sold, the property will yield long-term

appreciation of more than $1 million, but they have not provided any information

related to the basis of the property except for the original purchase price of

$150,000.

        B.    Horse Show Marketing and Barn Construction

        Petitioners also marketed Rock Ledge by entering horses in competitions at

horse shows. Petitioners distributed flyers listing horses for sale, hung custom
                                        - 24 -

[*24] stall drapes with the Rock Ledge logo, and set up an area where clients

could sit comfortably and watch videos of horses available for sale.

      Petitioners also distributed T-shirts promoting the dealerships at horse

shows. Petitioners submitted a photograph of a dog wearing a T-shirt advertising

RayPriceCars.com although it is not clear that the dog is actually at a horse show;

additionally, the T-shirt celebrates the centennial of Ray Price dealerships in 2013,

meaning it was likely distributed after the years at issue. The T-shirt advertises

only RayPriceCars.com and does not mention Rock Ledge. In 2011 Ray Price

auto group donated two cars to be raffled off at the 2011 North American Arabian

Horse Show Association World Championship Horse Show. There is no evidence

that the donation of the cars was used to promote Rock Ledge.

      Petitioners constructed a large barn on the property that was completed in

2007. The barn contains 19 horse stalls, a lounge area, restrooms, and workrooms.

The lounge is meant to serve as an area where customers can relax and watch

through a window into an indoor area where their horses are being worked. The

lounge has a seating area, a TV, and a small bar with stools. The bar is portable

and is often taken to horse shows. The barn also has wash racks for washing and

grooming horses, saddle tack rooms, and a washer and dryer for horse blankets.
                                        - 25 -

[*25] C.     Financials of Rock Ledge

      Mrs. Price does all of the recordkeeping and bookkeeping for Rock Ledge.

For the taxable years 2005 through 2012 petitioners reported Rock Ledge on

Schedule F, attached to their Forms 1040, U.S. Individual Income Tax Return.

For those years petitioners reported losses as follows:

                           Taxable year             Loss
                               2005               ($91,710)
                               2006                (83,503)
                               2007               (151,849)
                               2008               (225,544)
                               2009               (174,492)
                               2010               (195,904)
                               2011               (147,242)
                               2012                (85,022)
                                Total            (1,155,266)

      Rock Ledge has not made a profit since it was begun in 1993. Petitioners

did not deduct the cost of any labor hired for the years at issue. Tax year 2009 was

the only year at issue for which any advertising cost deductions were claimed; for

that year, petitioners reported $1,120 in advertising costs. For each of the years at

issue, Rock Ledge did not generate enough income to cover the costs associated

with feeding the horses.
                                        - 26 -

[*26] Petitioners hired Robert J. Murphy to prepare their income tax returns for

the years at issue. Mr. Murphy is a certified public accountant (C.P.A.) with the

firm of Boyer & Ritter in Camp Hill, Pennsylvania. Boyer & Ritter specializes in

accounting work for automobile dealerships. Mr. Murphy has prepared

petitioners’ individual income tax returns and the corporations’ tax returns since

2002. In addition, Mr. Murphy has also served as the corporations’ accountant

since 2002, in which capacity he prepares balance sheets, income statements, and

statements of cashflow.

      The IRS has audited petitioners’ returns on two prior occasions, in 1999 and

2007, and concluded that Rock Ledge was conducted with a profit objective. Mr.

Murphy consulted with Mr. Price regarding his prior methodology for reporting

Rock Ledge’s losses and decided to continue reporting Rock Ledge on Schedule

F, as Mr. Price had previously done before hiring Mr. Murphy as his accountant.

      Mr. Murphy does not audit the books and records of Rock Ledge, nor does

he prepare any financial statements for it. Boyer & Ritter has other clients who

file Schedules F, but petitioners are the only clients for whom Mr. Murphy

prepares a Schedule F. Additionally, none of Mr. Murphy’s other clients operated

a horse activity. Petitioners did not file any Forms 4797 for the years at issue.
                                        - 27 -

[*27] D.     Setbacks

      Petitioners suffered a number of setbacks to Rock Ledge over the years.

The mare Bey-Rose Gal died of unknown causes in 2002. The mares Overlook

Galaxina and Pasazz both died in 2003. The mare Silver Lining injured her knee

in 2004 and had to be euthanized. The stallion Reflection RL had to be put down

after an injury in late 2009 or early 2010. The mare Galoreus RL had to be

euthanized because of a virus in 2010. Zips Reflection RL, whose sire was

Reflection RL, became paralyzed in 2011 after stumbling in his training pen;

consequently, he also had to be euthanized. The mare Gianna RL developed an

infection in her joints and was culled in 2012 for $1.

      A number of Rock Ledge’s horses aborted or had other reproductive

complications, including: a mare that developed uterine torsion while in foal in

2000; mares that developed uterine cysts in 2000 and 2005, resulting in their

inability to be used for breeding; a mare that foaled a stillborn foal with a wry nose

in 2001; two foals out of the same mare and stallion that developed cherry-colored

hooves and died shortly after birth in 2003 and 2004; a foal whose testicles did not

descend and that had to be gelded with expensive surgery in 2005; mares that

spontaneously aborted in 2003, 2006, 2007 and 2008; and a mare whose foal

presented in breech, resulting in the death of both the foal and the mare in 2009.
                                        - 28 -

[*28] At a point which the record does not reflect, but probably between 2000 and

2003, Mr. Price reached out to contacts at Penn State University regarding the

high number of abortions his mares were experiencing.6 In response, he received a

copy of a bulletin written by Professor Marvin H. Hall discussing spontaneous

abortions by mares in Kentucky. The bulletin describes how eastern tent

caterpillars living in wild cherry trees may produce excrement containing

chemicals that cause mares that eat the excrement to abort. In response, Mr. Price

removed all of the wild cherry trees on his property.

      E.     Audit and Notices of Deficiency

      By letter dated November 7, 2011, respondent informed petitioners that

their 2009 income tax return had been selected for audit. At some point the audit

was expanded to tax years 2010-11. Respondent mailed a notice of deficiency

relating to tax year 2009 to petitioners on November 27, 2012. Respondent mailed

a separate notice of deficiency relating to tax years 2010-11 to petitioners on

February 28, 2013.




      6
        Mr. Price did not identify the year in which he contacted Penn State, but at
trial he stated that Kentucky experienced spontaneous abortions of mares between
2000 and 2003. The bulletin he received from Professor Hall is undated but
references the Kentucky abortions as a concurrent event.
                                        - 29 -

[*29]                                OPINION

I.      Burden of Proof

        Generally, the taxpayer bears the burden of proving, by a preponderance of

the evidence, that the determinations of the Commissioner in a notice of deficiency

are incorrect. Rule 142(a); Welch v. Helvering, 

, 115 (1933).

This burden may shift to the Commissioner if the taxpayer introduces credible

evidence with respect to any relevant factual issue and meets other conditions,

including maintaining required records. See sec. 7491(a). We decide this case on

the preponderance of the evidence and accordingly need not address whether the

burden of proof has shifted. See Estate of Bongard v. Commissioner, 

,

111 (2005).

II.     Section 183

        Taxpayers may generally deduct all ordinary and necessary business

expenses paid or incurred during a taxable year in carrying on a trade or business.

Sec. 162(a). In general, no deductions are allowable for expenses incurred in

connection with activities not engaged in for profit, such as activities carried on

primarily as a sport or hobby or for recreation, except to the extent provided by

section 183(b), discussed infra. Sec. 1.183-2(a), Income Tax Regs. Section

1.183-2, Income Tax Regs., sets forth a nonexclusive list of relevant factors to be
                                        - 30 -

[*30] considered in determining whether an activity is engaged in for profit. To

be engaged in an activity for profit, the taxpayer must have an actual and honest

objective of making a profit. Dreicer v. Commissioner, 

, 645 (1982),

aff’d without opinion, 

(D.C. Cir. 1983); sec. 1.183-2(a), Income

Tax Regs. A taxpayer’s expectation of profit need not be reasonable, but it must

be a good-faith expectation. Allen v. Commissioner, 

, 33 (1979)

(citing section 1.183-2(a), Income Tax Regs.); Dunn v. Commissioner, 

, 720 (1978), aff’d, 

(2d Cir. 1980); Churchman v. Commissioner,

, 701 (1977); Benz v. Commissioner, 

, 383 (1974). A mere

declaration of profit objective is not controlling, and the Court will give greater

weight to all objective facts and circumstances than to a taxpayer’s statement of

intent with regard to the activity. Dreicer v. Commissioner, 

.

      If an activity is not engaged in for profit, section 183(b)(1) allows

deductions that would be allowable without regard to whether the activity is

engaged in for profit. Section 183(b)(2) allows deductions equal to the amounts of

deductions that would be allowable if the activity were engaged in for profit, but

only to the extent gross income derived from the activity exceeds the deductions

allowed by reason of section 183(b)(1).
                                         - 31 -

[*31] Section 183(d) creates a presumption of a profit objective if, for three of the

five taxable years ending with the year at issue, gross income exceeds the

deductions attributable to the activity. In cases such as this one where the activity

consists in major part of the breeding, training, showing, or racing of horses, a

presumption of profit objective exists if gross income exceeds the deductions for

two of the seven taxable years ending with the year at issue. Sec. 183(d). Rock

Ledge has not turned a profit since it was commenced in 1993, and thus the

presumption created by section 183(d) does not apply.

      Respondent disallowed the loss deductions attributable to Rock Ledge on

the grounds that the activity giving rise to the losses was “not engaged in for

profit” within the meaning of section 183. Petitioners contend that Rock Ledge

was engaged in for profit and that Rock Ledge and the automobile dealership

actively are sufficiently interrelated to make them one activity for purposes of

section 183.

      A.       Scope of Activity

      Before resolving whether Rock Ledge was engaged in for profit, we must

determine the scope of the activity that is at issue. Before trial the parties jointly

moved to bifurcate trial to first decide the issue of whether Rock Ledge and the

automobile dealership activity constituted one activity or separate activities. The
                                       - 32 -

[*32] motion indicated that if the Court determined Rock Ledge and the

automobile dealership activity constituted one activity, respondent would concede

that Rock Ledge was engaged in for profit within the meaning of section 183. The

Court denied the parties’ motion on December 5, 2013, and trial was held on all

issues on January 14 and 15, 2014, in Philadelphia, Pennsylvania.

      Petitioners argue that Rock Ledge and the automobile dealership activity are

sufficiently interconnected to constitute one activity. They rely heavily on our

decision in Topping v. Commissioner, T.C. Memo. 2007-92, 2007 Tax Ct. Memo

LEXIS 88. Respondent argues that Rock Ledge and the automobile dealership

activity are separate activities. Under section 1.183-1(d)(1), Income Tax Regs.,

the Court may consider all facts and circumstances to determine whether a

taxpayer’s separate undertakings constitute one activity for purposes of section

183. In relevant part, section 1.183-1(d)(1), Income Tax Regs., provides as

follows:

      Generally, the most significant facts and circumstances in making this
      determination are the degree of organizational and economic
      interrelationship of various undertakings, the business purpose which
      is (or might be) served by carrying on the various undertakings
      separately or together in a trade or business or in an investment
      setting, and the similarity of various undertakings. Generally, the
      Commissioner will accept the characterization by the taxpayer of
      several undertakings either as a single activity or as separate
      activities. The taxpayer’s characterization will not be accepted,
                                        - 33 -

      [*33] however, when it appears that his characterization is artificial
      and cannot be reasonably supported under the facts and circumstances
      of the case. * * *

      The Court considers these and other factors in determining whether a

taxpayer’s characterization of two or more undertakings as one activity is

reasonable. These other factors (Mitchell factors) include: (1) whether the

undertakings are conducted at the same place; (2) whether the undertakings were

part of the taxpayer’s efforts to find sources of revenue from his or her land; (3)

whether the undertakings were formed as separate activities; (4) whether one

undertaking benefited from the other; (5) whether the taxpayer used one

undertaking to advertise the other; (6) the degree to which the undertakings shared

management; (7) the degree to which one caretaker oversaw the assets of both

undertakings; (8) whether the taxpayer used the same accountant for the

undertakings; and (9) the degree to which the undertakings shared books and

records. Mitchell v. Commissioner, T.C. Memo. 2006-145 (citing Keanini v.

Commissioner, 

, 46 (1990), Tobin v. Commissioner, T.C. Memo.

1999-328, Estate of Brockenbrough v. Commissioner, T.C. Memo. 1998-454,

Hoyle v. Commissioner, T.C. Memo. 1994-592, De Mendoza v. Commissioner,

T.C. Memo. 1994-314, and Scheidt v. Commissioner, T.C. Memo. 1992-9). We

examine these factors in turn.
                                        - 34 -

[*34]         1.    Mitchell Factors

                    a.     Location of Activities

        The activities are not conducted at the same location. Rock Ledge activity

is conducted primarily on the property, which also includes petitioners’ personal

residence. In contrast, the automobile dealership activity is conducted at various

dealerships. Petitioners contend that there are some aspects of each activity that

are conducted at the same locations. For example, petitioners cite the receipt of

cooled stallion semen at the Honda dealership as evidence that a horse activity is

conducted at that dealership; petitioners also claim that Mr. Price’s handwritten

notebook he kept at the Stroud Ford dealership is evidence of a horse activity

conducted at that location. Petitioners also cite the delivery of vehicles to horse

shows, which they argue serve both as “car store operations” and as alternative

locations of Rock Ledge. These arguments are unconvincing. Just as mailing a

personal letter from one’s place of business does not transmute the nature of the

letter, the receipt of cooled stallion semen at the Honda dealership does not make

the automobile dealership a location where horse sales are conducted. Further,

Mr. Price’s astute business sense enables him to sell cars even when he is not

working at the dealerships; the fact that these cars are delivered elsewhere does
                                        - 35 -

[*35] not broaden the physical location of the dealerships. This factor favors

respondent.

                    b.    The Activities as Efforts to Derive Revenue From Land

      Petitioners make two arguments. First, petitioners argue that since they

bought the property with the intent to operate a horse farm on it, Rock Ledge is an

effort to derive revenue from their land. Second, they contend that since vehicle

sales have been made to “horse customers”, the automobile dealership activity has

generated revenue from the property. We will deal with these arguments in

reverse order. Mr. Price started his automobile dealership activity in 1982, before

acquiring the property in 1985, and thus the automobile dealership activity could

not have been created to derive revenue from petitioners’ property. See Estate of

Stangeland v. Commissioner, T.C. Memo. 2010-185, 

(stating that land or assets must exist before start of activity). Turning to

petitioners’ other argument, petitioners did not begin Rock Ledge until 1993, and

it has never shown a profit. Thus, we find that Rock Ledge is not an effort to

derive revenue from the property, either in theory or in fact, because of both the

delay in starting the activity and its unprofitable history. This factor favors

respondent.
                                        - 36 -

[*36]               c.     Timing of Formation of Activities

        The activities were not formed at the same time. This factor favors

respondent.

                    d.     Each Activity’s Benefit to the Other Activity

        Petitioners argue that the “horse customers” form a “loyal core” of

customers who have purchased multiple vehicles from petitioners’ dealerships and

who helped sustain the Chevrolet dealership when it was facing termination of its

agreement by General Motors. Petitioners also argue that the automobile business

has provided benefits to Rock Ledge in the form of advertising work by Pat

Adelmann, a location where cooled stallion semen could be received, and

provision of shared worker’s compensation insurance, health insurance, and

payroll accounting.

        Petitioners urge us to follow the holding in Topping v. Commissioner, 

, which treated the taxpayer’s interior design and

equestrian activity as a single activity for purposes of section 183. The taxpayer in

Topping generated more than 90% of her interior design client base through

equestrian activity contacts.

The Court is not convinced that, in these

cases, the benefits each activity derived from the other were anything more than

incidental. Taking Mr. Price’s estimate as true that “horse customers” have
                                        - 37 -

[*37] generated $500,000 per year in sales, that amount is negligible considering

that the dealerships’ 2012 gross receipts exceeded $96 million. Mr. Price testified

that, even in the best years, “horse customers” purchased only 60 to 70 vehicles

from his dealerships. Considering that the dealerships average combined

wholesale and retail sales of 8,000 vehicles per year, the sales to “horse

customers” in good years still amount to less than 1% of all sales. Thus, Rock

Ledge and petitioners’ automobile dealership activity are not comparable to the

activities considered in Topping. The Court also excludes from the definition of

“horse customers” the Kanavy family and their business, Trevdan. Timothy

Kanavy has known Mr. Price since childhood, and their families had a

longstanding relationship before the formation of Rock Ledge. See, e.g., Trupp v.

Commissioner, T.C. Memo. 2012-108, 

, at *23

(finding that taxpayer’s major client hired him because of a preexisting

relationship and not because of taxpayer’s son’s equestrian activity). Moreover,

the Kanavy family and Trevdan began purchasing vehicles from petitioners in

1982, more than 10 years before Rock Ledge was commenced. Excluding sales to

the Kanavy family and Trevdan, the percentage of vehicles purchased by “horse

customers” shrinks even more.
                                        - 38 -

[*38] Further, the list of “horse customers” was prepared for trial and is self-

serving. The sample contracts submitted to corroborate the list include contracts

of sales that were clearly not made to anyone involved in Rock Ledge. Moreover,

some of the customers would likely have purchased vehicles regardless of any

involvement with Rock Ledge through the dealerships’ advertising to target

demographics, including those in the horse industry. Accordingly, this factor

favors respondent.

                     e.   Cross-Advertising

      Cross-advertising between the activities was minimal. Petitioners submitted

one print advertisement that covered both Rock Ledge and RayPriceCars.com, and

this advertisement was for 2012, after the years at issue. Rock Ledge’s Web site

has a button that takes visitors to RayPriceCars.com, but there is no evidence that

RayPriceCars.com has any sort of reciprocal button to take visitors to the Rock

Ledge Web site. All of the other advertisements that petitioners submitted

mentioned only one activity or the other. Petitioners argue that horse shows are

themselves a form of advertising and therefore advertising the dealerships at horse

shows through T-shirt giveaways and donations of cars is a form of cross-

advertising. However, this argument ignores the fact that marketing the

dealerships at horse shows could also have been done solely to capture a target
                                        - 39 -

[*39] demographic and would not require the existence of Rock Ledge as part of

the automobile dealership activity. This is especially true given that the

dealerships’ advertisements at horse shows made no mention of Rock Ledge.

Accordingly, this factor favors respondent.

                    f.    Shared Management

      Rock Ledge and the automobile dealerships share management only in the

form of Mr. Price. This factor favors respondent. See Estate of Stangeland v.

Commissioner, 

, at *26.

                    g.    Shared Caretaker

      Petitioners argue that they satisfy this factor as “Mr. Price oversaw the

assets of both undertakings”. Notwithstanding the fact that we find the overlap of

only Mr. Price in both undertakings to be insufficient from a shared management

standpoint, this factor would be duplicative of the sixth factor if we were to agree

with petitioners that Mr. Price’s managerial duties also qualify him as a caretaker.

Managers and caretakers typically have different roles. The general dictionary

definition of a caretaker as relevant here is “one that takes care of the house or

land of an owner who may be absent”. Webster’s Ninth New Collegiate

Dictionary 208 (1985). Conversely, the dictionary definition of “manage” as used

in the term “manager” as relevant here is: “1: to handle or direct with a degree of
                                        - 40 -

[*40] skill or address: as * * * c: to exercise executive, administrative, and

supervisory direction of <~a business>”.

      Mr. Price did not function as the caretaker of Rock Ledge. Mr. Price works

more than 60 hours per week at the dealerships and thus is absent from the

property during those hours. If anyone does qualify as a caretaker of Rock Ledge,

it would more appropriately be Ms. Steckel, the barn manager who looked after

Rock Ledge’s horses and barns daily, rather than Mr. Price. Since Rock Ledge

and the dealerships do not share a caretaker, this factor favors respondent.

                    h.      Shared Accountant

      Petitioners argue that Rock Ledge shares an accountant with the dealerships

because the same C.P.A., Mr. Murphy, prepared the Schedules F on which Rock

Ledge was reported and also prepared tax returns for the dealerships. Respondent

asserts that Rock Ledge does not share an accountant with the dealerships since

Mr. Murphy never prepared financial statements or independently audited the

books and records of Rock Ledge, but Mr. Murphy does prepare balance sheets,

income statements, and statements of cashflow for the dealerships.

      Since Mr. Murphy had only the limited involvement with Rock Ledge that

was required to prepare petitioners’ personal income tax returns, we agree that this

factor favors respondent.
                                         - 41 -

[*41]                i.    Shared Books and Records

        The activities do not share books and records. This factor favors

respondent.

              2.     Section 1.183-1(d)(1), Income Tax Regs., Factors

        Petitioner argues that despite not meeting any of the nine foregoing factors,

Rock Ledge and the automobile dealership activity are highly interrelated, serve a

common business purpose, and are similar undertakings. The Court disagrees

with petitioners’ contention that Rock Ledge and the automobile dealership

activity share sufficient organizational and economic overlap. The dealerships

were organized as S corporations, whereas Rock Ledge was a sole proprietorship

in 2009 and 2010 and operated as a limited liability company in 2011. See

Rabinowitz v. Commissioner, T.C. Memo. 2005-188, 

, at *24 (finding that where one activity was an S corporation and the other

was operated as a sole proprietorship, the two activities did not have a close

organizational relationship). The activities do not share assets or lease real or

personal property from one another. The activities do not share bank accounts or

employees, notwithstanding de minimis work by dealership employees for Rock

Ledge at the behest of their boss, Mr. Price.
                                        - 42 -

[*42] Additionally, any economic benefit between the two activities is entirely

unidirectional from Rock Ledge to the dealership. Mr. Price may occasionally

generate vehicle sales from meeting people through Rock Ledge, but as he is a

successful salesman, he is likely to pursue sales opportunities in many situations.

There is no evidence that Rock Ledge obtains economic benefit from the

dealerships, except for the inclusion of Rock Ledge employees on dealership

insurance plans and payroll accounts. Consequently, Rock Ledge and the

automobile dealership activity are not sufficiently interconnected under section

1.183-1(d)(1), Income Tax Regs.

      The Court also disagrees that the activities were conducted together within

the meaning of section 1.183-1(d)(1), Income Tax Regs. Any overlap in the

activities, such as receipt of cooled stallion semen at the Honda dealership, was for

the convenience of Mr. Price, the CEO of the corporations.

      Finally, the activities are wholly dissimilar. Petitioner attempts to overcome

this fact by arguing that: (1) both activities involve the sale of expensive personal

property; (2) Rock Ledge and the dealerships both sell services related to the

products sold; (3) both activities are predominantly headquartered in

Pennsylvania; and (4) both activities involve products which are created and sold

in the United States. These categories are so broad as to be meaningless.
                                         - 43 -

[*43] After reviewing all relevant facts and circumstances, we find that Rock

Ledge and petitioners’ automobile dealership activity were separate undertakings.

We next address whether Rock Ledge qualifies as a for-profit activity under

section 183.

      B.       Whether Petitioners Conducted Rock Ledge for Profit

      To determine whether a taxpayer conducts an activity for profit, section

1.183-2(b), Income Tax Regs., enumerates nine nonexclusive factors to be

considered. The factors are: (1) the manner in which the taxpayer carries on the

activity; (2) the expertise of the taxpayer or his advisors; (3) the time and effort

expended by the taxpayer in carrying on the activity; (4) 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, which are earned; (8) the financial status of the taxpayer; and (9) elements

of personal pleasure or recreation. Sec. 1.183-2(b), Income Tax Regs. No one

factor is determinative, and all the facts and circumstances are to be taken into

account in determining the existence of a profit objective. Allen v. Commissioner,

(citing section 1.183-2(b), Income Tax Regs., Dunn v.

Commissioner, 

, Jasionowski v. Commissioner, 

, 319
                                       - 44 -

[*44] (1976), and Benz v. Commissioner, 

). We examine each of

these factors in turn.

             1.     Manner in Which the Activity Is Conducted

      We begin by examining the manner in which petitioners conducted Rock

Ledge. Facts that may indicate that an activity was engaged in for profit include:

(a) carrying on the activity in a businesslike manner, including maintaining

complete books and records; (b) carrying on the activity in a manner substantially

similar to other activities of the same nature which are profitable; and (c) changing

operation methods, adopting new techniques, or abandoning unprofitable methods

in a manner consistent with an intent to improve profitability. Sec. 1.183-2(b)(1),

Income Tax Regs.

                    a.    Businesslike Manner

      Petitioners argue they conducted Rock Ledge in a businesslike manner. As

support, they cite Rock Ledge’s Web site, business plan, advertising, records such

as veterinary calendars and breeding data, maintenance of worker’s compensation

and health insurance on Rock Ledge employees, paying Rock Ledge employees

from an ADP payroll account, use of a price list for Rock Ledge services, and

having the same accountant as the dealerships. Respondent asserts petitioners did

not conduct Rock Ledge in a businesslike manner because the books and records
                                        - 45 -

[*45] were inadequate, incorrect, maintained primarily for tax purposes and not to

improve profitability, and consistent with conducting a hobby rather than a

business.

      Some of Rock Ledge’s practices are consistent with conducting the activity

for profit, whereas others are not. The Web site is characteristic of a business

rather than a hobby. Likewise, having a price list with the prices for services is

businesslike. However, other Rock Ledge practices are inconsistent with a profit

objective, particularly given Mr. Price’s business acumen with respect to the

dealerships. The business plan is undated and appears to have been created solely

for passing muster under section 183, given the inclusion of such aspects as the

appreciation of the land as a method of generating income. Rock Ledge did very

little advertising in the years at issue; only $1,120 in advertising expenses was

reported in tax year 2009, while no advertising expenses were reported for tax

years 2010 or 2011.

      Maintenance of veterinary calendars and breeding data, by themselves, are

consistent with a hobby and do not necessarily indicate a business purpose.

See Feldman v. Commissioner, T.C. Memo. 1986-287, 1986 Tax Ct. Memo

LEXIS 321, at *19 (citing Golanty v. Commissioner 72, T.C. 411, 430 (1979),

aff’d without published opinion, 

(9th Cir. 1981)) (finding that
                                        - 46 -

[*46] keeping pedigree, show, breeding, and veterinary records is as consistent

with a hobby as with a business, particularly where the taxpayers did not prepare

basic financial records such as profit and loss statements or balance sheets).

Petitioners have not submitted any books and records containing projected profit

and loss, balance sheets, or budgets. Each piece of evidence petitioners submitted

that purports to show expected profits is devoid of any calculations of expenses.

For example, Exhibit 202 is an “estimated revenue recap” for 2013 that shows

estimated revenues from board and training, hauling, show fees, horse leases,

riding lessons, sales commissions, and horse sales. By petitioners’ own

admission, Exhibit 202 was prepared in December 2013, just before trial. Further,

Exhibit 202 is one page, is handwritten, and contains no calculations used to arrive

at the numbers given for each category. As an estimate of revenue, Exhibit 202

gives no costs, actual or estimated, for 2013. Additionally, tax year 2013 is not at

issue; petitioners submitted no similar documents for tax years 2009-11. Exhibit

118, the handwritten notebook Mr. Price kept at the Stroud Ford location, likewise

covers tax years other than those at issue, is handwritten, and contains no

reference to expenses.

      Petitioners assert they have submitted adequate books and records because

“[r]espondent has not raised any issue of substantiation” with respect to the
                                        - 47 -

[*47] expenses petitioners claimed. Substantiation of expenses and maintenance

of books and records are distinct issues. Further, petitioners bear the burden of

proof with respect to deductions claimed for expenses. See sec. 6001. Petitioners

argue that Rock Ledge had the same C.P.A. as the dealerships. But as previously

discussed, even if the same C.P.A. did prepare petitioners’ returns with respect to

Rock Ledge, it was Mrs. Price who kept the books and records, of Rock Ledge,

not Mr. Murphy. Mr. Murphy did not audit these books and records and he did

not prepare financial statements regarding Rock Ledge.

      Respondent argues that petitioners’ inventory lists are incomplete and full

of errors. In particular, respondent points to one horse, Ryado RL, whose name is

absent from the 2010 inventory list but appears on inventory lists for 2009, 2011,

2012, and 2013. Additionally, both the 2010 and 2011 inventory lists reflect the

same horse, Zips Reflection RL, as having been “put down at trainers”. Aside

from these errors in the inventory lists, petitioners have not provided to the Court a

consistent list of horses owned by Rock Ledge. For example, petitioners claim to

own Evensong AH, which they claim is a daughter of *Aladdinn, and Bey-Rose

Gal, an Aristocrat mare.7 Neither Evensong AH nor Bey-Rose Gal appears on the


      7
       An “Aristocrat mare” is a mare that has produced four or more champion
offspring.
                                       - 48 -

[*48] 2013 inventory list or Professor Hughes’ appraisal report, and it appears

Bey-Rose Gal died in 2002. Likewise, petitioners’ briefs discuss the pedigrees of

*Werda and Baskarysa, but it does not appear that petitioners owned these horses

at the time of trial. Baskarysa’s name does not appear on any of the inventory lists

submitted to the Court. *Werda appears on the 2009 and 2010 inventory lists, but

the 2010 list indicates that she was given away. In sum, the inventories submitted

to the Court were incomplete and some appeared to be incorrect, and they were not

kept in a businesslike manner.

      In some instances, maintaining workers’ compensation insurance and health

insurance on employees and paying them from a payroll account could be

indicative of businesslike methods. In these cases, however, it appears to the

Court that covering Rock Ledge employees under policies maintained for

dealership employees was done for the convenience of Mr. Price and to lower the

cost of obtaining these policies. Likewise, paying Rock Ledge employees from a

common ADP payroll account was done as a matter of convenience and does not

show a business purpose. In sum, petitioners did not conduct Rock Ledge in a

businesslike manner.
                                         - 49 -

[*49]                b.    Conducting the Activity Similarly to Profitable Activities

        Petitioners contend they conducted Rock Ledge in a manner substantially

similar to profitable activities of the same nature. For support, they cite the quality

of the barn at Rock Ledge, Mr. Price’s selection of the broodmare band, their

designation of homebred horses with the “RL” suffix, and various services offered

by Rock Ledge, including breeding services, horse sales, horse leasing, and riding

lessons. Respondent argues that Rock Ledge was not conducted in a manner

similar to profitable horse farms. Respondent also argues that petitioners did not

conduct Rock Ledge in a manner similar to the automobile dealership activity, but

the Court does not find that this is an appropriate comparison under section 1.183-

2(b)(1), Income Tax Regs., since this subfactor inquires about similar, rather than

dissimilar, activities. In the case of dissimilar activities, we discuss the differences

between Rock Ledge and dealership operations in our analysis of section 1.183-

2(b)(5). See infra pp. *66-*67.

        Petitioners argue that the main barn at Rock Ledge is a professional facility

that goes far beyond what a hobbyist would require. On one hand, the barn

contains some elements that may point to a profit objective, such as a lounge area

with a television and a bar for use by customers. On the other hand, the barn’s 19

stalls, workrooms, washrooms, and restrooms, although perhaps more than most
                                         - 50 -

[*50] hobbyists would require, are not necessarily out of line with the desires of a

serious hobbyist with the funds to construct such a facility. See Keating v.

Commissioner, T.C. Memo. 2007-309, 

, at *14

(stating that construction of a barn may be consistent with either a hobby or a

business). For the Court to determine that the barn construction was required for

Rock Ledge to be conducted in a manner substantially similar to profitable

activities of the same nature, we would need to have evidence that other for-profit

horse farms require barns like the one in these cases. Unfortunately, petitioners

have not provided any point of comparison on this issue. Professor Hughes’

report states that the barn is “a first class facility, designed for customers and

service” but does not reference the basis for his determination, such as other

comparable facilities. Without a reference point, we conclude that the main barn

is not evidence that Rock Ledge was conducted in a manner substantially similar

to other activities of the same nature which are profitable.

      Petitioners cite Mr. Price’s selection of elite mares to form the broodmare

band as evidence that Rock Ledge is conducted for profit. Petitioners name

several mares ostensibly owned by Rock Ledge as being elite broodmares,

including Overlook Galaxina, Bey-Rose Gal, Evensong AH, *Werda, Opalesque

VF, Baskarysa, and Pasazz. The major problem with naming these horses as
                                       - 51 -

[*51] current broodmares at Rock Ledge is that none of them appears to be

currently owned by Rock Ledge, and not all of them are even alive. None of the

above-named horses appears on the list of horses appraised by Professor Hughes.

Overlook Galaxina, Bey-Rose Gal, and Pasazz all died in 2002 or 2003. *Werda

was given away in 2010. Evensong AH, Opalesque VF, and Baskarysa’s names

do not appear on the 2013 inventory list. Petitioners have not named any other

horses that supposedly form part of Rock Ledge’s broodmare band. Petitioners

have not shown, as they claim, that “the higher the quality of the horses used for

breeding, the higher the potential sale revenue that can be expected”, since no

revenue can be expected from horses that are either dead or not owned by

petitioners. Evidence of a profit objective is lacking because in the case of some

of the horses, petitioners did not own the named mares during the years at issue,

and in all cases they do not currently own the named mares.

      Petitioners argue that designating homebred horses with the suffix “RL” is

consistent with a profit objective. They cite the practice of Ms. Varian of Varian

Arabians, who is a top breeder of Western Pleasure horses, and Ventura Farms,

which uses the suffix “VF” after a horse’s name. The Court accepts that

appending a suffix to a horse’s name is a businesslike practice. However, the

Court also notes that petitioners cited only two breeders who employ this practice
                                       - 52 -

[*52] and provided no evidence with regard to the profitability of either Varian

Arabians or Ventura Farms.

      Finally, petitioners argue that Rock Ledge offers numerous services that a

hobbyist farm would not provide, including breeding services, horse sales, horse

leasing, and riding lessons. However, there is no evidence that any of these

services were offered during the years at issue. Rock Ledge did not report any

income from breeding during the years at issue. Likewise, the evidence does not

reflect that any horses were sold during the years at issue. The Court does not find

that Rock Ledge currently leases horses or offers riding lessons. The leases

submitted were not for the years at issue and appear to have been crafted on the

eve of trial. Petitioners offered scant evidence that Rock Ledge currently offers

riding lessons, and there is no evidence that riding lessons were offered during the

years at issue. The Court may consider events occurring after the years at issue to

the extent those events are probative of petitioners’ profit objective. See Mathis v.

Commissioner, T.C. Memo. 2013-294, at *8; Myslisz v. Commissioner, T.C.

Memo. 1988-206, 

, at *23 n.19 (citing Taube v.

Commissioner, 

, 482 (1987)). However, the Court may assign such

events less weight than events occurring during the years at issue. See, e.g.,

Storey v. Commissioner, T.C. Memo. 2012-115, 

,
                                        - 53 -

[*53] at *27 (considering marketing taking place after the years at issue to be

unreliable); Carson v. Commissioner, T.C. Memo. 1990-508, 1990 Tax Ct. Memo

LEXIS 561, at *14 (finding advertising occurring after the years at issue not to be

evidence of businesslike operations during the years at issue). On balance, the

Court concludes that the lack of breeding services, horse sales, horse leasing, and

riding lessons during the years at issue points to a lack of profit objective during

those years, particularly considering that some of these services were not begun

until well after petitioners received notice November 7, 2011 that their 2009

income tax return had been selected for audit.

                    c.    Change of Methods

      Changing operation methods, adopting new techniques, or abandoning

unprofitable methods is consistent with an intent to improve profitability. Sec.

1.183-2(b)(1), Income Tax Regs. Petitioners argue they have implemented several

changes to improve the profitability of Rock Ledge by replacing Mr. McManus

with Mr. and Mrs. Hall and tracking results. Respondent counters that petitioners

have not modified the way in which they operate Rock Ledge in any way that

would increase profitability, such as reducing expenses or advertising to generate

new income.
                                         - 54 -

[*54] Petitioners did seek to improve profitability by hiring new trainers when Mr.

McManus did not meet their goals. Respondent argues petitioners must have

lacked a profit objective since nine months elapsed between the firing of Mr.

McManus and the hiring of Mr. and Mrs. Hall. Petitioners claim that hiring

qualified Arabian horse trainers takes time, and Mr. Price carefully selected Mr.

and Mrs. Hall after searching for an appropriate replacement for Mr. McManus.

We agree with petitioners that nine months is not an unreasonable amount of time

for hiring new horse trainers. Consequently, replacing the trainers is evidence that

petitioners undertook to change operating methods in a bid to improve

profitability.

       Petitioners also point to “tracking results”. For this, petitioners cite Exhibit

202, the one-page handwritten “estimated revenue recap” for 2013, as evidence

that horse sales income and other income has increased. Again, we take notice of

the fact that this document makes no mention of expenses. Further, a one-page

handwritten document prepared just before trial is hardly evidence that petitioners

closely tracked the expenses and income of Rock Ledge. This factor does not

support a change in operating methods.

       Respondent argues that petitioners have not made any meaningful changes

calculated to increase profitability because they have not reduced expenses, in
                                        - 55 -

[*55] contrast to Mr. Price’s business philosophy that expense is a key element of

any successful business, and they did very little advertising during the years at

issue. We agree with respondent that petitioners have not undertaken any efforts

to reduce expenses. Additionally, petitioners’ advertising expenses were

miniscule, particularly given their overall expenses. Petitioners reported only

$1,120 of advertising expenses for 2009 and none for 2010 and 2011. Their

expenses for those years totaled $219,010, $208,944, and $204,049 for 2009,

2010, and 2011, respectively. See Mills v. Commissioner, T.C. Memo. 1990-432,

, at *27 (finding that taxpayers’ small amount of

advertising showed a lack of profit objective); Boddy v. Commissioner, T.C.

Memo. 1984-156, 

, at *21 (finding that

advertising was insubstantial compared to overall cost of taxpayer’s horse-

breeding operation), aff’d without published opinion, 

(11th Cir.

1985). Horse shows may be a method of advertising horses for sale but, without

other efforts to advertise, is not consistent with a profit objective. Sanders v.

Commissioner, T.C. Memo. 1999-208, 

, at *25

(citing Dodge v. Commissioner, T.C. Memo. 1998-89, 

, at *13-*14, aff’d without published opinion, 

(6th Cir. 1999)).

Thus, petitioners’ minimal advertising expenses do not evince a profit objective.
                                        - 56 -

[*56] Aside from replacing Justin McManus with Chris and Nicole Hall,

petitioners have changed very little about the operations of Rock Ledge to make it

profitable.

      Overall, the numerous unbusinesslike practices of Rock Ledge indicate that

petitioners did not have a profit objective. Petitioners did not conduct Rock Ledge

in a businesslike manner, nor did they conduct it in a manner sufficiently similar to

profitable horse activities. Petitioners have also not shown that they made

significant changes to improve the profitability of Rock Ledge, such as reducing

expenses or advertising to improve sales. This factor favors respondent.

              2.    Expertise of the Taxpayer or His Advisers

      Preparation for an activity by extensive study of its accepted business,

economic, and scientific practices, or by consultation with experts in the activity,

may indicate that the taxpayer has a profit objective where the taxpayer carries on

the activity in accordance with such practices. Sec. 1.183-2(b)(2), Income Tax

Regs. Without study of the business aspects of an activity, mere knowledge or

familiarity with an activity may indicate a hobby rather than a for-profit activity.

See Golanty v. Commissioner, 

; see also Burger v. Commissioner,

, 359 (7th Cir. 1987), (finding that taxpayers were familiar with

mechanics of dog breeding operation but lacked knowledge regarding economics
                                        - 57 -

[*57] of the activity), aff’g T.C. Memo. 1985-523; see also Wilmot v.

Commissioner, T.C. Memo. 2011-293, 

, at *16.

Taxpayers need not make a formal study of an activity before commencing

operation, but they should undertake a basic investigation of the factors that affect

profit. Westbrook v. Commissioner, T.C. Memo. 1993-634, 1993 Tax Ct. Memo

LEXIS 655, at*20 (citing Burger v. Commissioner, 

), aff’d, 

, 875 (5th Cir. 1995).

      Petitioners argue that they have the requisite expertise because (1) Mr. Price

grew up breeding and training Arabian horses, (2) they have been recognized as

top breeders by Arabian Horse World Magazine, and (3) Mr. Price has consulted

with advisers knowledgeable about horse breeding operations, including Carol

Skeuse Hart and Leonard and Jean Skeggs.

      The mere fact that Mr. Price grew up around horses and has extensive

knowledge of horse breeding and training is, by itself, insufficient to show that he

has the expertise required for a for-profit activity. See Kahla v. Commissioner,

T.C. Memo. 2000-127, 

, at *18-*19 (finding that

taxpayer lacked expertise even though he grew up on his parents’ cattle ranch,

knew firsthand the basics of raising and breeding cattle, and had consulted with

the USDA Soil Conservation Service and State game and wildlife agencies), aff’d,
                                         - 58 -

[*58] 

(5th Cir. 2001); Hillman v. Commissioner, T.C. Memo.

1999-255, 

, at *24-*25 (same).

      Similarly, the fact that petitioners have been recognized as top breeders does

not necessarily show a profit objective. Petitioners submitted one article from

Arabian Horse World Magazine dated August 16, 2012, that recognizes them as

the fifth-best breeder of purebred Western Pleasure horses from 2007-11. The

same article also named Prego RL, a horse bred by petitioners, as the fifth-best

purebred Western Pleasure horse for 2007-11. Notwithstanding the limited

probative value of a lone magazine article, the fact that petitioners have bred some

quality horses is not, by itself, indicative of a profit objective. The expertise of

raising quality horses is separate from the business expertise required to operate a

profitable business. See Golanty v. Commissioner, 

.

      Petitioners point to various “advisers” as evidence that they have analyzed

the business side of Rock Ledge. Mr. Price testified that he discussed “business

operations * * *, climate treatment, costs, [and] employment costs” with Ms. Hart,

who operates Springwater Farms, and he also copied a contract used by

Springwater Farms for use by Rock Ledge. Petitioners presented no evidence on

the profitability of Springwater Farms, nor on any of the methods or techniques

they might have adopted from Springwater Farms in an effort to make Rock Ledge
                                         - 59 -

[*59] profitable. Mr. Price’s testimony regarding his discussions with Ms. Skeuse

Hart was self-serving and vague. He did not identify any specific practices she

might have advised him on, stating simply that he “ha[s] had and continue[s] to

have ongoing conversations with her and her trainers about horses in general or

business operations or training, or any number of things horse-related.”

      Additionally, Mr. Price testified that he was influenced by the success of

Mr. and Mrs. Skeggs, friends of his parents who had sold horses for up to

$500,000. Petitioners did not present any evidence to confirm that the Skeggses

had sold horses for such great value, or if they did, any evidence regarding the net

profit of such horse sales. Mr. Price may well have been influenced by the

Skeggses’ alleged success, but that does not make them his advisers in any way

relevant to the inquiry under section 183 of whether he sought guidance from

experts in the field.

      Petitioners have not shown that they sought professional advice on the

business aspects of operating a profitable horse business. This factor favors

respondent.

              3.    Time and Effort Expended in the Activity

      The fact that a taxpayer devotes much of his or her personal time and effort

to carrying on an activity, particularly if the activity does not have substantial
                                       - 60 -

[*60] personal or recreational aspects, may indicate a profit objective. See sec.

1.183-2(b)(3), Income Tax Regs. A taxpayer’s withdrawal from his or her

occupation to devote energy to the activity may indicate the activity is engaged in

for profit.

the taxpayer does not devote significant time and

energy to the activity may not prove a lack of profit objective where he or she

employs competent and qualified persons to carry on the activity.

Mr. Price spends a substantial amount of time on

Rock Ledge and therefore a profit objective is indicated. This argument is not

supported by the facts. Mr. Price works over 60 hours per week at his dealerships.

He has not withdrawn from his occupation as an automobile dealer in order to

devote more time and energy to Rock Ledge. Further, to the extent Mr. Price is

involved with Rock Ledge, much of his time appears to have been directed toward

its more enjoyable aspects, such as attending horse shows. However, petitioners

employed a barn manager throughout the years at issue as well as trainers during

portions of the years at issue. The barn manager and the trainers are competent

and qualified persons, and therefore the fact that Mr. Price did not withdraw from

his primary occupation does not weigh against petitioners. See e.g., Pirnia v.

Commissioner, T.C. Memo. 1989-627, 

, at *15-
                                         - 61 -

[*61] *16; Eisenman v. Commissioner, T.C. Memo. 1988-467, 1988 Tax Ct.

Memo LEXIS 492, at *16-*17. This factor is neutral.

             4.     Expectation That Assets Used in the Activity May Appreciate
                    in Value

      The term “profit” includes appreciation in the value of assets used in the

activity. Thus, a taxpayer may intend to derive a profit from the operation of the

activity, even if the operation is not currently profitable, if an overall profit will

result when appreciation of the assets used in the activity is realized, since income

from the activity together with the appreciation of the assets will exceed expenses

of the operation. Sec. 1.183-2(b)(4), Income Tax Regs. For purposes of section

1.183-2(b)(4), Income Tax Regs., assets used in the activity may include the land

on which the activity is conducted if the holding of the land and the activity are

considered to be a single activity under section 1.183-1(d), Income Tax Regs.

      Petitioners argue that Rock Ledge is conducted with a profit objective

because the horses are very valuable and the property, when sold, will generate

income in excess of $1 million. For reasons discussed below, the Court finds that

sale of the horses would not transform Rock Ledge into a profitable activity, and

further, the land is not to be considered an asset of Rock Ledge for purposes of

analysis under section 1.183-2(b)(4), Income Tax Regs.
                                         - 62 -

[*62]                a.    Value of the Horses

        Petitioners argue, on the basis of the appraisal by Professor Hughes, that the

value of the horses is $575,000. Mr. Price stated at trial that the top Half-Arabian

horses have been sold for as high as $500,000, but petitioners provided no

independent evidence with regard to this allegation, and we are not required to

accept Mr. Price’s statements without corroboration. See Giles v. Commissioner,

T.C. Memo. 2005-28, 

, at *57 (stating that taxpayer

provided no evidence on the syndicated value of purebred Arabian stallions).

Petitioners argue that there is potential for huge profits because their broodmare

band includes Evensong AH, the daughter of *Aladdinn, a $6.3 million horse (as

stated only by Mr. Price, also with no independent verification). As previously

concluded, the Court does not find that petitioners currently own Evensong AH.

Further, the value of the horses as appraised by Professor Hughes is not

convincing. Professor Hughes’ report is scant in its observations of the

differences among the horses; 19 of the 20 reports give the same “good” rating in

all 17 conformation categories. Ten of the horses are valued at over $20,000, with

one horse, Midnight Magnum, appraised at $75,000. The most expensive horse

ever sold by petitioners was Jason EL Jamaal RL for $17,000. To believe that

petitioners would suddenly have such increased success in their breeding program
                                        - 63 -

[*63] after 20 consecutive years of losses ignores the reality of past sale as well as

petitioners’ own business plan, which calls for an average sales price of $15,000

per horse.

      Further, there is direct evidence that petitioners did not follow the

valuations set forth in Professor Hughes’ report. Professor Hughes appraised

Ggrand Slam at $15,000 on December 13, 2013. Two weeks later, petitioners sold

Ggrand Slam for $8,000. Petitioners claim that the buyer also agreed to buy her

next vehicle from one of the dealerships, but this is not memorialized in the

contract for the sale of Ggrand Slam. Additionally, any profit from the sale of a

vehicle would be attributable to the automobile dealership activity, not to Rock

Ledge.

      Petitioners’ argument that they have unrecognized gain of $575,000 in the

herd is premised on Rock Ledge’s having a cash basis method of accounting,

which would mean that the homebred horses have a zero basis. However,

petitioners reported Rock Ledge under the accrual method on Schedule F for each

of the years at issue and therefore we cannot agree with petitioners that their basis

in the herd is zero. Without adequate information concerning basis, the Court

cannot agree with petitioners that the sale of the herd would result in petitioners’

realizing gains equal to the value of the herd as appraised by Professor Hughes.
                                       - 64 -

[*64] Cf., e.g., Erickson v. Commissioner, T.C. Memo. 2008-224. Finally, even if

petitioners were able to sell the horses for $575,000, they would recoup less than

half of their losses over the period from 2005-12. Consequently, the value of the

horses does not support petitioners’ allegation that when sold, Rock Ledge will

become profitable.

                     b.   Value of the Property

      Petitioners assert that the unrealized gain in the property exceeds $1 million,

and that when sold, the land will make Rock Ledge profitable. As with the horses,

petitioners have not provided adequate information about the basis in the land,

except for providing the Court with the original purchase price of $150,000.

Petitioners have extensively improved the land by renovating the farmhouse for

use as their principal residence, constructing several barns and sheds on the

property, clearing the land, and adding two septic systems and wells. There is no

information about the cost of these improvements. See Tarutis v. Commissioner,

T.C. Memo. 1982-313, 

, at *12 (stating that Court

was unable to determine whether appreciation in value of farm would offset years

of substantial losses with no evidence provided as to farm’s total cost or

taxpayers’ basis).
                                        - 65 -

[*65] Under section 1.183-1(d)(1), Income Tax Regs., we analyze the degree of

organizational and economic interrelationship of separate undertakings to

determine whether they are one activity for purposes of section 183. Where land

is purchased or held primarily with the intent to profit from its increase in value

and the taxpayer also farms the land, the farming and holding of the land will be

considered a single activity only if the farming activity reduces the net cost of

carrying the land for its appreciation. Sec. 1.183-1(d), Income Tax Regs. For this

purpose, the income from the farming must exceed the deductions attributable to

the farming activity which are not directly related to the holding of the land (such

as deductions attributable to interest on a mortgage secured by the land, property

taxes on the land and improvements, and depreciation of improvements on the

land).

fail the requirements of section 1.183-1(d)(1), Income

Tax Regs., because, assuming the land was purchased to hold for appreciation, the

income from Rock Ledge has never exceeded the relevant deductions. Petitioners

attempt to sidestep the characterization in section 1.183-1(d)(1), Income Tax

Regs., by arguing that they did not purchase the property to profit from its increase

in value; rather, they purchased the property to begin a horse farm. Petitioners

thus conclude that the land and Rock Ledge necessarily constitute the same
                                         - 66 -

[*66] activity. However, petitioners’ testimony on this point was somewhat

contradictory: Mr. Price testified that he bought the property with the intention of

operating a horse farm on the property, but he also testified he hoped the property

would appreciate.

      Considering all of the facts and circumstances, we find that there was no

economic or organizational relationship between the land and Rock Ledge.

Petitioners purchased the property in 1985 and began using the farmhouse as their

principal residence in 1987. Petitioners’ personal use of the property is contrary to

their assertion that their primary purpose was to begin a horse business. See Betts

v. Commissioner, T.C. Memo. 2010-164, 

, at *27-

*28. Petitioners did not begin Rock Ledge until 1993. The years during which

petitioners used the property before they began Rock Ledge cannot be considered

part of the startup period, a term that by its definition requires that the activity

have been started. Had petitioners truly intended to put a horse farm on the

property when they bought it, they would have done so within the first few years

of purchase. Further, the Court finds that the sale of part of the property in 1997 is

evidence that the land was appreciating independently from Rock Ledge and not

as a result of it. See Boddy v. Commissioner, 

, at

*22 n.6 (“An unsuccessful farming operation cannot be carried on forever simply
                                        - 67 -

[*67] because the price of land in that general area is rising.” (citing Jasionowski

v. Commissioner, 

)). Consequently, we hold that the property is not

to be considered an asset of Rock Ledge. Since the property is not an asset of

Rock Ledge, and the value of the herd does not support a finding that the assets

are appreciating, this factor weighs in favor of respondent.8

             5.    Taxpayer’s Success in Similar or Dissimilar Activities

      Although an activity is unprofitable, the fact that the taxpayer has

previously engaged in similar or dissimilar activities and converted them from

unprofitable to profitable may indicate that the current activity is conducted for

profit. Sec. 1.183-2(b)(5), Income Tax Regs.

      Petitioners argue that Mr. Price’s success in operating the automobile

dealerships demonstrates his ability to turn unprofitable businesses into profitable

enterprises. In particular, petitioners point to Mr. Price’s having transformed more

than one bankrupt dealership into profitable businesses and his overall growth in

car sales from fewer than 100 units per year to in excess of 8,000 vehicles sold per

year. Petitioners reason that this factor therefore weighs in their favor. We

      8
       Even if we were to find that the property is an asset of Rock Ledge, such a
finding would not lead to petitioners’ conclusion that the unrealized gain in the
property is sufficient to offset Rock Ledge’s losses since petitioners’ basis in the
property is unclear and does not provide the Court with adequate information to
determine appreciation in value.
                                        - 68 -

[*68] disagree. Although Mr. Price is a successful businessman, it does not

appear that he imported many of the core principles of his own business

philosophy into Rock Ledge, such as controlling margin, volume, and expense. In

particular, petitioners have failed to operate Rock Ledge in a businesslike manner

and have not sought to make changes that would reverse their 20-year trend of

losses. See Giles v. Commissioner, 

, at *52-*53

(finding that taxpayer who operated a successful dental practice did not conduct

horse activity in a businesslike manner); Dodge v. Commissioner, 1998 Tax Ct.

Memo LEXIS 89, at *18 (finding that taxpayers’ accounting, business, and legal

knowledge was not used in the operation of their horse activity). This factor

favors respondent.

            6.       History of Income or Loss With Respect to the Activity

      Section 1.183-2(b)(6), Income Tax Regs., provides in relevant part:

      A series of losses during the initial or start-up stage of an activity may
      not necessarily be an indication that the activity is not engaged in for
      profit. However, where losses continue to be sustained beyond the
      period which customarily is necessary to bring the operation to
      profitable status such continued losses, if not explainable, as due to
      customary business risks or reverses, may be indicative that the
      activity is not being engaged in for profit. If losses are sustained
      because of unforeseen or fortuitous circumstances which are beyond
      the control of the taxpayer, such as drought, disease, fire, theft,
      weather damages, other involuntary conversions, or depressed market
                                         - 69 -

      [*69] conditions, such losses would not be an indication that the
      activity is not engaged in for profit. * * *

      The Court has previously found the startup stage for a horse breeding

activity to be between 5 and 10 years. Engdahl v. Commissioner, 

,

669 (1979); Phillips v. Commissioner, T.C. Memo. 1997-128, 1997 Tax Ct. Memo

LEXIS 140, at *35. Petitioners have not realized a profit from Rock Ledge since it

was commenced over 20 years ago in 1993.

      Petitioners argue that the sale of part of the property in 1997 made Rock

Ledge profitable for that year, but we do not find the property to be an asset of

Rock Ledge and thus we do not attribute the gain on that sale to Rock Ledge.

Petitioners attribute their lack of profits to the setbacks that Rock Ledge suffered,

including the loss of Reflection RL, the spontaneous abortions suffered by

multiple mares, and reduced market conditions for Arabian horses during 2009-11.

Petitioners claim that the death of Reflection RL resulted not only in the lost value

of the horse but also in the loss of his services as a stallion, including the value of

offspring he might have sired. Petitioners cite the alleged value of Reflection

RL’s offspring, including Professor Hughes’ appraisals of Rock N Reflection RL

at $70,000, Rockette RL at $45,000, Rock N Roan RL at $45,000, and Ryado RL
                                        - 70 -

[*70] at $25,000. The record reflects that as of the time of trial, one gelding of

Reflection RL, a gelding named Evidence RL, had been sold for $10,000.

      Petitioners have not shown that the lost value of Reflection RL’s offspring

would be sufficient to compensate for the large losses they sustained during 2009,

2010, and 2011. Since Reflection RL’s death in late 2009 or early 2010,

petitioners have sold only one of his offspring, for $10,000. Consequently, we

cannot agree that the losses during those years were attributable to the death of

Reflection RL. See, e.g., Carson v. Commissioner, T.C. Memo. 1990-508, 

, at *18-*19 (stating that Court disagreed that loss of

taxpayers’ champion breeding dogs resulted in lost expected sales revenue.).

      Petitioners’ argument regarding lost revenue from the spontaneously

aborted foals fails for the same reason as their argument regarding the lost value of

Reflection RL’s offspring. Petitioners did not sell any horses during the years at

issue, and they have not provided any evidence as to the alleged value of the foals

lost because of the spontaneous abortions. See

that conditions of the Arabian horse market, like the

car market, were depressed during the years at issue. Petitioners presented no

evidence on this issue. Professor Hughes testified that the market conditions

during the years at issue were “difficult” and “going through very tough economic
                                        - 71 -

[*71] times”. However, petitioners offered no other evidence to corroborate

Professor Hughes’ statements at trial, and the report he submitted did not include

any analysis of the Arabian horse market, either during the years at issue or after.

Additionally, Mr. Price’s ability to weather economic downturns is evidenced by

the fact that during 2009-11 his automobile dealerships avoided laying off any

employees and remained profitable despite reduced automobile buying

nationwide. Consequently, we cannot agree that the economic recession or

conditions within the Arabian horse market during the years at issue were

“unforeseen or fortuitous circumstances” that would explain petitioners’ lack of

profit during those years. This factor favors respondent.

             7.     Amount of Occasional Profits, If Any, Which Are Earned

      The amount of profits in relation to the amount of losses incurred, and in

relation to the amount of the taxpayer’s investment and the value of the assets used

in the activity, may provide useful criteria in determining the taxpayer’s intent.

Sec. 1.183-2(b)(7), Income Tax Regs. Occasional substantial profit would

generally indicate that an activity is engaged in for profit, where the investment or

losses are comparatively small.

to earn a

substantial ultimate profit in a highly speculative venture is ordinarily sufficient to
                                         - 72 -

[*72] indicate that the activity is engaged in for profit even though losses or only

occasional small profits are actually generated.

never turned a profit. Despite a 20-year history of losses,

petitioners argue that they will realize a substantial profit upon sale of their “high

quality horses with excellent bloodlines”. For proof, petitioners again cite the

syndicated value of *Aladdinn, other stallions supposedly syndicated for millions

of dollars, and the presence of Aristocrat mares in the broodmare band. Again, it

bears repeating that petitioners have provided no independent evidence of the

value of *Aladdinn, and the Court is not required to accept their self-serving

statements regarding the value of syndicated stallions. See Giles v.

Commissioner, T.C. Memo. 2005-28. Petitioners have also not proven that their

broodmare band contains the mares, such as Evensong AH, that would supposedly

produce such high-value offspring, particularly when Evensong AH’s value as a

broodmare has been considerably reduced by chronic degenerative endometritis.

Moreover, Professor Hughes appraised the only offspring of Evensong AH

currently owned by Rock Ledge at only $15,000. Petitioners have not shown that

they can reasonably expect to earn a substantial profit. See McKeever v.

Commissioner, T.C. Memo. 2000-288, 

, at *48

(finding possibility of a substantial profit insufficient to outweigh 11 years of
                                        - 73 -

[*73] losses, particularly given that the taxpayers’ horses were not of the quality to

generate top prices.). This factor weighs in favor of respondent.

             8.     Financial Status of the Taxpayer

      In relevant part, section 1.183-2(b)(8), Income Tax Regs., provides:

“Substantial income from sources other than the activity (particularly if the losses

from the activity generate substantial tax benefits) may indicate that the activity is

not engaged in for profit especially if there are personal or recreational elements

involved.” Taxpayers with substantial income have greater tax incentives to incur

large expenditures in a “hobby-type business”. Jackson v. Commissioner, 

, 317 (1972).

      Petitioners’ gross income from other sources during the years at issue,

excluding the losses from Rock Ledge, was substantial, totaling $2,484,136,

$1,212,419, and $1,989,222 for 2009, 2010, and 2011, respectively. Cf. Strode v.

Commissioner, T.C. Memo. 2012-59, 

, at *14

(finding annual income of $137,000 substantial); Rundlett v. Commissioner, T.C.

Memo. 2011-229, 

, at *21 (finding annual income

in excess of $170,000 substantial). Petitioners’ income was sufficient to enable a

comfortable lifestyle during the years at issue despite the losses from Rock Ledge.
                                        - 74 -

[*74] See Dodge v. Commissioner, 

, at *21. This

factor weighs in favor of respondent.

             9.     Elements 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. However, 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.” Jackson v. Commissioner, 

.

      Mr. Price has been involved with horses from a young age and clearly

obtains personal enjoyment from working with horses. Additionally, petitioners’

daughter has a love of horses, and both Mr. Price and his daughter competed in

horse shows during the years at issue. Mr. Price testified that Mrs. Price and their

son do not like horses, but neither chose to testify, and we are not required to

accept Mr. Price’s statements concerning their lack of affection for horses.

Petitioners argue that several of their practices are consistent with a profit motive,

such as selling Prego RL after their daughter showed him at a national

championship show, and that these practices are inconsistent with a hobby. The

analysis here, however, focuses on personal pleasure or recreation, and it is clear

from the record that Mr. Price enjoys horses. The sale of a horse his daughter
                                        - 75 -

[*75] once rode does not cancel out this fact. Petitioners also argue that there is

no evidence that the barn or the property was used for entertainment. As with the

sale of Prego RL, the fact that petitioners did not entertain at the barn does not

disprove Mr. Price’s love of horses. This factor favors respondent.

       After weighing the nine factors set out in section 1.183-2(b), Income Tax

Regs., as applied to the facts and circumstances herein, we find that Rock Ledge

was not engaged in for profit within the meaning of section 183. Consequently,

petitioners are not entitled to deduct expenses in excess of gross income from

Rock Ledge.

III.   Section 6662(a) Penalty

       Respondent determined that petitioners were liable for an accuracy-related

penalty pursuant to section 6662(a) for each of the tax years at issue. Section

6662(a) and (b)(1) and (2) imposes a penalty equal to 20% of any portion of an

underpayment that is attributable to, inter alia, negligence or disregard of rules or

regulations, or any substantial understatement of income tax. “Negligence” is

defined as the “failure to make a reasonable attempt to comply with the

provisions” of the Internal Revenue Code. An understatement of income tax

substantial if it exceeds the greater of $5,000 or 10% of the tax required to be

shown on the return for the taxable year. Sec. 6662(d)(1)(A).
                                       - 76 -

[*76] The Commissioner bears the burden of production with respect to any

penalty, including the accuracy-related penalty. See sec. 7491(c); Higbee v.

Commissioner, 

, 446-447 (2001). To meet that burden, the

Commissioner must come forward with sufficient evidence indicating that it is

appropriate to impose the relevant penalty. Higbee v. Commissioner, 

. Respondent determined that petitioners’ underpayments were attributable to

substantial understatements of income tax of $75,802 and $69,836 for 2009 and

2010, respectively, and we agree. These amounts exceed the “substantial

understatement threshold” for tax years 2009 and 2010, and thus respondent has

met his burden of production for those years. For tax year 2011, respondent

argues that Mr. Price’s business acumen should have alerted him to the fact that

the tax losses generated by Rock Ledge were “too good to be true” within the

meaning of section 1.6662-3(b)(1)(ii), Income Tax Regs., and therefore,

petitioners’ underpayment for 2011 was attributable to negligence. We disagree

that Mr. Price’s expertise as a car salesman would alert him to the incorrectness of

deductions for Rock Ledge. Business expertise in the field of selling automobiles

is not necessarily indicative of knowledge of the proper tax treatment of horse

breeding expenses. Accordingly, we find that respondent has not met his burden

of production for tax year 2011.
                                        - 77 -

[*77] Once the Commissioner has met the burden of production, the burden of

proof remains with the taxpayer, including the burden of proving that the penalty

is inappropriate because of substantial authority or reasonable cause under section

6664. See Rule 142(a); Higbee v. Commissioner, 

-449. Pursuant

to section 6664(c)(1), no penalty shall be imposed under section 6662 with regard

to any portion of an underpayment if it can be shown that there was reasonable

cause for such portion and that the taxpayer acted in good faith with respect to

such portion. The decision as to whether a taxpayer acted with reasonable cause

and in good faith is made on a case-by-case basis, taking into account all pertinent

facts and circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. Factors to be

considered include the taxpayer’s efforts to assess the proper tax liability; the

taxpayer’s knowledge, education, and experience; and reliance on the advice of a

tax professional.

to satisfy the requirements of section

183 does not preclude a reasonable cause and good-faith defense to penalties

under section 6662(a). See Rodriguez v. Commissioner, T.C. Memo 2013-221, at

*57 (citing Connolly v. Commissioner, T.C. Memo. 1994-218, aff’d, 

(5th Cir. 1995)); Mathis v. Commissioner, at *19-*20.

      Petitioners relied on Mr. Murphy to prepare their returns. Although

petitioners directed Mr. Murphy to report Rock Ledge’s losses on Schedule F, they
                                        - 78 -

[*78] made good-faith efforts to assess their tax liability and discussed these

efforts with Mr. Murphy when they hired him as their accountant. Despite falling

short of the requirements for a profit objective, petitioners took Rock Ledge

seriously. See Mathis v. Commissioner, T.C. Memo. 2013-294. We hold that

petitioners had reasonable cause and good faith for their position. Accordingly,

we find that they are not liable for any of the accuracy-related penalties.

      To reflect the foregoing,


                                                 Decisions will be entered under Rule

                                       155.