T.C. Summary Opinion 2007-117



                      UNITED STATES TAX COURT



                 PAULA L. WILSON, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

               MICHAEL EDWARD RYAN, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 22721-05S, 22747-05S.      Filed July 11, 2007.



     Scott P. Hendricks, for petitioners.

     Catherine S. Tyson, for respondent.



     FOLEY, Judge:   This case was heard pursuant to section 74631

of the Internal Revenue Code in effect when the petitions were


     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
                                - 2 -

filed.    Pursuant to section 7463(b), the decisions to be entered

are not reviewable by any other court, and this opinion shall not

be treated as precedent for any other case.   The issue for

decision is whether petitioners are entitled to certain

deductions relating to their horse-breeding activity for 2002.

                             Background

     At all relevant times, Paula Wilson and Michael Ryan

(collectively, petitioners) have been law enforcement officers.

In 1995, petitioners established Wilson Ryan Quarter Horses, a

horse training and breeding operation (the activity).    Ms. Wilson

had significant experience in training horses (i.e., she began

training horses at age 9) and was responsible for the training of

petitioners’ horses.

     Petitioners routinely woke up before 5:00 a.m. each day to

clean the horse stalls and feed the horses; returned from their

respective law enforcement duties at 5:00 p.m.; and fed, trained,

and cared for the horses late into the night.    In addition,

petitioners kept continuous watch over the horses during breeding

and foaling seasons.

     From 1995 through 2002, Ms. Wilson attended exhibitions and

advertised in trade magazines to promote Wilson Ryan Quarter

Horses.   In addition, she consulted with trainers, doctors, and

nutritionists to care for the horses properly.    Mr. Ryan
                                - 3 -

maintained the books and records and tended to the horses when

Ms. Wilson was unavailable.    Neither petitioner rode the horses

for pleasure.

     In 1997, petitioners sold five horses for a profit.

Petitioners, however, believed that they needed to find a unique

type of horse to maximize their profit potential.    They

researched several types of horses, concluded that Skipper W

horses were the best “all-around performance” horses, and in

October of 1996, bought Scotchcourt, a champion-bred Skipper W

mare.    In 1997, Scotchcourt produced a stallion, Buzz, that

petitioners anticipated would become a profitable stud.     After

developing severe medical problems, however, he was not able to

do so.

     In 2000, petitioners sold their 10-acre farm and purchased a

75-acre farm.    On the new farm, they maintained a hayfield to

feed the horses, three additional structures to house the horses,

and a barn with stalls and a riding area to facilitate the

breeding and training of the horses.

     In September 2001, Ms. Wilson was injured while on duty as a

law enforcement officer and, as a result, could not train horses

for approximately 1 year.    In the fall of 2002, Ms. Wilson

suffered a broken collarbone and was unable to train horses for

another year.    In 2002, petitioners purchased a stallion, Scotch
                                - 4 -

N Lark, and hoped that he would sire numerous offspring that

could be sold for profit.    Scotch N Lark, however, died from an

undetectable illness.   Despite the setbacks, petitioners’ herd

grew from 5 horses in 1997 to 41 horses in 2002.

     On August 30, 2005, respondent sent each petitioner a notice

of deficiency relating to 2002.    Respondent determined that the

activity was not engaged in for profit.      On December 1, 2005,

while residing in Murphysboro, Illinois, each petitioner filed a

petition with the Court.    On December 8, 2006, the cases were

consolidated for trial, briefing, and opinion.

                             Discussion

     Section 183 limits the deductions relating to an activity

not engaged in for profit.    Sec. 183(b).    For purposes of section

183, a taxpayer engages in an activity for profit if he enters

into the activity with the actual and honest objective of making

a profit.   The taxpayer's expectation of profit need not be

reasonable, but he or she must have a good faith objective of

making a profit.   Allen v. Commissioner, 

, 33 (1979);

sec. 1.183-2(a), Income Tax Regs.

     Section 1.183-2(b), Income Tax Regs., sets forth a

nonexclusive list of nine factors to guide courts in analyzing a

taxpayer’s profit objective.    The nine factors are:    (1) The

manner in which the taxpayer carries on the activity; (2) the
                              - 5 -

expertise of the taxpayer or his advisers; (3) the time and

effort expended by the taxpayer in carrying on the activity; (4)

the expectation that the 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, that are earned; (8) the

financial status of the taxpayer; and (9) the elements of

personal pleasure or recreation involved in the activity.

     Having considered the factors listed in section 1.183-2(b),

Income Tax Regs., we hold that petitioners actually and honestly

intended to make a profit in the activity.   Consequently, section

183 does not limit the deductions claimed by petitioners with

respect to the activity.2

     Respondent contends that because petitioners have incurred

losses relating to the activity in each year, they did not have

the requisite profit objective.   To the contrary, petitioners

honestly and actually believed that they would recoup their


     2
        Pursuant to sec. 7491(a), petitioners have the burden of
proof unless they introduce credible evidence relating to the
issue that would shift the burden to respondent. See Rule
142(a). Our conclusions, however, are based on a preponderance
of the evidence, and thus the allocation of the burden of proof
is immaterial. See Estate of Bongard v. Commissioner, 

, 111 (2005).
                                - 6 -

losses and ultimately make a profit.    Sec. 1.183-2(b)(6), Income

Tax Regs. (stating that losses incurred during the initial phase

of a business are not necessarily an indication that the activity

was not engaged in for profit).    Respondent contends that the

fact that petitioners have never conducted a successful horse-

breeding and training business indicates a lack of profit

objective.    We conclude that this factor is outweighed by the

following factors.

     Petitioners carried on the activity in a businesslike

manner.   They advertised in trade magazines, attended seminars,

and kept records in a manner consistent with an intent to improve

profitability.   In addition, they abandoned an unprofitable

method in a manner consistent with an intent to improve

profitability (i.e., determining that the Skipper W bloodline

would be more profitable).   See sec. 1.183-2(b)(1), Income Tax

Regs.   Petitioners did not ride the horses for pleasure.   See

sec. 1.183-2(b)(9), Income Tax Regs. (stating that the presence

of personal pleasure may indicate the lack of a profit

objective).

     Ms. Wilson had significant experience training horses, and

petitioners consulted with experts relating to the caring,

feeding, and training of horses.    In addition, petitioners

regularly consulted with their accountant with respect to the

activity’s books and records.    Petitioners, in addition to their
                                 - 7 -

law enforcement careers, devoted considerable time to, and

handled all material aspects of, the activity.       Sec. 1.183-

2(b)(3), Income Tax Regs. (stating that the fact that a taxpayer

devotes substantial personal time and effort to carrying on an

activity may indicate an intention to derive a profit).

     Petitioners expected their farm and herd to appreciate.

Furthermore, petitioners devoted all of their savings from their

law enforcement salaries to the activity.       They are hardworking,

diligent, and levelheaded.   We do not believe that they would

squander their hard-earned money on an extravagant hobby.

     The fact that the taxpayers do not have substantial income

or capital from sources other than the activity may indicate that

the activity is engaged in for profit.       See sec. 1.183-2(b)(8),

Income Tax Regs.   Although petitioners suffered several setbacks

(e.g., the injuries suffered by Ms. Wilson, the death of Scotch N

Lark, etc.) that prevented them from making a profit, they

actually and honestly believed that their future earnings and

profit would be substantial.

     Contentions we have not addressed are irrelevant, moot, or

meritless.

     To reflect the foregoing,

                                              Decisions will be entered

                                         for petitioners.