# T .C . Memo . 2010-9 2

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## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

T .C . Memo . 2010-9 2

UNITED STATES TAX COURT

JO ANNE M . CHANDLER, Petitioner v .
COMMISSIONER OF INTERNAL . REVENUE, Responden t

Docket No . 6828-07 .

Filed

April

29,

2010 .

Richard W . Craigo , for petitioner .
Kaelyn Romey and Melissa .Quale , for respondent .

MEMORANDUM FINDINGS OF FACT AND OPINIO N

KROUPA,

Judge : Respondent determined deficiencies in

8
.$17,91
,
petitioner's Federal income taxes of $19,494 for 2002

for 2003 and $14,763 for 2004 . Respondent also determined
petitioner was liable for the section 6662(a)' accuracy-relate d

'All numerical amounts are rounded to the nearest dollar .
(continued . . . )

SERVED APR 2 9 2010

-2penalty . for taxable year 2002 . There are two issues for
decision . The first is whether petitioner conducted her horse
breeding, training and racing activities (horse activity) for'
profit within the meaning of section 183 when she failed to
generate a profit for over 20 years, including 2002, 2003 and
2004 .(the years at issue) . We hold that she did : not conduct he r
horse activity for profit and is therefore not entitled to deduc t
losses from the activity on her returns . The second issue is
whether petitioner .is liable for the accuracy-related penalty for
.2002 . We hold that she is liable for the penalty .
FINDINGS OF FAC T

Some of the facts have been stipulated and . are so found .
The stipulation of facts and the accompanying-exhibits are
incorporated by this reference . Petitioner resided in California
at the time she filed the petition .
.A .

Petitioner's Backgroun d
Petitioner graduated from Merritt College-in Oakland,

California, with a degree in .,accounting . She held various
accounting jobs after college, including a job with the Oakland
Municipal Court . where she prepared budgets of up to $8 million .

Petitioner had significant income from sources other than
the horse activity totaling $166,861 in 2002, $150,472 in 200 3

1 ( . . . continued )
All section references are to the Internal Revenue Code in effect
for the years at issue .

_3_
and $148,059 in 2004 .2 The retirement income, Social Security
income ,

rental income ,

gambling income and income from savings

petitioner received during the years at issue enabled her to
continue her horse activity without generating any profit . She
earned additional income from her employment as a pari-mutuel
clerk in 2003 and 2004 . Petitioner and her husband bet on .horses
as a form of recreation . Petitioner personally placed bets at
the track and on the internet during the years at issue . She
reported gambling winnings of $35,000, $18,000, and $10,000 on
the returns for 2002, 2003 and 2004, respectively .
B.

Petitioner's History With the Horse Activit y

Petitioner was engaged in breeding ,

training and racing

thoroughbred horses during the years at issue . She incurred
substantial losses in her horse activity for over 20 years before
and including the years at issue .
Petitioner first became interested in horses when she was a
child . Her father, a construction worker by trade, bred and
raced horses in California and he taught petitioner how to care
for them . Petitioner was not personally involved with horses for
almost 40 years until 1981 when she decided to get involved with
horse racing by "claiming" a racehorse .' She was 51 years old a t

2These amounts include gambling income petitioner earned on
horse betting separate from her horse activity .

'The horses running in a claiming race are being offered for
(continued . . .)

-4the time and she held a<job in another industry . Petitioner
claimed her first horse, Tardson, in 1982 .
Petitioner admitted that horse racing is highly speculative .
She did not provide any specific details about her purse winnings
during any of . the years at issue . In fact, the record reflects
that petitioner raced the same unsuccessful horses year after
year, even though they failed to generate enough money to exceed
the expenses for any year . Additionally, several of petitioner's'
racehorses died or suffered serious injuries during the years~at
issue .
Petitioner expanded her horse activity to include horse
breeding in 1983 when she purchased a breeding mare with foal .
Her primary goal for the breeding program was to obtain an
"outstanding horse" for racing because she could not afford t o
buy one . She admitted that breeding an outstanding horse is
highly speculative and-that the costs of operating a breeding
program greatly exceed the costs associated with buying a
racehorse . Petitioner stopped . breeding her mares after 2002 . At
the time of trial petitioner had not developed . an outstanding .
horse . that could win and .be sold for a large sum . The most she
received for selling any-horse,through 2004 was $750 . :

;1( . . .continued)
.
Someone who "claims" a particular horse owns that horse as
sale
soon as it leaves the starting gate .

-5Petitioner began using two of her stallions for stud servic e
in 1996 . The only income petitioner earned from stud fees during
the years at issue was $555, however, and that was only in 2003 .
Petitioner obtained a trainer's license from the Californi a
Horse Racing Board in 1988 after completing a licensing exam .
She asserts she obtained the training license to save money on
training fees for her racing program . Petitioner failed to
provide documentation, however, to establish that her decision to
train her own horses was an economic decision and there was no
cost-benefit analysis to quantify the benefit to her hors e
.activity . She also asserts she trained horses for other owners .
Petitioner failed to provide any training contracts, however, and
she failed to show any income from training horses for others .
Petitioner consulted with William Anton (Mr . Anton) and
Terry Johnson (Mr . Johnson) ., both horse trainers and owners, over
the course of her horse activity . Neither Mr . Anton nor Mr .
.Johnson knew whether petitioner's horse activity was profitable .
There is also no evidence on how, if at all, consulting with
these two trainers and owners caused petitioner to improve her
losing operation . Nothing establishes that either Mr . Anton or
Mr . Johnson provided petitioner with economic or business advice,
and that she followed their advice .

Petitioner did not make any meaningful changes to improve
the profitability of her horse activity, despite her over 20-year

history of losses . She also has not set-any limit, on-the amount .
she is willing to lose . The expenses-,of petitioner's horse
activity-have increased each year . She asserts that she
implemented some cost-saving measures to decrease the spiral of
losses . These measures include transporting, . her horses, with her
own truck and trailer to avoid the expense of commercial horse
vans . Petitioner failed to establish, however, whether her costsaving measures were based on any economic analysis of . her ,business . She has retained, and continues to incur expenses for,,
several horses that are useless to her horse activity . ,
Petitioner also admitted that she-incurs substantial costs by .`
providing feed for other horses without' seeking reimbursement,
from their owners . . She stoically says she will continue this
practice regardless of the great expense .
C.

Petitioner's Time and Effort With .the Horse Activity
Petitioner scaled back her horse activity .in 2002 when

health problems plagued her and her husband . She was diagnosed
with breast cancer in 2002 when she was 72 years old and
subsequently underwent two operations and 37 radiation
treatments . Petitioner's husband suffered from Parkinson'sdisease, and his condition significantly deteriorated during the
years at issue . He passed away in 2005, after the years at
issue .

-7Petitioner did not provide specific details of the time sh e
devoted to her horse activity during the years at issue . She
relied on friends or hired people to assist her with cleaning
stalls and caring for her horses . Petitioner spent time at the
racetrack monitoring her horses and watching them "at the rail"
when they exercised . She socialized with other trainers and
owners who were at the rail watching their horses . Petitioner
also placed bets on horse races while overseeing her horse
activity at the track .
D.

Petitioner's Books and Records for the Horse Activity
Petitioner at some point kept her horse records on a

computer but switched to keeping them by hand during the years a t

issue because it was easier for her . She scribbled down expense
records but failed to organize them into any useable form, and
her expense records for the years at issue were incomplete and
indecipherable . Petitioner failed to keep a separate record of
each horse's income and expenses . She produced manila files for
each horse she bred, trained or raced, . but the files did not
contain information necessary to evaluate the horse'ss economic
performance . The files contained sentimental documents, such as
race clippings, photos, and letters written by . petitioner to the
horse . Petitioner did not maintain any record of what she paid
to claim each horse and how much that horse had won .

-8Petitioner did not produce any background financial records
to substantiate the .income and expenses claimed on the returns
for 20 .02 and 2004, and she produced only three receipts for 2003 .
She never prepared written business plans, budgets, financia l
projections,-or financial statements, nor did she employ any cost
accounting methods to evaluate the profitability . of her horse
activity . Petitioner maintained four bank accounts during the
years at issue but commingled the funds from her . horse activity, .
with her personal funds .
Petitioner did not review any documents at year's end to,
make change's to the-horse activity to improve profitability . The
only document she prepared at year's .end was a tax organizer for
her, return preparer, Robert D'Amours (Mr . D'Amours) . Petitioner
did not provide him with any books or records beyond the tax
organizer . Mr . D'Amours prepared petitioner's returns for the
years at issue by simply inputting the numbers :she had supplied
in the tax organizer . Petitioner claimed losses of $74,772 for
2002, $69,782 for 2003 and $58,702 for 2004 on Schedule F, Profit
or Loss From Farming .
E.

The Deficiency Notic e

.Respondent issued the deficiency notice-to petitioner
disallowing the Schedule-F losses for the three years at issue,
and determining..deficiencies for those . years . Respondent also

-9determined that petitioner was liable for the accuracy-related
penalty for 2002 . Petitioner timely filed a ,petition . ,
OPINION
We are asked to decide whether a horse owner and operator
engaged in training, racing and breeding horses for profit within
the meaning of section 183 when she failed to generate a profit
from those activities during any of the years . at issue or for any
of the preceding 17 years . We are also asked to decide whether
petitioner is liable for the accuracy-related penalty for 2002 .
We address each of these issues in turn .
I .

Section 183 Analysis
A.

In Genera l

Taxpayers are precluded from claiming deductions stemming
from an activity that is not carried on for profit except to the
extent allowed by section 183(b) .4 See sec . 183(a) .5 W e

'Deductions that would be allowable . without regard to
whether the activity is engaged in . for profit are allowed under
sec . 183(b)(1) . Deductions that would be allowable only if the
activity is engaged in for profit are allowed under sec .
183(b)(2), but only to the extent that the gross income from the
activity exceeds the deductions otherwise allowable under sec .
183(b)(1) .
5We follow the Court of Appeals opinion squarely on point
when appeal from our decision would lie to that court absent
Golsen v .
stipulation by the . parties to the contrary .
Commissioner , 54 T .C . . 742 (1970), affd . 445 F .2d 985 (10th Cir .
1971) . Taxpayers residing in the Ninth Circuit, such as
petitioner, must prove they conducted their activities with the
primary, predominant or principal purpose of realizing an .
economic profit independent of tax savings . See Wolf v .
(continued . . .)

-10structure our analysis of whether an activity is engaged in for°
profit around nine nonexclusive factors . Seca 1 .183-2(b), IncomeTax Regs . The nine factors are : (1) the manner in which the
taxpayer carried on the activity ; (2) the expertise of the
taxpayer or his or her 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
loss with respect to the activity ; (7) the amount of occasional
profits, if any, which are earned ; (8) the financial status o f

the taxpayer ; and (9) whether elements of personal pleasure o r
recreation are involved .

Id .

No factor or set of factors is controlling, nor is the
existence of a majority of factors favoring ' or disfavoring a
profit objective necessarily controlling .

Hendricks v .

Commissioner , 32 F .3d 94, 98 (4th Cir . 1994), affg . T .C . Memo .
1993-396 ;

Brannen v . Commissioner , 722 F .2d 695, 704 (11th Cir .

1984), affg . 78 T .C . 471 (1982) ; sec . 1 .183-2(b), Income Tax
Regs . The individual facts and circumstances of each case ar e

'( . . .continued)
Commissioner , 4 F .3d 709, 713 (9th Cir . 1993), affg . T .C . Memo .
1991-212 ; Polakof v . Commissioner , 820 F .2d 321, 323 (9th Cir .
1987), affg . T .C . Memo . 1985-197 ; Indep . Elec . Supply, Inc . v .
Commissioner , 781 F .2d 724, 726 (9th Cir . 1986), affg . Lahr v .
Commissioner , T .C . Memo . 1984-472 .

-11the primary test .

Abramson v . Commissioner , 86 T .C . 360, 371

(1986) .
B.

Analysi s

We now apply the factors to the facts of this case . Nearly
all the facts in this case indicate that petitioner did not
engage in her horse activity for profit .
First, petitioner did not conduct her horse activity in a
businesslike manner . See
666-667 (1979) ; sec .

Enadahl v . Commissioner , 72 T .C . .659,

1 .183-2(b)(1),

Income-Tax Regs . She had

four checking accounts during the years at issue but not one was
devoted exclusively to the horse activity . See Keating v .
Commissioner , T .C . Memo . 2007-309, affd . 544 F .3d 900 (8th Cir .
2008) . Petitioner also did not maintain adequate business
records for her horse activity . She did not use any cost
accounting methods to determine the overall . profitability of the
horse activity despite her accounting background . See

Burger v .

Commissioner , T .C . Memo . 1985-523, affd . 809 F .2d 355 (7th Cir .
1987) . Petitioner also did not keep a separate record of each
horse's income and expenses to evaluate its economic performance .
See McKeever v . Commissioner , T .C . Memo . 2000-288 . The manila
files she maintained for each of her horses contained sentimental
documents with limited health and training"records . Maintaining
these types of records, however, is as consistent with a hobby as
with a business . See Golanty v . Commissioner , 72 T .C .

411, 430

-12(1979),`affd . without published opinion 647 F .2d 170 (9th Cir .
1981) ;

Giles v . Commissioner , T .C . Memo . 2006-15 .

Petitioner had no oral or written business plan . She simply
wanted to "claim a racehorse" when she began her horse activity
in 1982 . Petitioner also did not make any meaningful changes in
her method of operation to improve profitability . See sec .

1 .183-2(b)(1 ) , Income Tax Regs . She argues .that she implemented .
some cost saving measures, such . as training and transporting her,
own racehorses, to show that she sought to make a profit .
Petitioner failed to establish, however, that she implemented the
measures for economic reasons and she prepared no projections 'to
show when any of these measures would cause the activity t o
generate a'profit . Moreover, none of these measures caused
petitioner to earn a profit . We find that petitioner's failure .
to maintain adequate records and to make significant changes in
light of her over-20-year history of substantial losses shows
that she did not conduct her horse . activities in a businesslike
manner . This factor weighs in favor of respondent .
Petitioner also has not shown that she .^studied accepted
business, . economic, and scientific practices related .toher horse
activities and acted in accordance with those . practices . See
sec . 1 .183-2(b)(2), Income Tax Regs . Petitioner consulted with
Mr . . Anton and Mr . Johnson, both horse owners and trainers, but,
neither Mr . Anton nor Mr . Johnson provided her with business

-13advice . In fact, neither Mr . Anton nor Mr . Johnson knew whethe r
.petitioner's horse activity was profitable . Furthermore,
petitioner provided nothing to demonstrate how consulting with
Mr . Anton or Mr . Johnson helped her prevent her losses from
increasing ., We find . petitioner's, failure to seek out and follo w
business, economic or scientific advice indicates that she did
not have a profit motive . This factor weighs in favor of
respondent :
We also question petitioner's testimony regarding the time
and effort she spent on the horse activity . See sec . . 1 .1832(b)(3), Income Tax Regs . Petitioner claims that during the
years at issue .she spent an average of eight hours a day, seven
days a'week, 30 days a month, carrying out such tasks as feeding .
and grooming her horses and cleaning stalls . She did not provide
any evidence beyond her own self-serving testimony to
substantiate this claim . The record shows that not all the time
petitioner devoted to her-horses was work related- . The record
also reflects that during the years at issue petitioner and her
husband had medical . problems and that she paid individuals or
relied : on friends to complete the manual labor . Accordingly, we
find the time and effort expended by or on behalf of petitioner
to be a neutral factor .

--

Petitioner offered nothing to-support an expectation that
her horses would appreciate in value . `See sec . 1 .183-2(b)(4),

-14Income Tax Regs . First, petitioner had no way of determining th e
value of a horse because she,did not maintain any record of what
she paid to claim each horse and how much that horse had won .
Furthermore, petitioner had never sold a horse for over $750,

.and,

most of her horses sold for less than $400 . Even if petitioner
expected her horses . to appreciate in value, any expectation of
recouping the hundreds of thousands of dollars in accumulated
losses would be unlikely . Accordingly, this factor weighs in
favor of respondent .
Petitioner provided nothing to establish'she ever owned or
operated a successful business venture . See sec . 1 .183-2(b)(5),
Income Tax Regs . She claimed that she and her husband had a
successful venture "flipping" houses but did not produce any
evidence to support this assertion . nor was a gain reported on the,
returns for 1996 through 2004 . Accordingly, this factor is,
neutral .

.

Petitioner sustained large ever-increasing losses, from the
horse racing activity for 20 years in succession, from its start
in 1982 through the years at issue . Respondent conservatively
estimates that petitioner's losses from 1981 through 2007 exceed
$1 .5 million . The losses petitioner, incurred during . the years at'
issue were well beyond the accepted five-to-ten- .year startup
period for horse breeding . See

Engdahl v . Commissioner ,

supra .

Nevertheless, petitioner tried to explain away the losses by

-15claiming they were due to unforeseen hardships-, including death
or serious injury to several horses during the years at issue .'
We recognize that horse breeding and racing are speculative
activities where death or injury to horses is a common
occurrence. Even petitioner's witness Mr . Anton, a racehorse
owner and trainer, testified that the loss . of several horses
during a given year "can be normal ." We do not find that the
losses were caused by unforseeable circumstances . Accordingly,
we find that petitioner's history of large losses weighs in favor
of respondent .

Furthermore, petitioner's horse activity has never made even
an occasional profit . See sec . 1 .183-2(b)(7), Income Tax Regs .
Petitioner claims that she made a profit with her horse "Award
Winning" in 2006, which is after the years at issue . Moreover,
the return for that year reports a loss . Petitioner further
contends that we should disregard her history of losses because
she could potentially earn a substantial profit with on e
.outstanding horse . The possibility of a speculative profit is
insufficient to outweigh the absence of profits for a perio d

'Petitioner also argues that her own illness and her
husband's illness were unforeseen hardships that contributed to
the losses . This claim directly contradicts petitioner's claim
that she continued to devote eight hours a day, seven days a
week, to the horse activity despite her and her husband's
illnesses . It also overlooks petitioner's long history of losses
before the years at issue . We find, therefore, that petitioner's
and her husband's illnesses were not unforeseen hardships that
contributed to petitioner's losses .

-16greater than 20 years, however .
Memo.

2000-288 . Accordingly ,

McKeever v . Commissioner , T: .C .

petitioner ' s failure to make even

an occasional profit in over 20 years weighs in favor of
respondent .

Petitioner had substantial income from other sources' and
was able to reduce this income by approximately 40 percent by
claiming Schedule F losses from the horse activity .
1 .183-2,( b)(8), Income Tax Regs .

See sec .

This factor favors respondent .

Petitioner derived pleasure and recreation from her horse
activity .

See sec . 1 . 183-2 ( b)(9), Income Tax Regs .

She combined

her racing and training activities with social and,recreational
activities at the track .
Income Tax Regs .

See sec . 1 . 183-2(c),' Example

(3),

Petitioner enjoyed spending time "at the rail"

with other trainers and owners .

She also placed bets while

overseeing her horse racing activity .

This factor favors

respondent .
Based on all the facts and circumstances ,
petitioner has not shown that
for profit .

Accordingly ,

we find that

she engaged in her horse

activity

we sustain respondent ' s determination

in the deficiency notice regarding the losses .

7She had income totaling $16 .6 ,861 in 2002, $,150,472 in 2003
and $148,059 in 2004 . She claimed net losses from the horse
activity of $74,772 in 2002, $69,782 in 2003 and $58,702 in 2004 . . .

-17II .

Accuracy -Related Penalty for 2002 ,
We now address whether petitioner is liable for the section

6662 ( a) accuracy - related penalty for 2002 ,
which respondent determined a penalty .

the only year for

Respondent asserts

petitioner is liable for the penalty because she failed to
maintain adequate books and records for that year . We agree .

-A taxpayer is liable for an accuracy - related penalty for any
portion of an underpayment of income tax attributable to
negligence or disregard of rules and regulations .

Sec . 6662(a)

and (b )( 1 ) . Negligence is defined as any failure to make

a

reasonable attempt to comply with the provisions of the Code an d
includes any failure by_the taxpayer to keep adequate books and
records or to substantiate items properly . Sec . 6662(c) ; sec .
1 .6662-3(b)(1), . Income Tax Regs .

Petitioner failed to keep adequate books and records to .
substantiate the horse-activity-related losses she claimed for
the years at issue, including 2002 . Petitioner's explanation
that it was easier to keep records in writing than on a compute r
does not satisfy the accurate books and records requirement .
Even her handwritten records were incomplete and indecipherable .
Moreover, petitioner failed to present any defense . Accordingly,
we sustain respondent's determination of the section-666 2
'accuracy-related penalty .

-18We have considered petitioner's other arguments and conclud e
they are irrelevant, moot, or meritless .

Decision will be entere d
for respondent .

---

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