T .C . Memo . 2009-22 0
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T .C . Memo . 2009-22 0
UNITED STATES TAX COUR T
MARCIA TRESCOTT HELMICK'AND ROBERT P . HELMICK, Petitioners v .
COMMISSIONER OF INTERNAL REVENUE, Responden t
Docket No . 13713-06 .
Filed
September
22,
2009 .
Ps ran a horse-breeding and -boarding operation in
which they kept and cared for as many as 60 horses on
the same property as their personal residence . Ps had
no full-time employees and did most of the work
themselves, and they did not'use the horses for
personal pleasure . Ps intended to make a profit to
supplement their income, but, over a number of years,
they incurred a string of losses . The only substantial
income Ps had from other sources was P-H's modest
salary as a county employee, against which they applied
the losses .
Held : . On the basis of all the facts and
circumstances, the horse-breeding and -boarding
operation was an activity engaged in for profit under
I .R .C . sec . 183 in the years 1993 to 2002 .
SERVED Sep 22 2009
Marcia Trescott Helmick and Robert P . Helmick, pro sese .
M . Jeanne Peterson , for respondent .
MEMORANDUM FINDINGS OF FACT AND OPINIO N
_ 'GUSTAFSON,
Judge : The Internal Revenue Service (IRS) issued
to petitioners Marcia Trescott Helmick and Robert P . Helmick a
statutory notice of deficiency on April 11, 2006, pursuant to
section 6212,' showing the IRS's determinations of the following
deficiencies in income tax and accompanying failure-to-file
additions to tax and accuracy-related penalties under sections
6651(a) (1) and 6662,2 respectively, for tax years 1997 to 2002 :
'Unless otherwise indicated, all citations of sections refer
to the Internal Revenue Code of 1986 (26 U .S .C .), as amended, and
all citations of Rules refer to the Tax Court Rules-of Practice
and Procedure .
2Respondent concedes that the $2,133 .50 failure-to-file
addition to tax under section 6651(a)(1) for 2001 was overstated
by $150 in the notice of deficiency and seeks an addition of only
$1,983 .50 for that year . Respondent concedes that the $1,614 .75
failure-to-file addition to tax under section 6651(a)(1) for 2002
was overstated by $1,291 in the notice of deficiency and seeks an
addition of only $323 .75 for that year . Respondent concedes that
the $1,925 .40 accuracy-related penalty under section 6662 for
2001 was overstated by $120 in the notice of deficiency and seeks
a penalty of only $1,805 .40 for that year .
Addition to Tax
Penalt y
Tax Year
Deficiency
Sec . 6651(a)(1)
Sec . 666 2
1997
$4,114
$1,028 .00
$822 .8 0
19.98
5,861
1,383 .50 .
1,172 .2 0
1999
6,371
1,465 .50
1,274 .2 0
2000
6,446
1,440 .50
1,289 .2 0
2001
9,627
2,133 .50
1,925 .4 0
2002
7,598
1,614 .75
1 ; 519 .6 0
The issue for decision is whether the Helmicks' horsebreeding and -boarding operation (hereinafter, the horse
activity) was an activity engaged in for profit pursuant to
section 183 . We find that the Helmicks' horse activity was
engaged in for profit .
FINDINGS OF FAC T
Some of the facts have been stipulated and are so found .
The stipulation of facts and supplemental stipulation of facts
filed September 10, 2008, and the attached exhibits are
incorporated herein by this reference . Trial of this case was
held in Denver, Colorado, on September 10, 2008 . Ms . Helmick and
Mr . Helmick testified . Mr . Helmick, in particular, was a candid
and credible witness . Ms . Helmick, though-given to some
overstatement (e .g ., about the number of hours she worked and the
quantum of records she maintained), was believable as to the gist
4 of her testimony .' Respondent called no witnesses . At the time
that they filed their petition, the Helmicks resided in Colorado .
Initial Horse Activit y
In or around 1980, Ms . Helmick (then known as Marcia L .
Trescott) and Richard E . . Taylor acquired a roughly 1-1/2 to 2
acre parcel of real estate in a primarily residential
neighborhood in Niwot, Colorado, a town in Boulder County about 9
miles from the city of Boulder, Colorado . She conducted a small
horse activity on that property before her marriage t o
Mr . Helmick in the mid-1980s . After the Helmicks married, the
property was transferred to Ms . Helmick and Mr . Helmick as
tenants in common, and Mr . Helmick joined in the conduct of the
horse activity on that, property . Beginning no later than July
1986 and continuing through all the tax years at issue, the
Helmicks' primary residence was a .house located on the same
property on which they conducted their horse activity .
'For purposes of disputing Ms . Helmick's credibility,
respondent asks the Court to take judicial notice of a document
that she filed in bankruptcy court, in which she stated that,
.after the trial in this case, the Court "ruled from the benc h
* * * that the IRS was wrong to have attempted, at any time, to
characterize the farm as a hobby" ; but respondent points out that
there is no such ruling in the trial transcript of this case .
However, the Court did speak to the parties off the record,
observing that the Helmicks' horse activity did not appear to be
a mere "hobby", and that the disallowance of section 183 (though
sometimes referred to as the "hobby loss" provision) reaches more
than hobbies and disallows losses unless the activity is entered
into for profit . Ms . Helmick's statement does not accurately
characterize the Court's actual comment, but it is not (as
respondent argues) an "outright fabrication" .
The Helmicks' Horse Activit y
The Helmicks' horse activity principally involved-th e
breeding and boarding of-horses . The Helmicks' boarding activity
consisted of keeping horses belonging to third parties on their
property, and caring for and feeding those horses for a fee . The
Helmicks' horse-breeding-activities consisted of acquiring
purebred-Arabian stallions and mares for-the purpose' of breeding
them with each other'in .order to'produce and raise offspring for
sale . These breeding activities began in earnest in 1984 when
Ms . Helmick purchased SS Bay Moun, a 2-year-old Arabian purebred
stallion, for $30,000 .4 Although Ms . Helmick had physical custody
of SS Bay Moun, the horse's previous owners refused to transfer
clear title . As a result, Ms . Helmick could not register'the
horse or its offspring as purebred Arabians, and the Helmicks
lost some sales . In response,-the Helmicks filed a lawsuit in 1985, which remained pending for 9 years, to obtain clear title
to SS Bay Moun-in order to-register the horse and its offspring
as purebred Arabians and-thus to increase their value on the`
equine market . In 1994, at the conclusion of the litigation, the
Helmicks acquired clear title to SS Bay Moun .
The Helmicks' horse activity began with a focus on breeding
horses to'create salable livestock, but that focus shifted to
boarding horses when the Helmicks concluded that breeding was
less profitable because of a perceived decline in sale prices for
purebred Arabian horses in the 1980s and 1990s . The Helmick s
also believed that boarding horses would become increasingly
profitable for them because of their property's favorable zoning
status, discussed below,~which gave,them a virtual monopoly on
boarding horses in Niwot, Colorado .
From 1993 to 2002 Ms . Helmick typically spent her entire
work week conducting the horse activity . Mr . Helmick, who worked
full time as a land-use planner for Boulder and Larimer Counties,
typically, worked on the horse activity in early mornings an d
evenings, and on weekends . Conducting the horse activity
involved, inter alias buying and transporting hundreds of pounds
of feed each week, mucking stalls, shoveling hay, caring for sick
horses, and guiding pregnant mares through the birthing process .
In fact, the ..Helmicks frequently had : to watch over their pregnant
mares during the night as well as the day . On occasion during
the foaling season--which extended from January to April--the
Helmicks would have to take turns staying awake at night to
ensure that one of them checked on the mares at least once eac h
hour . The strenuous nature of the work tookfits toll on th e
Helmicks . Mr . .Helmick suffered from a bad back, which sometime s
left him bedridden,
and Ms . Helmick tore her shoulder .
The Helmicks never. hired full-time employees, but they would
occasionally hire part-time assistants--usually high school
students--to help them with the horse activity . Mr . Helmick had
a daughter (who was not Ms . Helmick's daughter) who was born in
1981 and of whom he had joint custody . However, the daughter did
not live with Mr . Helmick and seldom stayed=with him during the
weekends when he had visitation rights, because" she did not enjoy
cleaning stalls or doing other work in connection with the
horses . We find that Mr . Helmick's daughter did not spend a
material amount of time working with or riding the horses .
The Helmicks' History of Other Employment and Business Venture s
From 1993 to 2002 Ms . Helmick was not otherwise employed or
involved in business ventures aside from the horse activity .
Furthermore, Ms . Helmick does not allege, nor does the record
show, that she was ever involved in any other business ventures . '
Mr . Helmick worked full time as a land-use planner for
Boulder County from 1980 to 1994 and for Larimer County from 1995
.
through all of the tax years at issue . His salary for -that
job
during 1998 to 2002 never exceeded $65,000 . Neither he nor Ms .
Helmick had any other substantial sources of income during 1993
to 2002 . From 1995 to 1996 Mr . Helmick also ran his own parttime, private land-use consulting business, which he referred to
as "Action Consulting" . This business had a total of-six clients
over its brief existence, but Mr . Helmick speculated at tria l
'Ms . Helmick alleged that she entered the business of horse
breeding and boarding through her "business associations" with
"rural equine residential real estate" . However, she did not
allege that she was involved in a real estate business, nor did
she describe what that business might entail .
that because of the business's low overhead it was "probably"
profitable . Mr . Helmick ultimately closed Action Consulting
because he preferred the "regular paycheck and benefits" from hi s
work with county governments to the uncertain cashflow associated
with private consulting . Mr . Helmick does not allege, nor does
the record show, that he was .ever involved in any other business
ventures .
The Helmicks' Property and Zoning Statu s
From 1997 to 2000 the number of horses (both owned and
boarded) on the Helmicks' property in Niwot ranged from 40 to 60 .
At any given time during that period, the Helmicks owned between
40 and 70 percent of the horses on their property . Those horses
were kept in a barn with 13 stalls inside and an outdoor arena
for exercise . In or around 1994 the Helmicks made plans to
improve their property by adding to their house and barn and
constructing an indoor riding arena, and they took out a
construction loan for that purpose . The Helmicks believed that
these improvements and additions to their property would make
their boarding activities--to which their focus was shifting-more profitable by lowering labor costs (because it is easier to
clean, indoor facilities than outdoor facilities where horses
exercise, particularly during inclement weather) and by
increasing the fees they could charge (because they could offer
more amenities, like the indoor riding arena) .
However, these improvements were delayed by an adverse
determination by Boulder County, which held that the Helmicks
were in violation of zoning law and would have to reduce the
number of horses kept on their property . The Helmicks responded
by engaging in a several-months-long campaign to challenge
Boulder County's determination,
.which effort included soliciting
clients and friends to testify on their behalf . Before 1997 they
won the right to continue to have 40 horses on their property,
which was then zoned as an equestrian center . However, the
Helmicks were required to keep a minimum of 40 horses on their
property to maintain . its status as an equestrian center in their
primarily residential neighborhood . If they kept fewer than 40
horses .on the property, then the number of horses they were
entitled to keep on their property would decrease
correspondingly . Moreover, if the Helmicks completely failed to
maintain their property's status as an equestrian center, then
they would be permitted to keep only two horses . The zoning
situation . thus imposed on-them, in effect, a downward ratchet
that required them to maintain the size of their herd or
incrementally lose their right to run the horse activity .
The Helmicks began construction on the additions to their
house and barn .and-on the indoor riding arena in .1997 after,
winning their zoning dispute with Boulder County . However,
because of a dispute with the contractor whom the Helmicks hired
10 to construct the indoor riding arena, the proposed construction
of that arena ceased in the late .1990s after-the foundation was
built, and the arena :was never finished . The Helmicks sued the
contractor and ultimately settled the lawsuit in 2001 for $5,000 .
Expertise of the Helmicks and Their Adviser s
The Helmicks were largely self-taught in the running of the
horse activity, but by 1993, the Helmicks each had over 8 years
of experience in breeding and boarding horses on their property .
In addition, the record shows that Mr . Helmick was a member of
the board of directors of various professional horse-breeding and
-boarding associations--including the Colorado Horsemen's
Council,,-and the Boulder County .Horsemen's Association--at
various times during 1993 to 2002 .
The Helmicks were classified-as amateur owners in the equine
industry, i .e ., they were not professionally qualified or
compensated as horse trainers, and any training they performed
was incidental to their breeding and boarding operation . The
Helmicks were not . .veterinarians . However, the Helmicks consulte d
numerous veterinarians with respect to their horse activity . In
particular, the Helmicks occasionally employed a veterinarian to
inspect their mares to determine the appropriate time to breed
them in order to increase the likelihood of conceiving a mare
instead of a stallion, because at the time, mares would fetch a
higher price on the equine market . In the late 1980s the
- 11 Helmicks discontinued the use of veterinarians for this purpose
to save themselves and their clients the cost of veterinarian's
fees . By that time Mr . Helmick had become proficient"enough to
inspect the mares himself and achieve a success rate o f
influencing the sex of the colt that was lower than the
veterinarian's rate but still above the norm .
The Helmicks' Books and Record s
Ms . Helmick was responsible for the bookkeeping for the
horse activity . She did not prepare any contemporaneous business
plans or financial statements for the horse activity . . However,
Mr . Helmick would give the receipts generated by the horse
activity to Ms . Helmick, and after they had accumulated for some
time, she would enter them into a`Quicken or QuickBooks program
on their computer . In response to pointed questions, Ms .
Helmick's testimony was equivocal on whether she made her Quicke n
entries promptly or delayed doing so for months or years .
therefore find that Ms . Helmick delayed making her Quicke n
entries for months or years after she received the receipts from
Mr . Helmick . The Helmicks used Quicken to generate summaries of
their income and expenses for, inter alia, preparing their Forms
1040, U .S . Individual Income Tax Return, and dealing with IRS
audits .
At trial the Helmicks did not present the receipts as
evidence to corroborate their income or expenses for the tax
- 12 years at issue . However, the Helmicks introduced evidence of
their practice of saving their receipts and creating computergenerated records therefrom in the form of the Quicken summaries
of their source and use of funds for all six of the tax years at
issue ,
and we find their-testimony, corroborated with those .
summaries ,
to be credible .
However, they did not show that they
kept sufficiently current with their Quicken entries to enable
them to determine at any given moment the amount of their current
deficit .
Losses From the Helmicks '
The Helmicks '
horse
Horse Activit y
activity generated losses every year at
least after Mr . Helmick became involved with the activity in late
1984 or 1985 .
On•Schedules F, Profit or Loss From Farming,-
attached to their Forms 1040 for the six years at issue (19972002) and the five . previous years
( 1992-96 ),
deducted a string of losses from their horse
below, totaling approximately $400,000
the Helmicks
activity,
as listed
( and averaging about
$ 36,000 per year) .
However, for purposes of evaluating the Helmicks '
motive for persisting in the horse activity,
profit
those losses may b e
somewhat misleading in two respects . First, the-Schedule F
expenses that gave rise to those reported losses included a
portion of the mortgage interest expense and tax that the IRS' s
notice of deficiency allowed as additional itemized expenses .
- 13 The Helmicks would have incurred these expenses, and could have
deducted them, whether or not they had engaged in the horse
activity . Second, the Schedule F expenses included depreciation
on assets that the Helmicks had previously purchased and which
therefore did not represent current costs of running the
activity . On the one hand, the prospect of claiming the tax
benefit of such depreciation could be a tax-related, non-profitrelated motive for undertaking the activity . But on the other
hand, a person who already owned the asset might well disregard
depreciation in making a decision as to whether he could hope to
turn a profit from the activity and as to how long he-could
afford to incur losses before turning the corner . In this case
the evaluation of the Helmicks' profit motive should include a
reckoning of the actual out-of-pocket, marginal loss generated by
the horse activity that reduces the Schedule F losses by the
depreciation, taxes, and interest . When that reduction is made,
the marginal loss of the activity is shown to have been on
average .about $27,000 per year, i .e ., more modest than the
Schedules F would seem to indicate :
- 14 -
Schedule
Margina l
Year
F Loss
Depreciation
Interest
Taxes
Los s
1992
$57,034
---
---
---
-- -
1993
57,315
---
-- -
1994
28,544
1995
23,608
1996
9,561
1997
29,7 .83
1$6,947
1998
34,847
1999
-- ---
-- -
---
-- -
-0-
-0-
$22,83 6
6,947
$6,091
$61 .2
21,19 7
.41,174
6,206
6,419
1,858
26,69 1
2000
32,584
4,894
2,501
588
24,60 1
2001
28,023
3,789
6,150
52
18,03 2
2002
57,896
6,402
2,094
11 /
49,38 9
Total
---
---
400,369
162,74 6
'Because the 1997 Form 1040 is not in the record, we use the
1998 depreciation figure as an approximation .
Post-Suit Year Operation of the .Horse Activit y
The Helmicks married in the mid-1980s and remained married
through all of the tax years at issue . However, the Helmicks
separated in 2003, and their divorce was accompanied by
contentious litigation . In the course of that litigation, some
of the Helmicks' assets were divided . On October 2, 2007, the
divorce court ordered Ms . Helmick to vacate the house and
property in Niwot, where she and Mr . Helmick had lived together
and conducted the horse activity . Neither of the parties
alleges, nor does the record show, the exact date on which the
Helmicks concluded their horse activity . However, . the record
does show that the Helmicks' separation in 2003 and subsequent
litigation precipitated the end of that activity .
15
At trial Ms . Helmick testified that the receipts that sh e
and Mr . Helmick saved to substantiate their income and expenses
from the horse activity should still be located in the house in
Niwot . Ms . Helmick also testified that those receipts are
inaccessible to her because she-would be arrested if she returned'
to the house in violation of the divorce court's order . However,
Mr . Helmick testified with'equal conviction that he had been
unable to find the . receipts after he "went through the house with
a fine-toothed comb ." Mr . Helmick also testified that he had "no
knowledge of where * * * [the .receipts] are" today, but he is
certain that they must have existed "because * * *,[the Helmicks]
constructed the tax returns from those records ." On the basis of
the Helmicks' testimony, we find that the Helmicks
unintentionally lost their receipts in the disruption of the
horse activity that resulted from their divorce .
Notice of .Deficienc y
The Helmicks failed to timely file .their Forms 1040 for tax
years 1997 through 2002, because they believed there .was no tax
due for those years, as a result of the losses from their horse .
activity . However, the Helmicks did eventually file those forms
late with the IRS over the course of 2003, reporting losses from
the horse activity and claiming net operating loss carryovers
- 16 generated by the horse activity in previous years .' On April 11,
2006, the IRS mailed the Helmicks a notice of deficiency for tax
years 1997 through 2002, which disallowed the losses from their
horse activity as so -called hobby losses from an activity not
engaged in for profit pursuant to section 183 . The notice of
deficiency also disallowed net operating loss deductions carried
forward from their horse activity for the tax years at issue an d
'The Helmicks' Forms 1040 bear apparent discrepancies, but
they seem to show that, as of the beginning of the year 1997, the .
Helmicks'had accumulated net operating losses of $28,792,
available to be carried forward and used as deductions .
Schedule 1 to the notice .of deficiency bears a similar figure of
$29,762, and we assume this to be the correct figure . The
.schedules attached to the Helmicks' Forms 1040 for 1998 throug h
2002 seem to reflect that those forms include claimed deductions
of net operating loss carryforwards ; but in that respect they
seem to be in error : If the Helmicks' Schedule F losses are
allowed for the six years in issue, then for the five years 1997 ,
1998, 1999, 2000, and 2002, their Forms 1040 reflected overall
net losses after subtracting from their wage income and tax
refund income (a) their Schedule F losses, (b) their itemized
deductions, and (c) their exemptions . Those net losses so
computed were $1,930 in 1998, $4,131 in 1999, $5,103 in 2000, and
$11,375 in 2002 . Using figures from Schedule 1 to the IRS's
notice of deficiency, similar results are obtained by subtractin g
Net Operating Loss Deduction" from "Taxable income as Shown in
return as Filed" . The return for 1997 is not in the record, but
using the figures from Schedule 1 in the notice of deficiency,
the net loss for 1997 was $15,275 . Thus, the Helmicks did not
need to deduct any NOL carryforwards in order to have zero
taxable income in those five years . The one exception was 2001,
in'which they did apparently need an NOL deduction of $17,161 in
order to have zero taxable income . The net losses from 1997
through 2000 total $26,439, and if carried forward they would be
sufficient to offset the 2001 income . Thus, if the Helmicks'
Schedule F losses are allowable, as we find they are, then the
suit-year losses are sufficient to eliminate all their taxable
income for all of the years in suit, and carryforwards from the
pre-suit years 1992 to 1996 are immaterial .
17 tax years 1993 to 1996 ,
and determined failure-to - file additions
to tax and accuracy - related penalties under sections 6651(a)(1)
and 6662 . In response to the notice of deficiency ,
petitioned this Court ,
the Helmicks
pursuant to section 6213(a), to
redetermine their deficiencies .
OPINION
At issue is the Helmicks '
entitlement to deductions for tax
years 1997 to 2002 arising from their horse activity during, tax
years 1993 to 2002 .6 A taxpayer who is carrying on a trade o r
business may deduct ordinary and necessary expenses incurred in
connection with the operation of the business . Sec . 162(a) .•
However, a taxpayer . generally may not deduct expenses incurred in
connection with a hobby or other non-profit activity to offset
taxable income from other sources . Sec . 183(a), .7 We find that
the Helmicks' horse activity, though unprofitable, was engaged in
with the intention of making .a profit during tax years 1993 t o
6Only tax years 1997 to 2002 are at issue . However, it is
well settled that we may determine the correct amount of a net
operating loss for a tax year not at issue (whether or not the
assessment of a deficiency for that year is barred) as a
preliminary step in determining the correct amount of a net
operating loss carryover . to a tax year at issue .. Se e
sec . 6214(b) ; Lone Manor Farms, Inc . v . Commissioner , 61 T .C .
436, 440 (1974) (citing ABKCO Indus . ., Inc . v . Commissioner , 56
T .C . 1083, 1088-1089 (1971), affd . 482 .F .2d 150 (3d Cir . 1 .973)),
affd . without published opinion 5,10 F .2d 970 (3d Cir . 1975) .
7Section 183(a) provides generally that if an activity is
not engaged in for profit, no deduction attributable to that'
activity shall be allowed except as provided in section 183(b) .
18 2002 . Although their intention to make•the activity eventually
profitable was objectively unreasonable, it was their genuine
subjective intention . By the time of the years in issue, the
Helmicks had invested so much time and effort in this failing
activity that they could see no way out except to somehow make
the thing work . No other possible purpose explains thei r
willingness to persist in an activity that had become so
frustrating and unpleasant . Therefore, the Helmicks are entitled
to deduct their expenses and net operating losses from that
activity for those years .
A.
Burden of Proo f
Generally, the Commissioner's determinations set forth in a
notice of deficiency are presumed correct, and the taxpayer. bears
the burden of showing the determinations are in error . Rule
142(a) ;
Welch v . Helvering,
290 U .S . 111, 115 (1933) . Since the
IRS determined that the Helmicks' horse activity was not engage d
in for profit, that determination is presumed correct, and the
Helmicks have the burden to prove otherwise .
B .
: Activities Not Engaged In for Profi t
Section 183(c) defines an "activity not engaged in fo r
profit" as "any activity other than one with respect to which
deductions are allowable for the taxable year under section 162
or under paragraph (1) or (2) of section 212 ." An activity
constitutes a "trade or business" within the meaning of section
- 19 162--and it escapes the limitation of section 183--if the
taxpayer's actual and honest objective . is to realize a profit .
Osteen v . Commissioner , 62 F .3d 356, 358 (11th Cir . •1995), affg .
in part and revg . in part T .C . Memo . 1993-519 . The expectation
of profit need not have been reasonable ; however, the taxpayer
must have entered into the activity, or continued it, with the
objective of making a profit .
371,
393-(1988) ;
Hulter v . Commissioner , 91 T .C .
sec . 1 .183-2(a), Income Tax Regs (26 C .F .R .) .
Whether the requisite profit objective exists is determined by
looking at all the surrounding facts and circumstances .
Keanini
v . Commissioner , 94 T .C . 41, 46 (1990) ; sec . 1 .183-2(b),,Income
Tax Regs . Greater weight is given to objective facts than to a
taxpayer's mere statement of intent .
Thomas v . Commissioner ,
84 T .C . 1244, 1269 (1985), affd . 792 F .2d 1256 (4th Cir . 1986) ;
sec . 1 .183-2(a), Income Tax Regs' .
The stereotypical abusive scenario involving horse breeding
is the wealthy businessman who runs a real business during the
week--with business records, income projections, accountability
to banks and investors, and so on--and owns a "gentleman's farm"
as a weekend retreat where he keeps horses for the recreation of
himself and his family and friends . He dabbles in breeding
horses, with no expectation of ever making a profit, so that he
can deduct the expenses of his horses and thereby have Uncle Sam
subsidize the weekend farm . However, some horse-related-
20 operations are actually engaged in for profit . See, e .g .,
Miller
v . Commissioner , T .C . Memo . 2008-224 . The Helmicks' horse
activity does not fit the stereotypical abusive scenario ; instead
they engaged in the horse activity with a motive to make a
profit, and they are therefore entitled to deduct their losses .
Section 1 .183-2(b), Income Tax Regs ., provides a list of
factors to be considered in the evaluation of a taxpayer's profit
objective : (1) The manner in which the taxpayer carries on the
activity ; (2) the 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 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, from the
activity ; (8) the financial status of the taxpayer ; an d
(9) elements of personal pleasure or recreation . This list is
nonexclusive, and the number of factors for or against the
taxpayer is not necessarily determinative . Rather, all facts and
circumstances must be taken into account, and more weight may be
given to some factors than to others .
Id . ; see
Dunn v .
Commissioner , 70 T .C . 715, 720 (1978), affd . 615 F .2d 578 (2d
Cir . 1980) .
We now address these nine factors .
21 C.
Analysis of the Helmicks' Horse Activit y
1 .
Manner in Which the Activity Is Conducte d
The fact that a taxpayer carries on the activity in a
business-like manner and maintains complete and accurate books
and records may indicate a profit objective . Sec . 1 .183-2(b)(1),
Income Tax Regs . A change of operating methods, adoption of,new
.techniques,-or abandonment of unprofitable methods in a manner
consistent with an intent to improve profitability may also
indicate a profit objective .
Id .
Respondent emphasizes the
Helmicks' failure to prepare contemporaneous business plans or
financial statements, which in some circumstances might indeed be
a sign that a serious profit objective is lacking . However,
respondent concedes that the Helmicks retained their receipts
from the horse activity and subsequently entered them into a
Quicken or QuickBooks program on their computer . The record
shows that the Helmicks kept records in an unprofessional and
disorganized manner that would have satisfied no prospective
investor, but the Helmicks were not seeking or accounting to any
investor . 'For the Helmicks it was enough to know that the
business was not turning a profit (not yet, as they thought of
it), and their shoebox record keeping was adequate for their'
purpose .
While the Helmicks had no written business plan for their
horse activity, the evidence established that they did . have a
- 22 -
rudimentary plan, which was to weather their current losses while
maintaining the value of their herd and keeping at least 40
horses on their property in order-to preserve that property's
favorable zoning status as an equestrian center . See Phillips v .
Commissioner , T .C . Memo . . 1997-128 (holding that a business plan
need not be in written form and can be evidenced by the
taxpayer's actions) . This zoning status•gave the Helmicks a
virtual monopoly on boarding horses in Niwot, Colorado, and they
'hoped eventually to exploit this competitive advantage for a
profit by shifting their focus from horse breeding to boarding .
In line with this plan, the Helmicks sought to,lower their labor
costs and increase the boarding fees they could charge by
significantly improving their boarding facilities . In 1997 the
Helmicks began to construct an indoor riding arena as well as
additions to their house and barn . Respondent correctly notes
that the indoor riding arena was never completed . However, the
Helmicks did construct the foundation for the indoor riding
arena, and the project ceased only because of a dispute with the
contractor they hired to build that arena . The record shows that
the Helmicks were sincere about upgrading their facilities .
Respondent disputed the adequacy of the Helmicks' books and
records for substantiation of their expenses under section 6001 .
The Helmicks' practice of merely retaining their receipts and
subsequently quantifying them was indeed informal . However, the
'23
practice was sufficient'to keep`tPe`Helmicks apprised of thei r
cash on hand and expenses , which in turn was sufficient,for .thei- r
purpose of weathering their current losses to achieve monopol y
profits in the future .
As respondent correctly notes, the-Helmicks did not present
the receipts as evidence to corroborate their iricome or expense s
for the tax years at issue .. However, [i]t
s well establishe d
that the Tax Court may permit a taxpayer to substantiate .
deductions through secondary evidence where'the underlying
documents have been unintentionally lostor'"destroyed :
Davis v .-
Commissioner ,` T .C . Memo . 2006-272 (citing : Boyd v . Commissioner ,
122 T .C . 305, 320-321 (2004),
Malinowski v . Commissioner ,
71
T .C .
1120, 1125 (1979) :," Furnish v . Commissioner , T .C . Memo .- 2001-286,
Joseph v . Commissioner , T .C . Memo ., 1'997-4'47,,and Watson V .
Commissioner , T .C . -Memo .
1988-29) .' As is set out- above, 'the
Helmicks unintentionally lost their receipts from the horseactivity •in the -course -of .Ms Helmick''s =relocation and the
litigation that arose from their divorce . :, Thus ;'the Helmicks `
.will be permitted to substantiate-their expenses from that
activity through secondary" evidence .- We ' find -the -;.Helmicks'
testimony that they retained their .receipts from 'the' horse
activity and subsequently entered them into the, computer . databas e
of their Quicken program--corroborated with printouts, of Quicken
summaries of their source and use of funds derived .from those
- 24 receipts--to be .credible . We therefore hold-that the Helmicks
kept adequate ; records to substantiate their expenses from the
horse activity for,tax years .1993 to 2002 .
Notably, the Helmicks spent 9 years, from 1985 to 1994,
suing .for clear title to SS Bay Moun, the purebred Arabian
stallion they purchased .to jumpstart their horse-breeding
activity . The Helmicks•always had the possession and use of th e
horse, and they always enjoyed,any pleasure that such possession
and use might bring . -However, without a clear title, neither the
horse,, nor its ;off,spring could be registered or sold as purebre d
Arabians . This caused the Helmicks to lose sales, becaus e
registered horses are more valuable on the equine market . Thus,
it'necessarily follows that the lawsuit to register SS Bay Moun
was motivated not by personal pleasure but by a desire t o
increase profits and weighs in favor of .the,Helmicks . See Miller
v . Commissioner , T .C . Memo . 2008-224 (listing . registration of
horses as a ,fact that, weighed in favor of finding'that a hors e
breeder, carried on his ,activity- in a business-like manner) .
We conclude that this factor--the manner in which the
I
activity is conducted--is mixed : partly in respondent's favor,
but overall_in the-Helmicks' favor, indicating that they had the
requisite profit objective .
25 2 .
Expertise of the Taxpayers and Their Adviser s
A taxpayer's expertise, research, and study of an activity,
as well as his consultation with experts, may indicate a profit
objective . Sec . 1 .183-2(b)(2), Income Tax Regs . By 1993 the
Helmicks had modest relevant expertise : Each had over 8 years of
experience in breeding and boarding horses on their property, and
Mr . Helmick had served on the board of directors of various
professional horse-breeding and -boarding associations . In
addition, the Helmicks hired veterinarians to assist them with
their horse breeding from time to time, and Mr . Helmick became
proficient-at horse breeding by observing their practices .
Respondent acknowledges all of these facts but still contends
that the Helmicks failed to demonstrate that they consulted
"economic experts or developed any personal economic expertise"
in the business of horse breeding and boarding ., It is true that
the record does not show that the Helmicks consulted "economic
experts" . However, Mr . Helmick's tangential expertise as a
career land-use planner enabled him to recognize generally the
value of the favorable zoning status of the Helmicks' property-and fueled his hope to leverage that status into monopoly
profits .
We conclude that this factor--expertise--is neutral for
assessing whether the Helmicks had the requisite profit
objective .
- 26 ,3 .
Time and Effort Expende d
The fact that the taxpayer devotes much of his personal time
and effort to carrying on an activity, particularly if the
activity does not have substantial personal or recreational
aspects, may indicate a profit objective . Sec . 1 .183-2(b)(3),
Income Tax Regs . As respondent concedes, the mere fact that the
Helmicks kept and .cared for over 40 horses on their property
proved the Helmicks spent some time and effort in their horse
activity--particularly in light of the fact that the Helmicks
never hired any full-time employees . The record shows much more
than respondent concedes . Ms . Helmick was not otherwise employed
from 1993 to 2002 and typically spent her entire work week in the
conduct of the horse activity . Mr . Helmick also credibly
testified to the fact that he devoted his early mornings, his
evenings, and his weekends to the conduct of the horse activity .
The Helmicks clearly spent very substantial amounts of time in
the horse activity .
. This time was spent not riding horses or
attending horse shows but rather performing the dawn-to-dusk
labor--often grueling and strenuous labor--of .mucking stalls,
shoveling hay, caring for sick horses, and guiding mares through
the birthing process . The Helmicks' estimates of the hours they
spent seem overstated, but they also seem sincere, reflecting the
fact that their work was exhausting and--as profits failed to
materialize--discouraging . We attribute their exaggerations not
- 27 -
to deliberate dishonesty but to a lack of perspective that
resulted from their immersion in taxing and disappointing toil .
We conclude that this factor--time and effort--is strongly .
in the Helmicks' favor and indicates that they had the requisit e
profit objective .
4 .
The Expectation That Assets May Appreciate in
Valu e
A taxpayer's expectation that assets used in the activity
.may .appreciate .in :value• .and generate .an overall profit,ma y
indicate,a profit=objective . Sec .
1 .183-2(b)(4)7,
Income Tax,'
Regs . An overall profit is present if net earnings an d
appreciation are sufficient to recoup the`losse"s-sustained in the
"intervening years",`between a' given tax . year and the time at
which future profits,'were expected . See Bessenyey-V .
Commissioner,-45 T .C . 261, 274 (1965) :, affd .
379 F .2d 252
(2d, °
Cir . 1967) . Respondent . correctly notes'tthat the Helmicks' horse
activity sustained, losses from no later than 1985 . through at :
least 2002, but -respondent seems to assume that the requisite
profit motive as of any given year must . involve an expectation .
that even all past losses will be recouped ., so that the activity
will have generated a net profit over its entire course . . This .
position distorts :-the notion of profit motive for purposes 'of
section 183 .If .a natural disaster 'caused the death of .90 percent of a
rancher's herd and . resulted in a catastrophic . loss that could'
- 28 never, be recouped, but the rancher thereafter expected to
generate an overall prospective profit by breeding and selling
the remaining 10 percent of his herd on a foregoing basis, then
he could not be said to lack a profit objective after th e
disaster merely because he would never recoup the prior loss .
Likewise, . even assuming arguendo that the Helmicks could neve r
recoup their losses from years prior to 1997, if they expected to
generate an overall profit from 1997 onward, then they cannot be
said to lack a .profit objective with respect to those later years
merely because they would never recoup their losses from years
prior . to 1997 . Rather., the Helmicks meet their burden as to any
year for which they show that they expected eventually to recoup
losses sustained in the "intervening years" (to use the phrase
from Bessenyey ) between the current year and the hoped-for,
profitable future . Thus, we must . determine, as of each of the
relevant years, whether the Helmicks expected their horse
activity to generate an overall profit between that year and the
time at which future profits were expected .
The Helmicks' long-term goal was to profit from (i) creating
a self-perpetuating herd of purebred Arabian horses that would
increase in value over time, and-(ii) maintaining their
property's favorable zoning status as an equestrian center in the
middle of an otherwise residential neighborhood . In determining
whether the possibility of an overall profit is present, we take
29 into account the appreciation of both the herd and the zoning
status, because they were both assets that were used in the horse
activity . '
,Respondent correctly notes that "a vague and unauthenticated
notion" that'assets used in the Helmicks'° horse activity were
appreciating in value does not constitute-a bona fide expectation
that appreciation would be sufficient .to . .,recoup the losses
sustained during the intervening years .
La Musga v .
Commissioner , T .C . Memo . 1982-742 . However, the Helmicks
credibly testified that if they had liquidated their entire herd,
they would have suffered a "monstrous loss" . Furthermore, the
favorable zoning status of the Helmicks property was contingent
on keeping at least 40 horses on that property . If the Helmicks
liquidated their herd and ceased to keep horses on their
property, then they would lose that zoning status . While the
Helmicks are not appraisers, their estimate that preserving the
value of their herd and the favorable zoning status woul d
eventually yield an overall profit was plausible and--mor e
'The regulations provide that "all the facts and
circumstances" must be taken into account to determine the
activity or activities of the taxpayer . Sec . 1 .183-l(d)(1),
Income Tax Regs . Because of the close nexus between the horse
activity and the zoning status, i .e ., the zoning status was both
dependent on and necessary for the conduct of the activity, there
is no doubt that the zoning status was an asset used in the
activity--not in a separate real estate' investment activity . See
Keanini v . Commissioner , 94 T .C . 41, 46 (1990) .
30 pertinent here--was their genuine subjective assessment of the
value that their horse activity was generating and would continue
to generate .
We conclude that this factor--expectation that assets may
appreciate--is in the Helmicks' favor and indicates that they had
the requisite . profit objective .
5 .
The Taxpayers' Success in Similar or Dissimilar
Activitie s
Even if an activity is unprofitable, the fact that a
taxpayer has previously converted similar activities from
unprofitable to profitable enterprises may indicate a profit
objective with respect to the current activity .
Sec . 1 .183-2(b)(5), Income Tax Regs . The Helmicks do not allege,
nor does the record show, that either of them was ever involved
in a similar and profitable business venture . From 1995 to 1996
Mr . Helmick ran a part-time, private land-use consulting busines s
that-had at total of six clients over its brief
existence .
However, the record does not show whether this business wa s
profitable . Nor does it show any similarities . between that
business and the horse activity .
We conclude that this factor--success in similar or
dissimilar activities--is in respondent's favor .
31 6 .
History of Income or Los s
An important consideration is the taxpayer's history of
income or losses related to the activity . Sec . 1 .183-2(b)(6),
Income Tax Regs . A record of substantial losses over several
years may be indicative of the absence of a profit motive .
Golanty v . Commissioner , 72 T .C . 411, 426 (1979), affd . without
published opinion 647 F .2d 170 (9th Cir . 1981) . . In the tax years
at issue, and in prior years, the Helmicks claimed an impressive
string of losses from their horse activity on their Forms 1040 .
In the eleven years from 1992 through 2002, the Helmicks claimed
a total of over $400,000 of losses .
Section 1 .183-2(b)(6), Income Tax Regs ., provides that a
series of losses during the startup phase of an activity may not
necessarily be an indication that the activity is not engaged in
for profit . However, this Court has recognized that the startup
phase of an American horse-breeding activity is 5 to 10 years .
Engdahl .v . Commissioner , 72 T .C . 659, 669 (1979) . Since the
Helmicks ran their horse activity for no less than 8 years before
1993°and 12 years before the tax years at issue, we conclude that
their horse activity was not in its startup phase and this
exception does not apply .
We conclude that this factor--history of income o .r'loss--is
in respondent's favor .
32 7 .
.
Amount of Occasional Profit s
The amount and frequency of occasional profits earned from
the activity may indicate a .profit objective .
Sec . 1 .183-2(b)(7), Income Tax,Regs . Respondent correctly notes
that the Helmicks' horse activity sustained an unbroken string of
losses from no later than 1985 through at least 2002 .
See id . . Moreover, the record does not show that the Helmicks' .
horse activity was ever profitable .
We conclude that this,factor--occasional profits--is in
respondent's favor .
8 .
Financial Status of the Taxpayer s
A lack of income from sources other than the activity in
question may indicate a profit objective . In contrast,
substantial income from sources other than the activity in
question, particularly if offset by substantial tax benefits, may
indicate the activity is not engaged in for profit . Seca 1 .1832(b)(8), Income Tax Regs . The Helmicks did not have any
substantial income aside from Mr . Helmick's salary as a land-use
planner for Boulder and Larimer Counties, which never exceeded
$65,000 during 1998 to 2002 . In fact, even without the losses .
from the horse activity, the Helmicks' total taxable income
during that period would never have exceeded $50,000 in . any year,
33 -
and their marginal tax rate would never have exceeded
28 percent . 9
It is true, as respondent notes, that section 183 does not
apply just to "wealthy individuals",
Ranciato v . Commissioner ,
T .C . Memo . 1996-67 ; and taxpayers with modest tax liabilities can
have a motive to shelter those liabilities . However, "the wealth
of an individual is a fact to consider :in-determining the
applicability of section 183 . ."
Id .
The Helmicks' income tax
liability would have been higher without the claimed losses from
the horse activity, and the tax deficiencies calculated by the
IRS for the six years in issue total just over $40,000 . However,
the Helmicks' middle-class status meant that they could not
afford to maintain the horse activity simply for pleasure if
there was no hope of future profit . The Helmicks were not
wealthy individuals . whose unprofitable activities would suggest
an effort to shelter unrelated income with anticipated losses .
We do not find it credible that the Helmicks would keep and care
for 40 to 60 horses on their property-for the purpose of
sheltering the modest salary of a public servant .
'The notice of deficiency shows that, according to the IRS's
computations, the Helmicks' highest taxable income was in 2002,
in the amount of $49,733 . Married individuals filing jointly
with taxable income in that amount had a marginal tax rate o f
28 percent in the years in issue . See sec . 1(a) .
34
We conclude that this factor--financial status--is in th e
Helmicks' favor and indicates that they had the requisite profit
objective .
9 .
Elements of Personal Pleasur e
The absence of personal pleasure or recreation relating to
the activity in question may ._indicate a=profit objective .
Sec . 1 .183-2(b)(9 ) , Income'Tax Regs . -Respondent contends that
the Helmicks "concede -that they took personal pleasure in their
horse'breeding and boarding activity ."First, as respondent
correctly notes, "[t]he mere fact that a .taxpayer derives
personal pleasure from a particular activity .does not, per se,
demonstrate a lack of profit motive ."
Miller v . Commissioner ,
T .C . Memo . 2008-224 .
Second, ; respondent supports his contention that the Helmicks
took personal pleasure in their .horse activity with snippets o f
their testimony that are not fair to their context .
particular, respondent notes that "Mr . Helmick liked 'rubbing the
nose of a nice, warm, furry creature' ." Mr . Helmick made . that
statement in the context of explaining his profit objective and
the hard physical nature of keeping and caring for a herd of
horses :
the business was intended to ultimately supplement the
income, not to dodge paying taxes .
And, yes . Iz guess I enjoyed'it at times . You know,
rubbing the nose'of a nice, warm, furry creature is
- 35 good . The number of days I was'laid up with a bad back
or other things from moving all that feed are clearly
probably not items of personal pleasure .
On the basis of the record and the testimony cited by respondent,
we find that the Helmicks derived little personal pleasure from
the horse activity . The record does not 'show that riding horses
was-tle Helmicks' hobby . Nor does the record show that the
Helmicks used their horses to entertain family or friends . In
fact, Mr . Helmick's daughter often declined to visit him durin g
the weekends in order to avoid working with the horses .
Ultimately, respondent contends that the Helmicks kept an d
cared for dozens of horses on their property--without the help of
any full-time employees--solely for their personal pleasure .
Respondent further contends that the Helmicks contested Boulder
County's adverse determination that their horse activity violated
zoning law only so that they could continue to enjoy taking care
of those horses . If the Helmicks had paid a staff to handle the
day-to-day chores of the horse activity, and they had merely
visited the horses, it might be credible to assert that they
enjoyed maintaining a large herd . However, we cannot find on the
facts that the Helmicks derived so much pleasure from the company
of purebred Arabian horses that they were willing to spend all of
their, free time and lose thousands of dollars every year to
maintain a herd on the same property as their personal residence .
Even if the Helmicks had failed to maintain their property's
- 36 zoning status as an equestrian, center, they would still have bee n
entitled'to keep two horses .on their property . If .pleasure had
been the goal, then keeping and caring for 2 ;horses--rather than
40--would seem to have been preferable .
We conclude that this factor--elements of personal
pleasure--is in the Helmicks' favor and indicates that they had
the requisite profit objective .
Conclusion
We conclude that the Helmicks engaged in their horse
activity during tax years 1993 to 2002 with the actual and honest
objective of making a profit, and that section 183 is
inapplicable in this case .' °
To reflect the foregoing,
Decision will be entered fo r
petitioners .
"Since we hold that section 183 is inapplicable in this
.
case and the Helmicks are entitled to deductions for their losses
from their horse activity, it follows that the Helmicks are not
liable for the failure-to-file additions to tax and the accuracy
related penalties that the IRS determined in its notice of
deficiency under sections 6651(a)(1) and 6662 .
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.