UNITED STATES TAX COURT

T.C. Memo. 2001-266

UNITED STATES TAX COURT

VICTOR A. AND MARION W. PRIETO, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 12606-99.

Filed October 4, 2001.

Gregg M. Anderson and Richard W. Craigo, for petitioners.

Peter C. Rock, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

VASQUEZ, Judge:

Respondent determined the following

deficiencies in and penalties on petitioners’ Federal income tax:

Year

Deficiencies

Penalties

Sec. 6662(a)

1994

1995

$155,045

152,790

$31,009

30,558

All section references are to the Internal Revenue Code in effect

- 2 for the years in issue, and all Rule references are to the Tax

Court Rules of Practice and Procedure.

After concessions,1 the issues for decision are:

(1)

Whether petitioners’ horse activity was an activity engaged in

for profit; and (2) whether petitioners are liable for penalties

pursuant to section 6662 for negligence.

FINDINGS OF FACT

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

The stipulation of facts, the supplemental stipulation of facts,

the stipulation of facts with respect to subsequent years, the

stipulation of settled issues, and the attached exhibits are

incorporated herein by this reference.

At the time they filed

the petition, Victor Prieto (Dr. Prieto) and Marion Prieto (Mrs.

Prieto) resided in San Mateo, California.

I.

Dr. Prieto’s Medical Practice

Dr. Prieto is an orthopedic surgeon.

has been in private practice.

Since 1984, Dr. Prieto

In 1984, the partnership of

Jensen, Watson & Light (JWL) hired him at a salary of $65,000 per

year.

In 1986, Dr. Prieto made partner at JWL.

At this time,

his salary increased to between $130,000 and $150,000 per year.

Since 1988, Dr. Prieto has run his own successful medical

practice in San Francisco, California.

in her husband’s medical practice.

1

Mrs. Prieto also worked

She spends a considerable

Respondent concedes that sec. 469 is not applicable.

- 3 amount of time working in the medical practice.

Dr. Prieto’s

medical practice employed Lori Sasaki as a bookkeeper.

From 1991 through 1998, petitioners had no substantial

income-producing assets or any other substantial source of income

other than Dr. Prieto’s medical practice.

Petitioners reported

the following net profit from Dr. Prieto’s Schedule C, Profit or

Loss From Business, for his orthopedic medical practice:

Year

Net Profit

1991

1992

1993

1994

1995

1996

1997

1998

$456,451

548,350

586,073

650,898

695,620

794,424

636,523

737,684

Total

5,106,023

From 1991 through 1998, the net profit of Dr. Prieto’s medical

practice averaged $638,253.

II.

The Horse Activity

A.

Background

From the age of 4 to 5, Mrs. Prieto rode horses on the farm

where she lived.

From the age of 16 to 18, Mrs. Prieto owned a

horse that was an ex-barrel racer.

None of these horses were

show jumpers.

Since she was a teenager, Mrs. Prieto had wanted to be

involved in the horse field.

Mrs. Prieto always enjoyed horses

- 4 and had a strong interest in horses.

Dr. Prieto also enjoyed

horses.

Petitioners have two children:

Jill and Claire.

Jill was

born on April 17, 1980, and Claire was born on July 7, 1982.

As

parents, petitioners were actively involved in their daughters’

activities.

Some of the activities petitioners’ daughters

participated in included swimming and dancing.

Petitioners would

organize dance troops, transport children to events, and arrange

for obtaining uniforms.

In 1987, when Jill was 7 and Claire was

5, Jill and Claire began riding horses.

Whatever activity petitioners and their family got involved

with they did it “110 percent”.

Petitioners’ daughters became

interested in horses, so petitioners and their family got deeply

involved with horses.

Jill and Claire’s involvement with horses

became a family event where Mrs. Prieto would often be ringside

organizing lunches and dinners and Dr. Prieto would do his

medical charts and watch Jill and Claire ride the horses.

As

with swimming and dancing, petitioners’ children became deeply

involved with horseback riding.

By 1990, petitioners owned three ponies for their daughters

to ride.

Prior to May 1, 1991, the date the activity in question

commenced, Jill and Claire competed in horse shows.

Petitioners became interested in starting the horse activity

because of the recreational riding and showing activities that

- 5 Claire and Jill had participated in since 1987.

Prior to 1987,

when Jill and Claire got involved with horses, Mrs. Prieto had no

experience with show jumpers or showing horses.

Petitioners told

Jill and Claire if they wanted to participate in horseback riding

and perhaps compete on a high level, then petitioners would start

the horse activity.

B.

Startup

Starting in May 1991, petitioners engaged in a horse

activity under the name Fordham Farms that included purchasing,

training, showing, and selling “hunter”, “jumper”, and

“equitation” horses.

None of the horses in the horse activity

were held for breeding or bred.

“Hunter” is a category of horse competition that grades each

horse on its form, style, and technique as the horse competes on

a course of multiple hurdles.

“Jumper” is a category of horse

competition that grades the horse and rider on their ability to

jump fences cleanly and quickly.

The courses have tight turns

and angled fences making the jumps more difficult than those in

the hunter category.

“Grand Prix Jumper” is a category of horse

competition that also grades each horse on its ability to jump

fences cleanly and quickly; however, the courses are of a higher

difficulty than in the jumper category (higher fences, multiple

hurdles, etc.).

“Equitation” is a category of horse competition

- 6 that grades each rider on his form.

Petitioners’ daughters

mostly competed in equitation events.

Petitioners used the same ponies that their children rode

for pleasure to start the horse activity.

At the start of the

horse activity, petitioners purchased Welsh ponies for the horse

activity.

They chose Welsh ponies because that was the type of

horse their daughters were riding.

When they first started the horse activity, petitioners

talked to veterinarians, trainers, and other owners and read

periodicals about hunter and jumper horses.

Petitioners also

owned books about ponies, hunters, and jumpers.

Petitioners

attended seminars, clinics, and award banquets put on by horse

organizations.

C.

Employees Hired by Petitioners

Around May 1991, petitioners hired Joe Norick to be the

horse activity’s trainer.

In the middle of 1993, petitioners

hired Nicole Shahinian (Nicole) to ride their horses.

Shortly

thereafter, petitioners decided to replace Mr. Norick with a new

trainer.

One of the reasons petitioners decided to replace Mr.

Norick was because Jill and Claire could not ride the horses

petitioners owned.

Petitioners replaced Mr. Norick with Nicole.

At this time, Nicole was responsible for training the

horses, giving their daughters lessons, and supervising all

aspects of the horse activity (including supervising people

- 7 petitioners hired to clean the stalls and groom, braid, and feed

the horses).

Nicole’s background was as a “junior” rider;2 she

had no experience as a trainer or running a business.

At this

time, Nicole had just turned 18 years old.

Petitioners hired other people besides Mr. Norick and Nicole

to work in the horse activity.

Petitioners hired Scott Wilson as

an assistant trainer, Bill Nissen as veterinarian, Ms. Sasaki as

bookkeeper, Patrick Hurley as accountant for the horse activity,3

and Carlos Soriano as a groom.

At horse shows, when the horse

activity needed extra help, petitioners hired people to braid the

horses, horseshoers, and a night watchman.

Petitioners sent the horse activity’s records to Ms. Sasaki

to sort the records into separate file folders, and each year

petitioners received a box from Ms. Sasaki with the records

sorted.

Ms. Sasaki also inputted the financial records of the

horse activity onto a computer.

Petitioners reviewed the books

and records of the horse activity and their tax returns.

D.

How Petitioners Conducted the Activity

Petitioners created a logo for the horse activity and had

“business cards” and stationery that bore this logo.

Petitioners

also used envelopes bearing the name Fordham Farms.

2

3

“Junior” refers to riders under 18 years old.

Petitioners had a separate accountant, Jay Witt, who

prepared their individual income tax returns.

- 8 Petitioners did not have a written business plan or make a

budget for the horse activity.

sale for every horse they owned.

Petitioners did not have bills of

Some of the bills of sale for

horses were in petitioners’ names rather than the name of the

horse activity.

Petitioners insured only some of their horses.

Petitioners would not force people to pay money owed to them.

Jill and Claire advised petitioners which horses to purchase and

sell.

The horse activity’s opening balance sheet for 1994 listed

several horses as assets that had been reported as sold, or as

dying, in 1993.

This opening balance sheet also listed “Cody

Williams” as an asset.

Cody Williams is not a horse; he is a

person.

Petitioners placed an advertisement in a horse show program

that pictured Jill and Claire riding horses, wished them good

luck in 1995, and congratulated them on their 1994 equitation

medals and participation in the Marshal-Sterling Children’s

Jumper League.

Petitioners also placed one advertisement in a

publication called “Horse’s International”.

Petitioners kept records called “business goals” for 1994

and 1995.

Petitioners came up with these goals.

These goals

were informal ideas that petitioners hoped to implement.

the goals for 1994 were:

Some of

(1) Leasing or selling “Make Believe”,

(2) selling “Fashion Page”, (3) developing “Desire Me” and

- 9 selling it for either $75,000 as a “pre-green” or $125,000 to

$150,000 as a “first year green hunter”, and (4) selling “Rising

Sun” for $35,000 to $40,000.

Other goals were more general such

as purchasing and developing a grand prix horse and a junior

jumper, increasing the number of horses shown, and increasing the

use of trucks to transport horses.

Petitioners did not sell Fashion Page in 1994.

Petitioners

did sell Make Believe, Desire Me, and Rising Sun in 1994.

The

sale price and petitioners’ original purchase price of each of

these horses was as follows:

Horse

Purchase Price

Sale Price

Make Believe

Desire Me

Rising Sun

$22,500

22,500

1,000

$20,000

16,000

1

Petitioners' goals for 1995 were more general than those for

1994.

They included increasing hauling income, increasing their

client base, developing their horses, purchasing junior jumper

and equitation horses, getting their horses to the shows, and

having Nicole stay on as their trainer.

E.

Boarding the Horses

The horses and all other items necessary for the horse

activity were maintained at the following locations (all located

in California):

- 10 Dates

Boarding Facility

5/91 - 12/93

1/94 - 4/95

4/95 - 8/95

8/95 - 12/95

Location

Portola Valley Training Center

Pebble Beach Equestrian Center

Portola Valley Training Center

Hidden Valley Ranch

Portola Valley

Pebble Beach

Portola Valley

Hidden Valley

The boarding facility in Portola Valley was a 30-minute drive

from petitioners’ home in San Mateo, California.

The boarding

facility in Pebble Beach was a 1.5- to 2-hour drive from

petitioners’ home.

Rather than drive to Pebble Beach,

petitioners rented a house near Pebble Beach, California, where

petitioners and their children would stay on weekends they

visited the boarding facility.

Hidden Valley is in southern California and was not near

petitioners home.

Nicole recommended to petitioners that they

move their horses from northern California to southern

California.

When petitioners moved their horses to southern

California in August 1995, Nicole moved in with her then

boyfriend (and future husband), who, at the time, lived in

southern California.

F.

Expenses/Losses/AGI

The total entry fees and show costs reported by petitioners

for the horse activity were as follows:

Category

1991

1992

1993

1994

1995

1996

1997

1998

Entry fees

Show costs

Reimbursements

$21,831

4,065

(0)

$37,396

22,792

(22,820)

$79,240

20,991

(43,851)

$49,057

21,978

(30,417)

$56,168

28,030

(0)

$882

0

(0)

$91,656

0

(0)

$66,471

0

(0)

Total

25,896

37,368

56,380

40,618

84,198

882

91,656

66,471

- 11 Excluding 1996, the average yearly entry fee and show cost

expense of the horse activity was $57,512.

During the years in issue, petitioners showed the horses

they owned at least 46 times.

In 1996, petitioners’ horses that

were “serviceable” were “in the ring” at shows petitioners

attended.

In 1996, petitioners’ horse named “Fran’s Guy” was in

the ring at horse shows one to two times per show attended and

was in the ring at least 30 times over the course of the year.

This meant that during 1996 petitioners entered their horses in

at least 15 shows.

Petitioners reported the following ordinary income and

losses from the horse activity:

Year

Ordinary Income/(Loss)

1991

1992

1993

1994

1995

1996

1997

1998

($147,118)

(366,350)

(427,947)

(373,694)

(361,854)

13,703

(455,624)

(437,051)

Petitioners incurred $1,676,963 of losses through 1995 and

$2,555,935 of losses through 1998.

During these years, the loss

from the horse activity averaged $319,492.

losses averaged $367,091.

Excluding 1996, the

- 12 Petitioners reported the following adjusted gross income

(AGI):

Year

AGI

1991

1992

1993

1994

1995

1996

1997

1998

$343,212

235,390

181,237

290,909

293,567

785,116

157,006

245,474

After excluding the losses (and ordinary income) reported by the

horse activity, petitioners’ “readjusted” AGI is as follows:

Year

Readjusted AGI

1991

1992

1993

1994

1995

1996

1997

1998

$490,330

601,740

609,184

664,603

665,421

771,413

612,630

682,525

From 1991 through 1998, petitioners’ readjusted AGI averaged

$635,981.

G.

Petitioners “Attempts” To Cut Costs

During the years in issue, petitioners spoke with Nicole

about cutting the horse activity’s costs and increasing its

income.

Petitioners, however, only discussed with Nicole the

fact that the horse activity was losing money; petitioners never

informed Nicole of the amount of the losses (which totaled

hundreds of thousands of dollars).

- 13 H.

Personal Nature of Activity/Elements of Pleasure

During the years in issue, petitioners and their children

spent almost every weekend with the horses.

Dr. Prieto, Mrs.

Prieto, Jill, and Claire used the weekends spent with the horses

as their time to unwind.

lessons on the horses.

Jill and Claire would ride and take

Jill and Claire enjoyed riding horses.

Mrs. Prieto also rode the horses.

In addition to watching their

daughters compete at the horse shows, petitioners attended

hospitality tents located at the horse shows.

In January 1994, petitioners sold a horse named “Browning”.

In a letter thanking the purchaser of Browning for buying the

horse, petitioners wrote that they would be using the money from

this transaction to purchase a quality junior jumper for their

daughter Jill.

Dr. Prieto only did “simple” tasks for the horse activity.

He felt that his college and medical education entitled him not

to muck4 the stalls.

During the years in issue, Mrs. Prieto, Claire, and Jill

were members of the following horse organizations:

The American

Horse Shows Association, the Pacific Horse Show Association, the

California Professional Horsemen’s Association, the United States

Equestrian Team, and the NorCal Hunter Jumper Association.

4

To “muck” means “to clear of manure or filth”.

Webster’s Collegiate Dictionary 762 (10th ed. 1996).

In

Merriam

- 14 order for Claire and Jill to compete in horse shows, they had to

be members of these organizations.

I.

Source of Money for the Activity

Initially, petitioners had a sufficient amount in savings

accumulated to fund the startup of the horse activity.

At times,

however, the horse activity had cash shortages, and petitioners

needed extra money to purchase horses.

On these occasions,

petitioners borrowed money from Dr. Prieto’s medical practice

line of credit and transferred funds out of the medical practice

bank accounts to provide working capital for the horse activity.

J.

End of the Activity

As of October 2000, petitioners were closing up the horse

activity.

At that time, Jill was 20 and was in Belgium (since

February 2000) working with horses, and Claire was 18.

OPINION

The Horse Activity

Section 183(a) provides generally that, if an activity is

not engaged in for profit, no deduction attributable to such

activity shall be allowed except as provided in section 183(b).

Section 183(c) defines an "activity not engaged in for 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."

The U.S. Court of Appeals for the Ninth Circuit, to which an

- 15 appeal in this case would lie, has held that for a deduction to

be allowed under section 162 or section 212(1) or (2), a taxpayer

must establish that he engaged in the activity with the primary,

predominant, or principal purpose and intent of realizing an

economic profit independent of tax savings.

See Wolf v.

Commissioner, 4 F.3d 709, 713 (9th Cir. 1993), affg. T.C. Memo.

1991-212; Indep. Elec. Supply, Inc. v. Commissioner,

781 F.2d 724, 726 (9th Cir. 1986), affg. Lahr v. Commissioner,

T.C. Memo. 1984-472.

The expectation of profit need not have been reasonable, but

it must be bona fide.

See Golanty v. Commissioner, 72 T.C. 411,

426 (1979), affd. without published opinion 647 F.2d 170 (9th

Cir. 1981); sec. 1.183-2(a), Income Tax Regs.

Whether the

requisite profit objective exists is determined by looking to all

the surrounding facts and circumstances.

Golanty v.

Commissioner, supra at 426; sec. 1.183-2(b), Income Tax Regs.

Greater weight is given to objective facts than to a taxpayer's

mere after-the-fact statement of intent.

Indep. Elec. Supply,

Inc. v. Commissioner, supra; 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.

proof.

5

Petitioners bear the burden of

Rule 142(a).5

Cf. sec. 7491(a), effective for court proceedings arising

in connection with examinations commencing after July 22, 1998.

(continued...)

- 16 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 loss with respect to the

activity; (7) the amount of occasional profits, if any, from the

activity; (8) the financial status of the taxpayer; and (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 but rather all facts

and circumstances must be taken into account, and more weight may

be given to some factors than to others.

See sec. 1.183-2(b),

Income Tax Regs.; cf. Dunn v. Commissioner, 70 T.C. 715, 720

(1978), affd. 615 F.2d 578 (2d Cir. 1980).

The evidence submitted to the Court establishes that

petitioners’ primary, predominant, or principal motive for

engaging in the horse activity was not for profit.

5

(...continued)

Petitioners do not contend that their examination began after

July 22, 1998, or that sec. 7491 is applicable to their case.

- 17 A.

Manner in Which the Activity Is Conducted

Petitioners hired professionals to keep books and records

and to prepare their returns.

They also hired professionals to

work in the horse activity as grooms, braiders, horseshoers, and

veterinarian.

While these facts weigh in petitioners favor, they

are not the only facts presented to the Court.

While petitioners did keep records, they did not have bills

of sale for all their horses, and the records appear to be

faulty.

Dr. Prieto could not explain why the show costs and

entry fees were so low for 1996.

Mrs. Prieto testified that they

understated the horse activity’s show costs for 1996.

We agree.6

Even though they had records reporting substantial losses,

petitioners never developed a written business plan or made a

budget.

Dr. and Mrs. Prieto testified that the “business plan”

of the horse activity was to buy, train (develop), show, and sell

horses.

This is not a plan; this is merely a statement of what

the horse activity did.

While petitioners wrote out “business

goals” for 1994 and 1995, they never developed a plan to achieve

these goals.

Petitioners claimed to have hired other riders, such as

Annalee Bennet, to show the horses.

The horse show entry forms

for 1994 and 1995 list only petitioners’ daughters and Nicole as

6

We note that the likely effect of this understatement was

to create the appearance of a profit for the horse activity for

1996 when none in fact existed.

- 18 riders of petitioners’ horses.

witness.

Ms. Bennet was not called as a

We infer that her testimony would not have been

favorable to petitioners.

See Wichita Terminal Elevator Co. v.

Commissioner, 6 T.C. 1158, 1165 (1946), affd. 162 F.2d 513 (10th

Cir. 1947).

Petitioners did not attempt to collect debts owed to them.

Additionally, when petitioners fired Mr. Norick, they replaced

him with Nicole who was 18 years old at the time and, although

she had been a junior rider, had no experience as a trainer or

running a business.

Furthermore, petitioners decided which

horses to buy and sell based upon which horses their daughters

wanted.

Petitioners further rely on the testimony of Russell Stewart

to support the conclusion that they conducted the horse activity

in a businesslike manner.

Mr. Stewart was qualified as an expert

in his knowledge of and in judging grand prix jumper, hunter, and

equitation horses.

Subsequent to the years in issue, Mr. Stewart

rode petitioners’ horses and transported petitioners’ horses.

did not review petitioners’ books and records.

He

Furthermore, all

the facts for Mr. Stewart’s report were supplied by petitioners

or their representatives.

The purpose of expert testimony is to assist the trier of

fact to understand evidence that will determine the fact in

issue.

See Laureys v. Commissioner, 92 T.C. 101, 127-129 (1989).

- 19 We do not find Mr. Stewart’s conclusory report to be of any

assistance to the Court and accordingly disregard it.

On the whole, we conclude that this factor weighs against

petitioners.

B.

Expertise of Petitioners and Their Advisers

Dr. Prieto had no significant experience with horses prior

to starting the horse activity.

Mrs. Prieto’s only experience

with horses was riding them as a child and a teenager.

Petitioners claimed to have talked with many professionals before

entering the horse activity.

These conversations, however,

mainly focused on the fact that a person could make a lot of

money or lose a lot of money buying and selling horses.

Petitioners did not discuss how to conduct the horse activity to

make it profitable, how to train the horses, or how to manage the

horse activity.

Other than being advised to “get a trainer”,

petitioners received no useful advice before beginning the horse

activity.

C.

This factor also weighs against petitioners.

Time and Effort Expended by Petitioners

Mrs. Prieto claimed to work 40 hours a week, and Dr. Prieto

claimed to work 20 to 30 hours a week, in the horse activity.

Other than petitioners’ self-serving, conclusory statements,

there is no evidence to support this assertion.

orthopedic surgeon.

Dr. Prieto is an

Mrs. Prieto works in his office and spends a

considerable amount of time doing so.

According to Nicole,

- 20 during the workweek petitioners were not usually with the horses.

Accordingly, we do not accept petitioners’ testimony.

See Wood

v. Commissioner, 338 F.2d 602, 605 (9th Cir. 1964), affg. 41 T.C.

593 (1964); Tokarski v. Commissioner, 87 T.C. 74, 77 (1986).

Accordingly, this factor also weighs against petitioners.

D.

The Activity’s History of Income or Loss

A record of substantial losses over several years may be

indicative of the absence of a profit motive.

Commissioner, 72 T.C. at 426.

Golanty v.

As was noted by the Court on the

record at trial, the losses are large enough to be described as

substantial or huge.

loss is 1996.

The only year petitioners did not report a

This appears to be due to the incorrect reporting

of expenses for that year, and as we noted supra the likely

effect of the understatement of expenses was to create the

appearance of a profit for the horse activity when none in fact

existed.

Petitioners’ losses from 1991 through 1998 averaged

well over $300,000 per year.

Furthermore, petitioners’ history of losses belies any

notion that it was operated for profit.

While a person may start

out with a bona fide expectation of profit, even if it is

unreasonable, there is a time when, in light of the recurring

losses, the bona fides of that expectation must cease.

See

Filios v. Commissioner, 224 F.3d 16 (1st Cir. 2000), affg. T.C.

Memo. 1999-92.

This factor also weighs against petitioners.

- 21 E.

Petitioners’ Financial Status

Substantial income from sources other than the activity in

question, particularly if the activity's losses generate

substantial tax benefits, may indicate that the activity is not

engaged in for profit.

Sec. 1.183-2(b)(8), Income Tax Regs.

From 1991 through 1998, petitioners’ net profit from Dr. Prieto’s

medical practice averaged $638,253.

This factor weighs against

petitioners.

F.

Elements of Personal Pleasure

The absence of personal pleasure or recreation relating to

the activity in question may indicate the presence of a profit

objective.

Sec. 1.183-2(b)(9), Income Tax Regs.

Petitioners and

their children derived substantial amounts of pleasure from the

horse activity.

Based on the facts of this case, we find that

this factor weighs against petitioners.

G.

Additional Facts

The following additional facts also support our conclusion

that the horse activity was not entered with the primary,

predominant, or principal purpose of making a profit.

The

evidence established that petitioners’ daughters mainly rode the

horses in equitation competitions.

the rider and not the horse.

Equitation competitions grade

Dr. Prieto also testified that he

went to the horse shows to watch his daughters compete.

Dr. Prieto testified that petitioners never purchased horses

- 22 for their children and that they never told anyone that the

horses were for their children.

His testimony, however, was

impeached by a letter petitioners wrote in which they state that

they were using money specifically to buy a horse for Jill.

The

fact that petitioners did not purchase horses in their daughters’

names is unpersuasive.

Additionally, within months of Jill’s leaving the country

and Claire’s turning 18 petitioners terminated the horse

activity.

H.

Conclusion

After reviewing the entire record, we conclude that

petitioners did not engage in the horse activity with the

primary, predominant, or principal purpose and intent of making a

profit within the meaning of section 183.

Section 6662 Penalty

Section 6662 imposes a penalty on an underpayment of tax

required to be shown on a return.

Section 6664(c)(1) provides

that no penalty shall be imposed if it is shown that there was

reasonable cause for the underpayment and that the taxpayer acted

in good faith.

The determination of whether a taxpayer acted

with reasonable cause and in good faith depends upon the facts

and circumstances.

See sec. 1.6664-4(b)(1), Income Tax Regs.

Reliance on the advice of an accountant may demonstrate

reasonable cause and good faith.

See id.

- 23 Respondent argues that petitioners’ treatment of the horse

activity’s expenditures as business expenditures was negligent or

an intentional disregard of rules or regulations.

We conclude

that petitioners reasonably and in good faith relied on their

accountants to determine whether petitioners, as a legal matter,

were entitled to deduct the horse activity’s expenses.7

Accordingly, petitioners are not liable for the accuracy-related

penalties for 1994 and 1995.

In reaching all of our holdings herein, we have considered

all arguments made by the parties, and to the extent not

mentioned above, we find them to be irrelevant or without merit.

To reflect the foregoing,

Decision will be entered

under Rule 155.

7

Mr. Hurley, the accountant for the horse activity,

specialized in preparing tax returns for people who operated

horse activities. Petitioners gave him all the records prepared

by the horse activity’s bookkeeper and all the relevant facts so

that Mr. Hurley could prepare the tax returns for the horse

activity.