Respondent argues that for purposes of section 183, a taxpayer must prove that profit was the primary purpose for engaging in the activity. In Simon v. Commissioner, supra at 500, the Court of Appeals for the Third Circuit, the court to which this case is appealable, stated:

It is well established that in order to take a deduction for expenses incurred in carrying out a trade or business the taxpayer must have entered into the venture with the primary and predominant purpose and objective of making a profit. See Thomas v. Commissioner, 792 F.2d 1256">792 F.2d 1256, 1259 (4th Cir. 1986); Tallal v. Commissioner, 778 F.2d 275">778 F.2d 275, 276 (5th Cir. 1985). "Primary" in this context means "of first importance" or "principally", while "profit" means economic profit independent of tax savings. Malat v. Riddell, 383 U.S. 569">383 U.S. 569, 572 (1966); accord, Surloff v. Commissioner, 81 T.C. 210">81 T.C. 210, 233 (1983); Seaman v. Commissioner, 84 T.C. 564">84 T.C. 564, 588 (1985). * * * ^*649

The existence of the requisite profit objective is to be determined by examining all the facts and circumstances, giving greater weight to objective facts than to the taxpayer's statement of intent. Siegel v. Commissioner, 78 T.C. 659">78 T.C. 659, 699 (1982); sec. 1.183-2(a) and (b), Income Tax Regs.Section 1.183-2(b), Income Tax Regs., lists nine nonexclusive factors relevant to the issue of profit objective. ^{Section 1.183-2(b), Income Tax Regs., contains a nonexclusive list of objective *650 factors to be considered in deciding whether an activity is engaged in for profit. The factors are: (1) The manner in which the taxpayer carries on the activity; (2) the expertise of the taxpayer or the taxpayer's 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, which are earned; (8) the financial status of the taxpayer; and (9) elements of personal pleasure or recreation. Allen v. Commissioner, supra at 33. No single factor is determinative. Petitioners have the burden of proving that they had the requisite profit objective and that respondent's determination is incorrect. Welch v. Helvering, 290 U.S. 111">290 U.S. 111 (1933).}

BUSINESSLIKE MANNER

The fact that a taxpayer carries on the activity in a businesslike manner and maintains complete and accurate books and records may indicate that the activity was engaged in for profit. Sec. 1.183-2(b)(1), Income Tax Regs.

Petitioners *651 kept books and records for their horse racing and breeding activity. Petitioners kept detailed ledgers by date and check number in which they tracked monthly expenses.

Petitioners' detailed bookkeeping does not, by itself, demonstrate an intent to generate a profit. Golanty v. Commissioner, 72 T.C. 411">72 T.C. 411, 430 (1979), affd. without published opinion 647 F.2d 170">647 F.2d 170 (9th Cir. 1981). A lack of profit objective may exist where a taxpayer fails to abandon unprofitable methods, change operations, or adopt new techniques in an attempt to improve profitability. Sec. 1.183-2(b)(1), Income Tax Regs. Accordingly, the maintenance of detailed books and records may reveal the mere "trappings" of a profit objective, particularly when a taxpayer fails to produce income statements, profit plans, or business plans created to alter operations in an attempt to reverse mounting losses. Osteen v. Commissioner, T.C. Memo 1993-519">T.C. Memo. 1993-519, affd. in part and revd. in part 62 F.3d 356">62 F.3d 356 (11th Cir. 1995).

Petitioners contend that before conducting any racing or breeding activities, they consulted with individuals who had experience in racing horses who helped them establish a business plan. Petitioners also argue that since *652 commencing their activity, they have attempted to increase profitability by reducing expenses.

Although petitioners sought advice from several successful horse trainers and breeders, their testimony in this regard was vague and the meetings yielded no concrete plan of operation. Petitioners decided to commence their activity with little concept of the expenses involved or of the steps required to achieve cost efficiency and an eventual profit. See Daley v. Commissioner, T.C. Memo. 1996- 259.

With respect to petitioners' assertion that they constantly analyzed and modified their business plan and operation in order to minimize expenses, petitioners have failed to introduce specific credible evidence to indicate that increased profit potential would result. The record shows that expenses over 16 years of operating their horse racing and breeding activity have generally remained constant or increased. ^{*653 7 years prior and 5 years after that period have remained constant or increased as time passed. Moreover, veterinary expenses account for less than 10 percent of overall expenses in all years. Even assuming that petitioners were able to reduce their board and veterinary expenses to zero for all years, total losses would have only been reduced by approximately 40 percent. In the face of successive or increasing losses, petitioners have failed to materially alter their operations or their prospects of generating profits. Golanty v. Commissioner, supra at 428.}

EXPERTISE

Preparation for an activity by extensive study of its accepted business, economic, and scientific practices, or consultation with those who possess expertise in the activity, may indicate that the taxpayer has a profit objective. Sec. 1.183- 2(b)(2), Income Tax Regs.

Mr. Taras grew up on a farm and worked with horses during those years. Mr. Taras also became a member of the Pennsylvania Breeders Association and educated himself through industry publications. Petitioners sought out, consulted with, and hired professional racehorse trainers and breeders throughout the years of operation of their activity. Petitioners *654 followed the advice of Ms. Audrey Kraynik, who represented that she was a licensed trainer experienced in training racehorses. With respect to the breeding of their horses, petitioners consulted with two horse breeders, Mr. Tom Regal and Mr. Paul Mills. Petitioners sought and received professional training and breeding advice.

TIME DEVOTED TO THE ACTIVITY

The fact that a taxpayer devotes much of his personal time and effort to carrying on an activity may indicate an intention to derive a profit. Sec. 1.183-2(b)(3), Income Tax Regs.

Petitioners contend that they personally devoted a substantial amount of time to the activity. Ms. Taras testified that she spent approximately 30 hours per week on projects related to the activity, including: Bookkeeping, feeding the horses, cleaning the stalls, and exercising the horses. Mr. Taras testified that during the years at issue, he spent approximately 39 to 45 hours per week taking care of the horses, feeding and exercising the horses, and performing routine veterinary services.

During the period in which petitioners each claim they spent a large number of hours on their horse activity, they also participated in other time-demanding activities. *655 Mr. Taras has owned and managed a framing and truss fabrication business in which he employed and managed between 5 and 10 persons to help him do on-site framing of homes and fabrication of trusses while he claimed to have worked approximately 40 or more hours per week on petitioners' racehorse activity. Similarly, Ms. Taras worked at a full-time job requiring 40 hours per week at Bethlehem, while claiming that she contributed 30 hours per week year after year in petitioners' horse activity.

EXPECTATION THAT ASSETS MAY APPRECIATE

The appreciation of assets, including land used in the activity, is to be considered in determining whether a taxpayer intended to derive a profit from his activity. Sec. 1.183-2(b)(4), Income Tax Regs. An expectation that assets used in the activity may appreciate may be an indication of profit objective. Engdahl v. Commissioner, 72 T.C. 659">72 T.C. 659, 669 (1979).

Petitioners resided on a 1-acre parcel of land during the years in issue. Petitioners maintained their horses on a separate but adjacent 2-acre parcel of land, which was owned by Mr. Taras' parents. Because petitioners do not own the land upon which they kept their horses during the years at issue, we do *656 not consider the land an asset that may be used in determining whether petitioners had a profit objective.

Petitioners' horses were the only assets used in the activity that might have appreciated. Petitioners argue that the quality of their horses improved over time and that on the basis of this improvement, petitioners expected to recoup their prior losses. Mr. Taras testified that each of three horses bred from the stallion Norquestor and owned by petitioners has a value of "close to $15,000." Petitioners' net losses from their horse operation total $465,134 for all the years of operation. ^{*657 that petitioners believe they are worth, it would still not offset the losses reported from their horse activity in 1995. It is, therefore, unlikely that petitioners will generate profits on the sale of their horses in the near future that would recoup more than a fraction of the past or current losses.}

PAST SUCCESSES IN ACTIVITY

The fact that a taxpayer has engaged in similar activities in the past and converted them from unprofitable to profitable enterprises may indicate that he is engaged in the present activity for a profit, even though the activity is presently unprofitable. Sec. 1.183-2(b)(5), Income Tax Regs. Petitioners have offered no evidence that before commencing their horse racing and breeding activity, they had engaged in similar activities that were profitable.

HISTORY OF INCOME AND LOSSES

A taxpayer's history of income, losses, and occasional profits with respect to an activity may indicate the presence or absence of a profit objective. Golanty v. Commissioner, 72 T.C. at 426; sec. 1.183-2(b)(6), Income Tax Regs.*658 Respondent contends that petitioners consistently incurred losses on their horse racing and breeding activity over many years, indicating that they did not have the requisite profit objective.

A horse racing and breeding activity may be deemed to be engaged in for profit despite consistent losses during the initial startup phase. Golanty v. Commissioner, supra at 427. We have previously found that the startup phase for an activity involving horses may be between 5 and 10 years. Engdahl v. Commissioner, supra at 669; Phillips v. Commissioner, T.C. Memo. 1997-128. Losses sustained beyond the period normally required to generate profits may be an indication of a lack of profit objective unless such losses occurred because of unforeseen or unfortuitous circumstances. Petitioners sustained losses on their horse racing and breeding activity for 16 consecutive years.

Petitioners argue that their losses occurred because of unforeseen circumstances. A portion of petitioners' losses can be explained by a series of unfortunate events beyond their control. In 1983, petitioners were involved in a dispute with their first trainer, Ms. Audrey Kraynik, over the ownership of a stud horse named Distinctive *659 Jet, which resulted in the loss of Distinctive Jet. Also, as a result of the dispute, petitioners could not register their foals from Distinctive Jet with the Jockey Club, which prevented petitioners from racing any of the foals.

Petitioners' horses sustained numerous injuries, which contributed to their losses. Some of the injuries were as follows: Liberty Knoll broke a bone in her leg, an accident which ended in her death; Talitha jumped out of a trailer while being transported; Bad Memories suffered bone chips in her knee; Captain's K developed tendon problems; Naughty Castle suffered injuries to her leg and foot; and several of petitioners' other horses suffered injuries as well. These injuries prevented petitioners from racing the injured horses.

A number of the aforementioned injuries occurred to horses which were originally purchased by petitioners in 1980. The injuries to Liberty Knoll, Captain's K, Bad Memories, and Naughty Castle occurred in 1980 and 1981. The injury to Ruth Ann K occurred in 1983. The injuries to Traders K, Tekla Tekla Two, and Captain Konik occurred after the years in issue. We recognize that these injuries to some of petitioners' horses caused some of the *660 losses. However, petitioners did not offer any objective evidence to explain how injuries between 1980 and 1983, and subsequent to 1990, prevented them from operating a profitable activity during the years 1987, 1988, 1989, and 1990. Indeed, despite the fact that petitioners sustained consistent losses over 16 consecutive years, they continued to engage in horse racing and breeding.

AMOUNT OF PROFITS

The amount of profits earned in relation to the amount of losses incurred, the amount of the investment, and the value of the assets in use may indicate a profit objective. Sec. 1.183-2(b)(7), Income Tax Regs. The opportunity to earn substantial profits in a highly speculative venture may be sufficient to indicate that the activity is engaged in for profit even though only losses are produced. Id.; see Dawson v. Commissioner, T.C. Memo 1996-417">T.C. Memo. 1996-417. In determining whether the taxpayer entered into the activity for profit, a small chance of making a large profit may indicate the requisite profit objective. Sec. 1.183-2(b)(7), Income Tax Regs.

Petitioners may have believed that there was a possibility of producing a champion horse that could generate a substantial amount of revenue and correspondingly *661 large profits. However, the fact that petitioners suffered substantial losses year after year without significantly changing their method of operation in a meaningful way supports the inference that profit was not their primary reason for engaging in this activity. Ranciato v. Commissioner, 52 F.3d 23">52 F.3d 23, 26 (2d Cir. 1995), vacating and remanding T.C. Memo 1993-536">T.C. Memo. 1993-536.

TAXPAYERS' FINANCIAL STATUS

The fact that the taxpayer does not have substantial income or capital from sources other than the activity may indicate that the activity is engaged in for profit. Sec. 1.183-2(b)(8), Income Tax Regs. The legislative history of section 183(a) and (b) indicates a particular concern about wealthy individuals attempting to generate paper losses for the purpose of sheltering unrelated income. Ranciato v. Commissioner, supra at 25-26; S. Rept. 91-552, at 95-100 (1969), 3 C.B. 423">1969-3 C.B. 423, 484-487. In this respect, the Senate report focused primarily on farming operations, including specifically the racing of horses, and noted an overall concern about taxpayers with substantial income. S. Rept. 91-552, supra at 95-98, 1969-3 C.B. at 485-486; see also Ranciato v. Commissioner, supra at 25 n.3.

On their *662 Federal joint income tax returns, petitioners reported wage income of $26,690, $27,458, $29,576, and $31,804 in the years 1987, 1988, 1989, and 1990, respectively. Petitioners also reported on Schedules C income of $33,283, $32,261, $25,517, and $38,926 from their framing and truss fabrication business in 1987, 1988, 1989, and 1990, respectively. In each of the years at issue, the excess losses generated by petitioners' horse racing and breeding activity were used to offset their otherwise taxable income. On the other hand, petitioners were actually sustaining economic losses that were offsetting relatively modest amounts of wage and business income. On balance, this factor generally supports petitioners' position.

PERSONAL PLEASURE OR RECREATION

The absence of personal pleasure or recreation relating to the activity indicates the presence of a profit objective. Shane v. Commissioner, T.C. Memo. 1995-504; sec. 1.183-2(b)(9), Income Tax Regs.

Petitioners argue that they did not ride their horses or make them available for others to ride and, therefore, there were no elements of pleasure or recreation involved. While it is true that petitioners did not ride their horses, *663 nor permit others, except qualified jockeys, to ride them, it is obvious that petitioners' racehorses were not the kind of horses that are ridden around the farm for pleasure. The record shows that petitioners attended races at the track, watched their horses race, and also gambled on horses while they were in attendance at the races. In the final analysis, we are convinced that petitioners' enjoyment of being engaged in horse racing and breeding was the most significant reason why they continued to engage in this activity despite their record of consistent losses.

CONCLUSION

Having considered the factors listed in section 1.183- 2(b), Income Tax Regs., all contentions presented by the parties, and the facts and circumstances of this case, we believe that petitioners honestly hoped that their horse racing and breeding activity would generate a profit and that profit was one of their objectives. However, in order to prevail, petitioners must show that their horse racing and breeding activity was engaged in primarily for the purpose of making a profit. Simon v. Commissioner, 830 F.2d at 500; Warden v. Commissioner, T.C. Memo 1995-176">T.C. Memo. 1995-176, affd without published opinion 111 F.3d 139">111 F.3d 139 (9th Cir. 1997).

Petitioners *664 engaged in horse racing and breeding activities for at least 16 years, losing more than $465,000 without coming near a profit in any of those years. Petitioners initiated their activity without developing a business plan commensurate with that which would be expected from someone who was motivated primarily by a profit objective. Throughout all the years of continuous losses, petitioners did not materially alter their mode of operation. Petitioners maintained two full-time jobs and had access to sufficient property with which they could maintain a number of racehorses that they personally enjoyed breeding and racing.

Based on the entire record, we are not convinced that petitioners' primary objective was to make a profit. Rather, the evidence is more consistent with the conclusion that petitioners enjoyed breeding and racing their horses and, therefore, were willing to sustain continuing losses despite the improbability of profits. Consequently, we hold that petitioners' horse racing and breeding activity was not primarily engaged in for profit within the meaning of section 183(c).

Respondent also determined additions to tax under section 6651(a)(1) for petitioners' failure to file *665 their 1987 through 1990 returns. Section 6651(a)(1) imposes an addition to tax of 5 percent of the amount of the tax due for each month a return is delinquent, up to a maximum of 25 percent. The addition to tax is not applicable if it is shown that the failure is due to reasonable cause and not willful neglect. Sec. 6651(a)(1); United States v. Boyle, 469 U.S. 241">469 U.S. 241, 245 (1985). Petitioners have the burden of proving that their failure to file was due to reasonable cause and not willful neglect. Niedringhaus v. Commissioner, 99 T.C. 202">99 T.C. 202, 220-221 (1992). Petitioners filed their tax returns for the tax years 1987, 1988, and 1989 on August 23, 1991, and their tax return for the tax year 1990 on June 19, 1992. Petitioners have failed to show that their failure to file returns for the taxable years 1987 through 1990 was due to reasonable cause and not willful neglect. Petitioners are liable for the additions to tax under section 6651(a)(1) for the taxable years 1987 through 1990.

Decision will be entered under Rule 155.

APPENDIX

	1980	1981	1982	1983	1984	1985
Income
Gross	$ 11,317	$ 2,265	$ 5,606	$ 10,045	$ 4,550	$ 8,650
Board	0	0	1,283	0	0	0
Total	11,317	2,265	6,889	10,045	4,550	8,650

Expenses
Advertising	--	163	353	--	9	23
Car	--	--	--	--	--	--
Commissions	--	--	--	--	--	--
Depreciation	14,180	9,072	10,039	10,650	12,433	8,524
Dues & Pub-
lications	15	--	--	6	95	94
Freight	--	--	--	--	--	--
Legal & Pro-
fessional	--	1,550	1,500	--	--	45
Repairs	--	--	--	126	--	832
Supplies	--	--	145	--	--	718
Taxes	1,350	--	--	450	--	12
Feed	1,311	2,014	7,016	4,529	11,948	7,313
Veterinary &
Medical	3,029	4,455	2,058	4,206	2,123	1,855
Training	21,883	20,885	10,425	7,571	--	7,875
Board	1,000	--	--	2,409	5,426	3,904
Blacksmith	--	--	--	--	--	--
Tack	--	--	--	--	--	--
Tags	35	67	36	38	12	--
Jockey	2,740	1,204	898	1,035	--	--
Farrier	200	191	572	568	559	825
Stud fees	--	--	--	--	--	--
Other	0	0	0	557	826	1,033
Total	45,743	39,600	33,041	32,145	33,430	33,053
Net Income
Horses	(34,426)	(37,335)	(26,152)	(22,100)	(38,880)	(24,403)

*666 [TABLE CONTINUED]

	1986	1987	1988	1989	1990	1991
Income
Gross	$ 500	$ 0	--	$ 6,005	$ 1,930	$ 1,000
Board	0	0	0	0	0	0
Total	500	0	0	6,005	1,930	1,000

Expenses
Advertising	51	415	--	9	13	11
Car	74	--	--	--	--	--
Commissions	--	--	--	76	40	40
Depreciation	4,669	4,938	4,333	5,535	2,015	1,475
Dues & Pub-
lications	--	67	30	--	--	50
Freight	--	--	--	400	--	--
Legal & Pro-
fessional	48	1,500	--	--	--	--
Repairs	608	1,518	622	--	--	--
Supplies	95	147	49	55	--	830
Taxes	--	--	--	--	--	--
Feed	5,253	10,659	10,625	4,403	4,537	3,483
Veterinary &
Medical	4,510	2,280	774	1,568	810	2,546
Training	--	--	--	3,499	1,934	1,454
Board	1,409	2,700	8,305	8,145	15,245	12,513
Blacksmith	694	471	305	--	112	288
Tack	--	12	18	--	--	--
Tags	--	--	--	--	760	--
Jockey	--	--	--	--	--	--
Farrier	--	--	--	--	--	575
Stud fees	--	--	--	--	--	--
Other	0	0	0	185	200	139
Total	17,411	24,705	25,061	23,875	25,666	23,404

Net Income
Horses	(16,911)	(24,705)	(25,061)	(17,870)	(23,736)	(22,404)

[TABLE CONTINUED]

	1992	1993	1994	1995	Totals
Income
Gross	$ 6,082	$ 6,010	$ 6,996	$ 4,409	$ 75,365
Board	0	0	0	0	1,283
Total	6,082	6,010	6,996	4,409	76,648

Expenses
Advertising	--	--	--	25	1,072
Car	--	--	--	--	74
Commissions	--	--	--	--	156
Depreciation	603	547	450	166	89,627
Dues & Pub-
lications	225	40	120	40	782
Freight	--	--	--	--	400
Legal & Pro-
fessional	--	--	--	--	4,643
Repairs	296	--	4,914	504	9,420
Supplies	21	1,234	436	2,394	6,124
Taxes	--	--	18	12	1,842
Feed	4,476	7,862	8,132	7,960	101,521
Veterinary &
Medical	1,716	5,180	5,068	3,383	45,560
Training	8,798	24,832	9,684	27,014	145,854
Board	11,000	1,941	5,037	6,868	85,902
Blacksmith	280	642	475	471	3,738
Tack	--	--	--	--	30
Tags	--	655	2,100	960	4,662
Jockey	--	--	--	--	5,877
Farrier	1,315	1,980	200	900	7,885
Stud fees	--	8,000	9,000	6,500	23,500
Other	80	0	0	94	3,113
Total	28,810	52,913	45,634	57,291	541,782

Net Income
Horses	(22,728)	(46,903)	(38,638)	(52,882)	(465,134)

*667

Footnotes

1. Petitioners concede that the notice of deficiency for 1987 improperly allowed a gambling loss deduction in the amount of $3,701, thereby erroneously reducing taxable income by $3,701.↩
2. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩

3. The following is a list of the horses purchased and the calculation of gain or loss on each horse:

↩

Horse's	Year	Purchase	Sale
Name	Purchased	Price	Proceeds	Gain/loss
Dublin Bay	1980	$ 6,500	$ 500	($ 6,000)
Captain's K	1980	10,000	-0-	(10,000)
Liberty Knoll	1980	11,000	-0-	(11,000)
Bad Memories	1980	5,000	-0-	(5,000)
Naughty Castle	1980	10,500	110	(10,390)
Distinctive Jet	1980	2,500	-0-	(2,500)
Talitha	1980	2,500	380	(2,120)
Royale Finale	1981	900	-0-	(900)
Hermit's Glory	1981	1,637	-0-	(1,637)
Fab's Last	1981	1,637	600	(1,037)
Ruth Ann K	1982	1,000	-0-	(1,000)
Kings Linn	1983	5,000	3,200	(1,800)
Anda	1983	2,500	300	(2,200)
Kashmir	1983	-0-	-0-	-0-
Thaddius	1983	-0-	500	500
Snickers	1983	-0-	200	200
Tamara	1983	-0-	315	315
Scoundrel	1984	-0-	260	260
Filly	unknown	-0-	440	440
Colt	unknown	-0-	140	140
2 fillies	unknown	-0-	290	290
Dublin Bay's	1986	-0-	425	425
colt
Anda's colt	1987	-0-	300	300
2 colts	1988	-0-	1,000	1,000
Apple Writer	1990	2,000	500	(1,500)

Total		$ 62,674	$ 9,460	($ 53,214)

4. See appendix.
5. The Supreme Court also addressed the standard to be applied when it stated: "We accept the fact that to be engaged in a trade or business, the taxpayer must be involved in the activity with continuity and regularity and that the taxpayer's primary purpose for engaging in the activity must be for income or profit." Commissioner v. Groetzinger, 480 U.S. 23">480 U.S. 23, 35↩ (1987).
6. In order to determine whether, and to what extent, sec. 183 and the regulations thereunder apply, the activity or activities of the taxpayer must be ascertained. Sec. 1.183-1(d)(1), Income Tax Regs.↩ Generally, the Commissioner will accept the characterization by the taxpayer of several undertakings as either a single activity or separate activities. Id. Petitioners have treated their horse racing and breeding operations as one activity, and respondent has accepted this treatment.
7. See appendix.↩
8. See appendix.↩
9. In 1988, petitioners sold two colts which they bred for $1,000. We assume that the proceeds were allocated pro rata between the two horses sold.↩