DocketNumber: No. 8338-97
Judges: "Dean, John F."
Filed Date: 9/29/1999
Status: Non-Precedential
Modified Date: 11/20/2020
*379 Decision will be entered under Rule 155.
*380 MEMORANDUM OPINION
DEAN, SPECIAL TRIAL JUDGE: *381 Respondent determined a deficiency in petitioners' Federal income tax of $ 3,664 for the taxable year 1993. Unless otherwise indicated, section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
The issues for decision are: (1) Whether petitioners' horse-related activities were engaged in for profit; (2) whether petitioners are entitled to take a deduction for real estate taxes; and (3) whether petitioners are entitled to deduct mortgage interest.
Some of the facts have been stipulated and are so found. The stipulation of facts is incorporated herein by this reference. At the time the petition was filed, petitioners resided in Baltimore, Maryland.
Background
Immediately before moving to Baltimore, Maryland, petitioners resided in Shelby County, Tennessee. Petitioners owned two quarter horses and a pony, which they paid to have boarded at local stables. Their daughters were experienced riders with trophies earned from competition. Petitioners also claim to jointly own a house at 4429 Kerwin Drive in Shelby County, Tennessee, with Mrs. Hudnall's mother, who is also their tax adviser.
*382 Sometime shortly before 1993, petitioners moved to Baltimore, Maryland. They rented a dilapidated farm at 315 East Jarrettsville Road, where, after renovation, they lived and kept their horses without paying others to care for them. The 68-acre farm has since been subdivided and developed into town houses. Petitioners state that, initially, they were not aware of the owner's plans to subdivide the property, though they admit it was common knowledge to at least some of the neighbors. In 1994, however, it became clear to petitioners that the lessor had plans to develop the property.
Mr. Hudnall worked full time as an interstate truck driver while in Tennessee and continued to do so after the family's move to Maryland. Mr. Hudnall was away from his family most of the year at issue and did not actively participate on the farm. He reported wages of $ 38,721 from his truck driving in 1993.
Petitioners' stated intent in moving to Maryland was to launch Victoria Stables, a horse-boarding venture to have been managed by Mrs. Hudnall. Mrs. Hudnall had no formal training for horse boarding but asserts that she grew up around and had knowledge of horses because of her father, a longtime horse*383 hand.
Petitioners do not account for any business preparation other than selecting and renovating the farm. Petitioners do not claim that they advertised the business or had any detailed plans on how to conduct the business. All work on the farm, primarily cleaning stables, was done by Mrs. Hudnall or by family members lending a helping hand.
According to petitioners, their clientele consisted of a polo team, a short-term visitor from Brazil, and an independent horse trainer. Petitioners claim that their clients handled the daily maintenance of their horses. Petitioners produced neither receipts nor averments from any of the clients. Any other records evidencing the existence of the business were, somehow, lost. Petitioners could not remember the prices they charged.
Of the $ 1,500 monthly rent for the property, petitioners contend that $ 1,200 was attributable to the horse farm, with the remaining $ 300 accounting for the residence. Petitioners continued to rent the farm until sometime in 1994. Petitioners claim to have moved from the farm to an apartment at some point in 1993 but produce no lease agreement other than that for the farm residence.
Petitioners claim that their barns*384 were full at times. They spent a good deal of money in initially repairing the property, and according to petitioners, bought heavy machinery to facilitate a horse-boarding business. They reported gross receipts of only $ 2,260. Their Schedule C for 1993 lists expenses of $ 15,720 in rent, Petitioners produced property tax receipts from Shelby County, Tennessee, for 4429 Kerwin Drive addressed to Victoria A. Hudnall. Petitioners also presented*385 a letter from the Internal Revenue Service (IRS), dated January 21, 1997, rescinding an offer to allow a deduction for interest payments on the Kerwin Drive property as a "second home". In the notice of deficiency, respondent determined that petitioners' horse-boarding activity was not engaged in for profit, disallowing all of the Schedule C expenses. Respondent also disallowed deductions of mortgage interest and real estate taxes for the home at 4429 Kerwin Drive because of lack of substantiation. Discussion *386 Deductions are allowed under Whether the required profit objective exists is to be determined on the basis of all the facts and circumstances of each case. See After considering all the factors, we agree with respondent that petitioners did not have an actual and honest objective of making a profit because: (1) Petitioners enjoyed substantial personal pleasure and recreation from their horse-related activities; (2) they did not have any experience or expertise in operating a horse-related business; (3) petitioners' clientele remains unverified; and, (4) petitioners did not carry on their activities in a businesslike manner. See The weight and credibility of the evidence presented suggests that petitioners may have accepted some income for the use of their farm which defrayed the cost of their recreational horse- related activities. Still, the expectation of profit was lacking. Petitioners enjoyed substantial personal benefits from the use of the farm, but that, by itself, does not preclude their activities from being "for profit". *390 See When petitioners moved to Maryland and rented the farm at issue, they saved themselves the cost of boarding their own horses elsewhere and had greater access to the horses for their daughters. Petitioners' testimony describes activities which did not exceed what would be necessary to care for their own horses. Barns and stables were renovated. Family members helped in exchange for meals. Mrs. Hudnall cleaned stables. These activities do not go beyond those related to the care of one's own horses. Petitioners did not produce credible evidence that the horse-related activity had a chance of recovering the losses it had incurred. See The absence of any business documentation whatsoever is indicative that the activity was not engaged in for profit. While a taxpayer need not maintain a sophisticated cost accounting system, the taxpayer should keep records that enable the taxpayer to make informed business decisions. See In sum, on the basis of all the facts and circumstances, we hold that the record shows petitioners did not engage in their horse-related activity with the actual and honest objective of earning a profit. Nor have petitioners properly substantiated any expenses, other than the farm lease expense, for any activities which occurred, if at all, during 1993. We find that petitioners' deductions for their horse-boarding activity are limited to their reported gross income from the activity. See Petitioners may not deduct real estate taxes for 1993. Under section 164, a deduction is allowed for any State, local or foreign real property tax. See sec. 164(a)(1). Receipts produced by petitioners, however, in an attempt to substantiate their deduction, clearly state that the taxes were paid on March 17, 1997, not the year at issue. Respondent properly disallowed this deduction. Petitioners may not deduct mortgage interest*393 for 1993. Qualified residence interest is deductible if paid during the taxable year. See sec. 163(h)(2)(D). Petitioner produced no documentation of interest paid. Petitioners rely solely on a settlement offer sent to them by the IRS which would have allowed petitioners to deduct interest paid with respect to the property at issue as a "second home". Petitioners did not respond timely to the offer. The offer was rescinded by the IRS. Petitioners did not show at trial that they are entitled to the claimed deduction. See Rule 142(a); To reflect the foregoing, Decision will be entered under Rule 155.
1. On their Schedule C for 1993 petitioners list the $ 15,720 farm rent on line 20 "RENT OR LEASE--Machinery & Equipment--Other Business Prop."↩
2.
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