Golanty v. Commissioner, 72 T.C. 411

 
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STANLEY A. GOLANTY, LORRIEE M. GOLANTY, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
 
Docket No. 10325-76. Filed June 5, 1979.
 
 
Petitioners (Ps) operated an Arabian horse-breeding venture. Over a number of years, they incurred substantial losses in such operation, and in no year did the operation make a profit. Ps had income from other sources which allowed them to sustain the losses. Held, based on all the facts and circumstances, including the tax benefit expected from the deduction of the losses, the horse-breeding activity was not conducted for profit within the meaning of sec. 183, I.R.C. 1954.
 
 
Jeffrey L. Davidson and William K. Carr, for the petitioners.
 
Charles O. Cobb, for the respondent.
 
 
SIMPSON, Judge: The Commissioner determined deficiencies in the petitioners' Federal income taxes of $12,180 for 1972 and $9,031 for 1973. The only issue for decision is whether the petitioners' Arabian horse-breeding operation was an "activity * * * not engaged in for profit" within the meaning of section 183(a) of the Internal Revenue Code of 1954. <<ENDNOTE 1>>
 
 
FINDINGS OF FACT
 
Some of the facts have been stipulated, and those facts are so found.
 
The petitioners, Stanley A. Golanty and Lorriee M. Golanty, husband and wife, maintained their legal residence in Long Beach, Calif., at the time they filed their petition in this case. They filed their joint Federal income tax returns for 1972 and 1973 with the Internal Revenue Service, Fresno, Calif. Mrs. Golanty will sometimes be referred to as the petitioner.
 
The petitioner was born and raised on a farm in Iowa. She obtained her first experience in handling and riding horses when, as a youngster, she helped her grandfather gather the cattle on their farm. The petitioner obtained a bachelor's degree in biological science from Long Beach State College (Calif.) in 1964. She has done postgraduate work in anatomy, physiology, and chemistry, although she has not completed her master's degree. The petitioner also took a course in equine sciences at the University of California at Los Angeles. She is licensed with the State of California, and has a national license, as a medical technologist. Dr. Golanty, the petitioner's husband, is a medical doctor who practices medicine on a full-time basis.
 
After the petitioner received her bachelor's degree in 1964, she was unable to find a satisfactory position in her profession. Sometime in 1966, an acquaintance of Dr. Golanty informed him of an Arabian breeding stallion that was for sale. Dr. Golanty had just inherited some money, and he and the petitioner discussed the possibility of buying the horse. The horse was a 5 year-old Arabian stallion name Tazzrouf. The petitioner and Dr. Golanty went to see Tazzrouf and to talk to the owner, Sam Whitney.

 
The petitioner was somewhat hesitant to purchase Tazzrouf because she did not have experience in handling a stallion. She was allowed to work with the horse for 3 weeks, and thereafter, she decided to purchase him. Tazzrouf was standing at stud, and the petitioner worked out an arrangement with Mr. Whitney to leave the horse with him and to share the fees for the stud services.
 
Since Mr. Whitney's facility was not patronized by the best clientele in the horse business, he suggested that the petitioner enter Tazzrouf in public horse shows to expose him to a better class of horse breeders and thereby increase his marketability as a stud. He showed her how to prepare a horse for the show ring, explained the details of transporting a horse to a show, and introduced her to Margaret Haverstock. Ms. Haverstock's occupation was that of a swimming teacher. At the time the petitioner was introduced to her, she was an amateur horsewoman who intended to become a professional at showing horses. Ms. Haverstock owned a son of Tazzrouf which she was showing and promoting, and she agreed to show Tazzrouf for the petitioner. She did not receive compensation for her services, since she could not receive a salary and maintain her amateur status, but the petitioner reimbursed her for expenses, fees, and meals.
 
The petitioner prepared Tazzrouf for a show in Santa Barbara, Calif., rented a trailer and took him there, and Ms. Haverstock showed him in the show ring. Tazzrouf placed sixth in the large stallion class, thus placing over an imported horse which had received a great deal of publicity. The petitioner was very pleased with his performance, since Tazzrouf was a domestic-bred horse. When Mr. Whitney learned how well the horse had done, he suggested that the petitioner hire a professional trainer who could work with Tazzrouf on a regular basis, and that she talk to Dan Weisen, who represented that he was trained in Vienna at the Spanish Riding School.
 
Mr. Weisen had a ranch in Walnut, Calif., which is about 30 miles from the petitioner's home in Long Beach. She visited Mr. Weisen's facility, saw that he had some horses of excellent breeding, and sometime in 1967, she decided to hire him to train and show Tazzrouf. Although Tazzrouf was already trained to be ridden under a saddle, Mr. Weisen was to train him in the various things a horse is required to demonstrate in a show, such as walking, trotting, and cantering. Since the petitioner had no experience in showing a horse, he was also to instruct her so that she would eventually be able to show the horse herself. She paid Mr. Weisen $150 per month for his services, which included his compensation for handling Tazzrouf at shows. The petitioner also paid the entrance fees of the horse shows and for transporting the horse to the shows. Mr. Weisen primarily showed the horse as a driving horse, an English pleasure horse, and as a breeding horse. He also agreed to promote Tazzrouf to those who inquired about breeding services. The petitioner hoped that she would receive sufficient stud fees to defray the cost of the horse shows. At that time, the fee for breeding a horse was $300 to $350. However, the petitioner never received any breeding fees from Mr. Weisen, nor did he ever inform her that he had bred Tazzrouf.
 
After the petitioner moved Tazzrouf to Mr. Weisen's ranch, she went there every morning to make sure that he was working with the horse. Mr. Weisen suggested that the petitioner work with and ride other horses at his facility, even those that had never been ridden. He told the petitioner that it was a necessary part of her training to receive experience in handling horses at all phases of their development. She was thrown from a horse she was riding at the instruction of Mr. Weisen, and she broke a bone in her left hand. After she recovered from that injury, Mr. Weisen suggested that she learn how to jump horses. As a result of that experience, she broke her right hand.