McKeever v. Commissioner, T.C. Memo 2000-288

  
 
<<FULL TEXT>>
 
T.C. Memo. 2000-288

 
UNITED STATES TAX COURT

 
RICHARD J. AND MELODIE D. MCKEEVER, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
 
Docket No. 4130-97. Filed September 14, 2000.
 
 
B. Paul Husband, for petitioners.
 
Jordan S. Musen and Michael H. Salama, for respondent.
 
 
MEMORANDUM FINDINGS OF FACT AND OPINION
 
MARVEL, Judge: Respondent determined the following deficiencies and accuracy-related penalties with respect to petitioners' Federal income taxes:
 
Accuracy-related penalty
Year Deficiency sec. 6662(a)
---- ---------- ------------------------
1991 $16,902 $3,380
1992 21,165 4,233
1993 29,073 5,815
 
 
After concessions, <<ENDNOTE 1>> the issues remaining for decision are whether petitioners' horse activity during the years at issue was an activity not engaged in for profit within the meaning of section 183(a), <<ENDNOTE 2>> and whether petitioners are liable for accuracy-related penalties on account of negligence under section 6662(a) for the years at issue.
 
 
FINDINGS OF FACT
 
Some of the facts have been stipulated and are so found. The first and second stipulations of facts are incorporated in this opinion by this reference.
 
 
THE PETITIONERS
 
Richard J. and Melodie D. McKeever (petitioners) resided in Norco, California, on the date they filed their petition in this case.
 
At all relevant times, Richard J. McKeever was the sole shareholder, chief executive officer, and general sales manager of Aero Industrial Alloy, Inc., a metals distributing business. Mr. McKeever does not hold a college degree.
 
Since at least 1986 and continuing through the date of trial, Melodie D. McKeever has been employed full time as a medical technologist by Kaiser Permanente. Mrs. McKeever received a bachelor of science degree in microbiology, with an emphasis in premed for veterinarians, from Long Beach State University in 1972.
 
Mrs. McKeever has been involved with horses her entire life. As a child, Mrs. McKeever spent time with horses on her grandfather's and uncle's ranches. When her father was stationed in Barstow, California, Mrs. McKeever cleaned stalls and did other volunteer work at the U.S. Marine Corps stables in exchange for lessons in riding and horsemanship. From 1975 until 1983, Mrs. McKeever was a member of Equestrian Trails, Inc., an organization devoted to maintaining trails throughout California. Mrs. McKeever served as the secretary of her local chapter for 2 years. Prior to 1988, Mrs. McKeever owned two horses: A grade gelding and a quarter horse mare.
 
 
COMMENCEMENT OF THE HORSE ACTIVITY
 
In 1987, petitioners began their horse activity. Petitioners did not have any prior employment history or business experience in breeding, showing, or selling horses. By the time they began their horse activity, petitioners had acquired only general experience in owning, caring for, and riding horses. Petitioners have never taken any classes or attended any programs regarding the financial or business aspects of horse breeding and showing.
 
Petitioners chose the paso fino breed for their horse activity for a variety of reasons. Petitioners admired paso finos for their beauty and smooth-gaited ride. Petitioners also decided that, because of their smooth ride, paso finos are good for people, like Mr. McKeever, who have back problems. Prior to starting their horse activity, petitioners did not research the marketability of the paso fino breed or determine how they were most likely to make money with paso fino horses. Petitioners did not seek business advice prior to purchasing their first paso fino horses.
 
In August 1987, petitioners purchased their first two paso fino horses, Chispa Nuac and Sol Rey de Pito, from Dorothy Sarnecky for a total of $15,000. During 1988, petitioners had discussions with Ms. Sarnecky and Charles Minter which confirmed petitioners' perception that paso finos have an excellent disposition and that they are marketable.
 
 
PETITIONERS' ADVISERS
 
In 1988, petitioners used Mr. Minter as a breeding and sales consultant and horse trainer. Petitioners did not pay Mr. Minter for his advice. Petitioners initially approached Mr. Minter for advice on breeding and showing Chispa Nuac, the mare they had purchased from Ms. Sarnecky. Mr. Minter has served on the board of directors and several committees, including the ethics committee, of the Paso Fino Horse Association. His ranch, Rancho Paso Bravo, has approximately 125 paso finos.
 
From 1988 through 1992, petitioners purchased at least 10 horses from or through Mr. Minter. All the horses were mares, except for one gelding included in a six-horse dispersal sale. Several of the horses purchased in that sale were untrained. Other horses purchased from or through Mr. Minter during the years 1988-92 had health problems which made them unsuitable for riding or showing. <<ENDNOTE 3>>
 
At some point during 1991, petitioners began consulting with other paso fino breeding and training experts. They did so after talking with successful owners and trainers at horse shows. As a result of these conversations, petitioners began to question their reliance on Mr. Minter's advice.
 
In March 1992, petitioners purchased six horses from Richard Howe in a package deal for $15,000. Mr. Minter brokered the deal. The package consisted of five mares and a gelding. One of the mares was trained, one was partly trained, and the rest were untrained.
 
Petitioners placed Bonita Bravo, a brood mare and show horse purchased as part of the package deal, in training under Mr. Minter and Favio Arias at Mr. Minter's ranch. During 1992 and while at Mr. Minter's ranch, Bonita Bravo suffered a cut to her tongue. <<ENDNOTE 4>> As a result of the injury, Bonita Bravo was never shown.
 
The injury to Bonita Bravo led petitioners to end their business relationship with Mr. Minter. Petitioners were unhappy with many of the horses they had purchased from Mr. Minter. Although Mr. Minter had a trade-in policy that allowed dissatisfied customers to trade in
unsatisfactory animals, the time limit on the policy effectively limited
its application to animals purchased for riding, as opposed to breeding stock. Moreover, although Mr. Minter arranged prepurchase veterinary examinations of animals he purchased for Rancho Paso Bravo, he advised petitioners not to obtain veterinary examinations of any horses purchased from him or through him. Petitioners did not have a veterinarian examine any of the horses purchased from Mr. Minter either prior to or immediately after their purchase.
 
During 1991, Mrs. McKeever hired Diego Palacio as a trainer for
petitioners' horses. Mr. Palacio introduced petitioners to Carlos Cortelezzi, D.V.M., who became petitioners' mentor and principal adviser concerning their horse activity. Dr. Cortelezzi first saw petitioners' horses in 1993, and since then, he has given petitioners general advice on improving the quality of their herd. <<ENDNOTE 5>> He also advised them to purchase several mares in 1994 from a third party. Several younger horses, including El Nino Cisco de Norco, were purchased with the mares. The total purchase price of the horses purchased in 1994 was $25,000.
 
 
BREEDING ACTIVITIES
 
Since the acquisition of their first mare in 1987, petitioners have
attempted to expand their herd through breeding, with mixed results. A number of setbacks have hampered petitioners' attempts to breed their horses.
 
In 1989, petitioners purchased three breedings from Mr. Minter's stallion, Bochica Tres, for a total of $8,000. Bochica Tres has been a "top-ten stallion" many times. However, the foals produced as a result of these breedings were all unsatisfactory and eventually sold at or below the cost of Bochica Tres' stud fee.
 
In 1994, petitioners began using one of their home-foaled horses,
Sindicato de Norco, as a breeding stallion. Although he sired two foals, neither foal met petitioners' quality standards, and Sindicato de Norco was gelded in 1997. <<ENDNOTE 6>>
 
The breeding history with respect to petitioners' brood mares through and including the years at issue is summarized in the following chart:
 
YEAR MARE BREEDING HISTORY BREEDING RESULT
---- ---- --------------------- -------------------
1989 Chispa Nuac <1> Bred to Bochica Tres Dominador Bravo
Adelita LaCe Bred to Rey La Joya Cassandra del Rey
Dulcinea del Rey Bred to Reyzuelo Bravo   Did not take
 
1990 Adelita LaCe Bred to Dios del Did not take
Mar Bravo
Bernardita LaCe <2> Bred to Bochica Tres Filly died at birth
Dulcinea del Rey Bred to Dios del Preciosa de Dios
Mar Bravo
Bonita Bravo Bred to Flamenco Sindicato de Norco
del Moro
Flint Oak Aura <3> Bred to Festival Dos Did not take
 
1991 Chispa Nuac       Bred to Bochica Tres Did not take
Adelita LaCe Bred to Dios del El Capital de Norco
Mar Bravo
Bernardita LaCe Bred to Bochica Tres Did not take
Bonita Bravo Bred to Paco Bravo Antoinetta de Norco
Flint Oak Aura Bred to Bochica Tres Did not take
 
1992 Chispa Nuac Bred to Bochica Tres Did not take
Adelita LaCe Bred to Bochica Tres Miranda de Norco
Bernardita LaCe Bred to Bochica Tres Did not take
Dulcinea del Rey Bred to Santo Humo La Duquesa de Norco
Flint Oak Aura Bred to Impetuoso La Tempestad
del Ocho de Norco
Vanescita de Bred to Bochica Tres La Briesa de Norco
Caroline
Bernardita LaCe Bred to Bochica Tres Did not take
Lobo Lucinda de Oro Bred to Impetuoso Did not take
del Ocho
 
1993 None
 
----------
1/ This mare was found to have an immune deficiency, resulting in
constant infections. She was successfully bred only once (1989). Further attempts to breed her were unsuccessful despite extensive medical treatment.
2/ As a result of a difficult delivery, this mare developed a large hematoma and bladder tumors. Further attempts to breed her were
unsuccessful.
3/ Eventually, petitioners discovered that Flint Oak Aura needed to
receive medication in order to carry a foal.

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