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PLEASE READ THE ARTICLE THAT IS ATTACHED AND ANSWER THE DISCUSSION QUESTIONS THAT IS ALSO ATTACHED. THERE IS NO WORD LIMIT, JUST ENSURE THAT YOU GIVE YOUR THOUGHT AND ANSWER EACH QUESTION ACCURATELY. apa format

Read the Burger case. Please post your thoughts on the following questions:

1. What was the judge’s reasoning for his ruling?

2. Do you agree with his ruling? Why or why not?

3. How would you advise a similarly situated client in may have an interest in starting a business given this case? What specific advice would you recommend?

Date and Time: Saturday, March 13, 2021 2:11:00 PM EST

Job Number: 138834942

Document (1)

Burger v. Commissioner

, 1985 Tax Ct. Memo LEXIS 107

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Burger v. Commissioner

United States Tax Court

October 7, 1985.

Docket No. 11731-83.

Reporter
1985 Tax Ct. Memo LEXIS 107 *; T.C. Memo 1985-523; 50 T.C.M. (CCH) 1266; T.C.M. (RIA) 85523

THOMAS C. BURGER and MARIAN E. BURGER,
Petitioners v. COMMISSIONER OF INTERNAL
REVENUE, Respondent

Counsel: David E. Price and Steven C. Bradley, for the
petitioners.

Brett J. Miller and Reid M. Huey, for the respondent.

Opinion by: JACOBS

Opinion

MEMORANDUM FINDINGS OF FACT AND

OPINION

JACOBS, Judge: Respondent determined deficiencies
in petitioners’ Federal income taxes for 1978, 1979 and
1980 in the following amounts:

Go to table1

[*3] After concessions, the issues for decision are (1)
whether petitioners’ dog breeding activity was an
“activity not engaged in for profit” within the purview of
section 183 1 and (2) if the activity was one engaged in
for profit, whether certain deductions disallowed by
respondent are allowable.

1 All section references are to the Internal Revenue Code of
1954, as amended and in effect during the years at issue.

FINDINGS OF FACT

Some of the facts have been stipulated and are so
found. The stipulation of facts and attached exhibits are
incorporated herein by this reference.

Petitioners, Thomas C. Burger and Marian E. Burger,
husband and wife, resided in Evansville, Indiana, at the
time they filed their petition. At all times relevant,
Thomas Burger has been a surgeon in a solo private
practice, as well as the medical director (on a part-time
basis) for Aluminum Company of America (“Alcoa”) at
their Warrick, Indiana facility.

Sometime during 1973 or 1974, when Dr. Burger was
49 years of age, he discovered that he had an affliction
of the right hand known as Dupuytren’s Contracture,
which ultimately results in the fingers being clamped
down into the palm. In its [*4] advanced stage, the
disease would render the practice of surgery impossible.
The progression of the disease is unpredictable; the
loss of hand function can occur at any time from one to
twenty years after onset of the affliction.

When he became aware of his affliction, Dr. Burger
began to plan for his eventual retirement from the
private practice of medicine. He sought an activity
which would allow him and his wife to work together and
which could be re-established outside of the Evansville
area if he and his wife were to move to a warmer
climate. They decided to breed dogs because it
afforded them the desired mobility and was an activity
which they could do together.

Having decided on this course, but without any prior
experience with animal breeding 2, petitioners embarked

2 Dr. Burger had owned thoroughbred horses as an absentee
owner for three years during the early 1960’s but abandoned
that venture when the losses got unwieldy and he realized that
his input and control of the operation was limited.

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on an educational program in which they read books
and journals on the subject, attended seminars on dog
breeding, and consulted with dog breeders. 3 Further,
they consulted an accountant with regard to the keeping
of adequate books and records, and an attorney with
regard to the need for obtaining a zoning variance 4 , a
kennel license, and whether or not to incorporate.

[*5] Petitioners decided to breed Afghan hounds under
the kennel name Shantoma. Afghan hounds, when fully
grown, are relatively large dogs. The show dogs have
long hair on their heads, ears, bodies and legs. Afghan
hounds can be bred after reaching approximately 2
years of age; the gestation period is 63 days. Top
Afghans command sales prices of several thousands of
dollars. After consultation with Dr. Gerda Kennedy of
Shangrila Kennels, an Afghan hound breeder in Tulsa,
Oklahoma, petitioners purchased three Afghan hounds
from her, as follows:

Go to table2

Tutenkyor and Kunasata were each 2 years of age at
the time of purchase and thus could be immediately
campaigned.

The value of a breeding dog derives from the dog’s
show reputation, its bloodline and its ability to breed.
The dog’s reputation is developed and cultivated on the
dog show circuit. In a dog show, a dog that places well
in the various competitions earns points. These points
are accumulated over the dog’s show career until 15
points [*6] are garnered, at which time the dog is
designated a champion and the dog’s name is prefaced
with the letters “Ch.” A successful breeding program
ideally includes dogs that have been “finished” to
champion and that have pedigrees evidencing an
ancestry of champions.

When acquired, Kunasata had five points toward
champion, and petitioners expected to finish and breed
her within one year. Petitioners’ first show with
Kunasata, in Nashville in October, 1975, was
disappointing. However, in their second attempt,
Kunasata won Best of Breed. In May, 1976, in a
competition in St. Louis, Missouri, Kunasata was
finished to champion. Petitioners decided to continue

3 In discussing the breeding of dogs with breeders, petitioners
did not discuss the financial hazards involved.

4 Petitioners’ residence was located in a zone restricted to
single family houses.

showing Kunasata with the desire that she would
accumulate a sufficient number of points (during 1976 or
1977) to qualify as the Best Afghan in the United States
for that particular year, even though campaigning
Kunasata for an additional year was anticipated to cost
$20,000 and there would be a delay in her breeding.

The pinnacle of Kunasata’s career was reached the
following February. On February 12, 1977, Kunasata
was named Best of Breed at the Afghan Hound Club of
America National Specialty Show, held in New York
City. Three [*7] days later, she repeated as Best of
Breed at the Westminster Kennel Club Show, also in
New York City. This double win by an Afghan bitch had
never before, or since, been accomplished. Shortly
before Kunasata won at the Westminster, Mrs. Burger
was offered $25,000 for the animal, but the offer was
declined.

Pursuant to petitioners’ purchase agreement for
Kunasata, Dr. Kennedy had the right to provide the stud
for Kunasata’s first three breedings, as well as the right
to select and receive the second and third puppies of
the litter. When Kunasata came into season (i.e., in
heat) in March, 1977, petitioners requested that Dr.
Kennedy provide the stud to be bred to Kunasata;
however, Dr. Kennedy did not do so. Six months later,
when Kunasata next came into season, Dr. Kennedy
again failed to provide the promised stud. With the
breeding of Kunasata already delayed by her extended
campaigning, and in view of Dr. Kennedy’s repeated
failure to provide the stud, petitioners bred Kunasata to
their own Tutenkyor (now a champion) in March, 1978.
On May 13, 1978, Kunasata whelped a litter (the 1978
litter) of 13 pups, 9 of which were born alive (six male
and three female). However, during [*8] the whelping,
Kunasata suffered a ruptured uterus requiring a
hysterectomy, thus preventing her from further
breedings.

Petitioners were forced by this turn of events to
reassess their plans. They decided not to immediately
sell the puppies from the 1978 litter, but rather to retain
them for a period of time in order to evaluate which ones
should be kept for eventual breeding purposes.

The first sale from the 1978 litter occurred on
September 21, 1979, when petitioners sold a hound to a
customer in Japan, for which they received $3,000 plus
shipping and related charges. Also, in 1979, petitioners
gave away two dogs that neither could be used in their
breeding program nor sold.

In February, 1980, petitioners bred a male dog from the

1985 Tax Ct. Memo LEXIS 107, *4

1978 litter, Sarouk, to Adhara. The whelping which
occurred on April 3, 1980 (the 1980 litter), produced
nine pups (five female and four male). One pup from
the 1980 litter died two months later of parvo virus. At
this point in time, petitioners had nine Afghan hounds
(the three they purchased originally and six remaining
from the 1978 litter) and eight pups. During 1980, they
sold one hound from the 1978 litter, Shiraz, for $2,000
and one pup, [*9] Ariadne, for $700. From 1981
through 1983, they sold four of the five hounds
remaining from the 1978 litter for a total of $12,250 —
Tabriz for $500, Bijar for $750, Ghiordes for $3,500, and
Sarouk (after having finished him to champion) for
$7,500 (thr latter two sales were to customers in Japan).
The last, Bergama, was kept as petitioners’ brood bitch.
During these same years, they sold five of the seven
hounds remaining from the 1980 litter for a total of
$3,400, with prices ranging from $150 to $2,250.

Petitioners owned and attempted to breed other dogs
over the years. They received as a gift in 1975, a
Borzoi bitch, but this dog died while en route to a show
in California during the first half of 1977. They acquired
for $750 on July 2, 1977, a male Shih Tzu which they
intended to finish to champion. After having finished him
to champion, they acquired on January 3, 1979, for
$1,000, two female pups, both direct descendant’s of
the top Shih Tzu of all time (Akaba’s Pinkerton Man).
However, a genetic defect from in-breeding resulted in
whelpings in late 1980 and early 1981 in which half of
the pups died and almost all of those that lived had
physical deformities. Only [*10] one of the eight live
Shih Tzu pups eventually whelped was ever of show
quality.

Petitioners operated Shantoma out of their home, which
necessitated capital renovations to both the inside and
outside of the house. In 1979, they purchased (for a
room used as an office) and oriental rug for $3,550,
Japanese prints for $700, and wallpaper for $240, as
well as other items, which they deducted as a business
expense. Additionally in 1980, they purchased (for the
outside) urns, concrete statutes, and a concrete Buddha
for $1,034.50, and an oriental iron gate for $1,271.80,
as well as various electrical appliances, which they
claimed as a business expense.

Although their house was located in a residential area
petitioners did not seek a zoning variance. Further, they
did not license any of their dogs despite an ordinance
requiring animal licensing, nor did they seek a license to
run a kennel.

To facilitate their extensive travel to various shows,
petitioners purchased a motor home which was used
exclusively in relation to the dog breeding activity and
which they converted to accommodate their needs.

The amount of time Dr. Burger was able to devote to
Shantoma varied over the years [*11] due to the
demands of his medical practice and his employment
with Alcoa.Nevertheless, he undertook the routine care
of the animals in the early morning and evening hours
and on the weekends. Mrs. Burger testified that she
devoted most of her waking hours to petitioners’ dog
breeding activities.

Petitioners each attended over 20 seminars on dog
breeding and between 400 and 500 dog shows. Often
the dog shows included social affairs for the
participants. In addition to petitioners’ operation of
Shantoma, they held offices in various kennel clubs.

Shantoma’s financial records consisted of a ledger into
which entries were made at the end of each year from
bills and receipts accumulated throughout the year. It
was maintained by the office manager of Dr. Burger’s
medical office both during her working day and on her
own time. She received no compensation for this
service beyond that which she received from the
medical practice for her normal duties. The
bookkeeping system employed for Shantoma was not
as sophisticated as that maintained for the medical
practice, which included daily, weekly, and monthly
posting in a double entry ledger, financial statements,
and computer generated [*12] balance sheets. Rather,
the system used for Shantoma merely listed revenues
and expenses under appropriate headings; it did not
permit an analysis to be made as to the costs incurred
for each dog, nor did it permit periodic assessment of
the ongoing profitability of Shantoma’s activities.

Petitioners did not maintain a separate checking
account for Shantoma. Instead, checks for Shantoma
were drawn on their personal checking account; those
that were written for Shantoma were clearly identified as
such.

Petitioners did not maintain a telephone directory listing
for Shantoma nor did they maintain insurance coverage
on any of the dogs.

Dr. Burger’s wages from Alcoa, his net earnings from his
medical practice, and his gross receipts and expenses
from Shantoma for the years 1975 through 1980 are as
follows:

1985 Tax Ct. Memo LEXIS 107, *8

Go to table3

[*13] Respondent disallowed the deductions claimed
by petitioners in 1978, 1979 and 1980 for their dog
breeding activity since he determined that such activity
was not an activity engaged in for profit. Alternatively,
respondent contends that if petitioners’ dog breeding
activity is characterized as an activity engaged in for
profit (a) certain expenses (travel and entertainment,
maintenance and repairs, and cleaning) are personal in
nature and hence not deductible and (b) an allocation is
required between business and personal use for certain
claimed depreciation expenses.

OPINION

Based on his contention that petitioner’s dog breeding
activities were not engaged in for profit, respondent has
not allowed under section 183 5 the deductions claimed
by petitioners for 1978, 1979 and 1980 relating to
Shantoma.

[*14]

Section 183(a) provides that, in general, an individual
will not be allowed any deduction attributable to an
activity if such activity is not engaged in for profit.

5 SEC. 183. ACTIVITIES NOT ENGAGED IN FOR PROFIT.

(a) GENERAL RULE.–In the case of an activity engaged in by
an individual or an electing small business corporation (as
defined in section 1371(b)), if such activity is not engaged in
for profit, no deduction attributable to such activity shall be
allowed under this chapter except as provided in this section.

(b) DEDUCTIONS ALLOWABLE.–In the case of an activity
not engaged in for profit to which subsection (a) applies, there
shall be allowed–

(1) the deductions which would be allowable under this
chapter for the taxable year without regard to whether or not
such activity is engaged in for profit, and

(2) a deduction equal o the amount of the deductions which
would be allowable under this chapter for the taxable year only
if such activity were engaged in for profit, but only to the extent
that the gross income derived from such activity for the taxable
year exceeds the deductions allowable by reason of
paragraph (1).

(c) ACTIVITY NOT ENGAGED IN FOR PROFIT DEFINED.–
For purposes of this section, the term “activity not engaged in
for profit” means 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.

Section 183(c) defines an activity not engaged in for
profit as any activity that is either not deemed a trade or
business for purposes of section 162 or not deemed to
be for the production of income for purpose of section
212(1) or section 212(2).

To establish that an activity is one engaged in for profit,
petitioners must show that they engaged in the activity
with an actual and honest objective of making a profit.
Surloff v. Commissioner, 81 T.C. 210, 233 (1983);
Dreicer v. Commissioner, 78 T.C. 642, 644-645 (1982),
affd. without opinion (D.C. Cir. 1983). The taxpayer’s
expectation need not be a reasonable one, but the profit
objective must be bona fide. Section 1.183-2(a), Income
Tax Regs.; Dreicer v. Commissioner, supra. In
determining whether [*15] the requisite intention to
make a profit exists, greater weight is to be given to the
objective facts than to the taxpayer’s self-serving
characterization of his intent. Section 1.183-2(a),
Income Tax Regs.; Dreicer v. Commissioner, supra at
645.

In making our inquiry as to whether Shantoma is an
activity engaged in for profit we must analyze all the
relevant facts that bear on the true nature of the activity.
The income tax regulations list nine relevant, non-
exclusive factors gleaned from pre-existing case law to
aid in this inquiry. Sec. 1.183-2(b), Income Tax Regs.
These factors include: (1) the manner in which the
taxpayer carried on the activity; (2) the expertise of the
taxpayer of his advisors; (3) the time and effort
expended by the taxpayer in carrying on the activity; (4)
the expectation that the 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 [*16] activity; (7) the amount of occasional profits, if
any, which are earned; (8) the financial status of the
taxpayer; and (9) any elements indicating personal
pleasure or recreation. No one factor is conclusive in
making the determination. Allen v. Commissioner, 72
T.C. 28, 34 (1979).

Petitioners request that we find that the expenses
incurred by petitioners in their dog breeding activities for
the years involved were incurred by them with the
objective of making a profit. For the reasons set forth
below, we are unable to make such a finding.

Petitioners cite Engdahl v. Commissioner, 72 T.C. 659
(1979), to support their position. In Engdahl, the
taxpayers (an orthodontist and his wife) with substantial
income embarked upon a horse breeding enterprise in

1985 Tax Ct. Memo LEXIS 107, *12

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contemplation of the husband’s impending retirement.
After having consulted with those already involved in
horse breeding about how to operate a breeding activity,
as well as the general business and economics of a
breeding enterprise, they purchased horses in 1964 and
boarded them at a stable. By 1967, to cut costs of
boarding, they had purchased a ranch on which they
would live and operate [*17] their breeding activity.

The Engdahls worked between 35 and 55 hours during
the week in all facets of the operation, from building
stalls, fences and irrigation facilities themselves to
attending to the horses during horse shows. Although
they occasionally attended social functions in
connection with horse shows, their social life was not
structured around the horse breeding community, nor
did they view their involvement with the horses as
anything more than a job, having no particular affection
for horses.

They maintained a single checking account for the
horse operation, the orthodontic practice and personal
expenditures, although all revenues from horse sales
and stud fees were deposited into a separate savings
account. Their books and records, which were
maintained under the auspices of their accountant, were
compiled and reviewed by the accountant quarterly and
an annual summary recapitulation was compiled, with a
breakdown of expenses for each month.

The taxpayers in that case attributed their continued
losses to the failure of the anticipated demand for their
breed of horse to materialize, increased costs, the death
of two horses (one of which was their most
expensive [*18] mare), and the less-than-zealous
efforts of their trainer. In that case, we held that the
taxpayers were not precluded by section 183 from
deducting the expenses attributable to their horse
breeding activity.

Petitioners herein argue that they, like the taxpayers in
Engdahl, have (1) maintained complete and accurate
books and records; (2) attempted to change their
operation to overcome losses incurred because of
circumstances beyond their control; and (3) worked long
hours to build a business which would sustain them in
Dr. Burger’s retirement. However, we do not find
petitioners’ arguments compelling. Petitioners did not
approach and operate Shantoma as would one with a
bona fide objective of making it a profitable enterprise,
and we, therefore, hold that they were not engaged in
dog breeding to make a profit.

The extensive study or consultation with experts about
an activity’s accepted business and technical practices
may indicate a profit motive. Sec. 1.183-2(b)(2), Income
Tax Regs. Petitioners read numerous books and
periodicals pertaining to the breeding [*19] of dogs and
consulted with individuals whom petitioners considered
to be expert in the field, yet they embarked on the
venture without any particular expertise and without
consulting with any experts on the business end of the
activity. While a formal market study is not required, a
basic investigation of the factors that would affect profit
is. Golanty v. Commissioner, 72 T.C. 411, 432 (1979),
affd. without opinion (9th Cir. 1981); compare Engdahl
v. Commissioner, supra at 668. 6 They undertook the
activity with no concept of what their ultimate costs
might be, how they might operate at the greatest cost
efficiency, how much revenues they could expect, or
what risks could impair the generation of revenues.

That the taxpayer carried on the activity in a
businesslike manner and maintained complete and
accurate records may indicate that the activity is
engaged in for profit. Sec. 1.183-2(b)(1), Income Tax
Regs. [*20] However, petitioners have failed to either
operate in a businesslike manner or maintain adequate
records. We do not base this finding, as respondent
would have us do, on the fact that petitioners used a
single checking account for both personal and dog
breeding expenditures. Such a practice has already
been found to be acceptable where, as here, proper
notation is made distinguishing the various expenditures
from each other. Engdahl v. Commissioner, supra. It is
the annual posting of various income and expenditure
items to a ledger of no real business value as done by
petitioners that we find to be insufficient.

The purpose of maintaining books and records is more
than to memorialize for tax purposes the existence of
the subject transactions; it is to facilitate a means of
periodically determining profitability and analyzing
expenses such that proper cost saving measures might
be implemented in a timely and efficient manner.
Golanty v. Commissioner, supra at 430. The ledger
maintained for Shantoma did not supply this information.
It was compiled [*21] only annually. It neither broke
down the costs incurred by the month, as did the
records maintained by the taxpayers in Engdahl, nor did

6 Steele v. Commissioner, T.C. Memo. 1983-63 (a “little
feasibility study” is not sufficient).

1985 Tax Ct. Memo LEXIS 107, *16

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it allocate the costs and overhead among the dogs
maintained for sale to determine the profitability or
break-even point for each. 7 We believe that if
petitioners’ primary objective was to achieve profitability
of their operation they would have shown greater
interest in monitoring the costs they incurred for
Shantoma so that they could discover ways of reducing
them. The ledger was completely inadequate for cost
analysis.

Petitioners assert that they lack the sophistication to
implement such an involved bookkeeping process and
the resources to hire someone who had such ability.
Indeed, lack of business sophistication does not
necessitate a finding of lack of profit objective, but the
term “businesslike manner” contemplates the usage of
cost accounting techniques that, at a minimum, provide
the entrepreneur [*22] with the information he requires
to make informed business decisions. Without such a
basis for decisions affecting the enterprise, the
incidence of a profit in any given period would be a
wholly fortuitous result. Furthermore, as Dr. Burger
employed a sophisticated accounting system for his
medical practice, he could have employed a similar
system for Shantoma. Dr. Burger’s office manager kept
the Shantoma books as well as the medical practice
books; she could have applied her skill as much to the
one as she did to the other.

Petitioners also point to their extensive records of
pedigree, dog show accomplishments, potential
breeding partners, and correspondence to buttress their
claim that they maintained accurate records. However
impressive the completeness of these files may be, they
are as consistent with a hobby as with a business and
therefore do nothing to support petitioners’ position.
Golanty v. Commissioner, supra at 430.

Petitioners do not fare any better when we examine the
operational results of Shantoma. The six consecutive
years of losses (from 1975 to 1980) 8, the rate at which
these losses grew, and the level which they reached,
when [*23] analyzed with respect to petitioners’ inability
to recoup these losses from operations, unrealized
asset appreciation, or a combination of the two,
supports our finding that Shantoma was not operated as
an activity in which petitioners had a profit objective.

7 See, e.g., Ballich v. Commissioner, T.C. Memo. 1978-497;
Steele v. Commissioner, T.C. Memo. 1983-63.

8 Shantoma sustained losses for 1981 ($50,898.18), 1982
($15,114.00) and 1983 (amount not specified in the record).

A continuous series of losses during the start-up stage
will not necessarily be deemed indicative that the
activity was not engaged in for profit. Sec. 1.183-
2(b)(6), Income Tax Regs. However, the cumulative
losses should not be of such a magnitude that an overall
profit (total revenues over cumulative expenses) from a
combination of operations and realization of the
appreciation in assets used in the business cannot
possibly be achieved. Bessenyey v. Commissioner, 45
T.C. 261, 274 (1965), affd. 379 F.2d 252 (2d Cir. 1967);
see sec. 1.183-2(b)(4), Income Tax Regs.

Assuming, arguendo, that each of the years at issue
falls within [*24] the category of “start-up stage,” the net
cumulative losses by the end of each such year were so
great ($134,473.30 by the end of 1978; $189,072.41 by
the end of 1979; and $239.778.51 by the end of 1980)
that petitioners could not have expected to realize a net
overall profit during any of the years at issue from
operations of from the sale of Shantoma’s assets.
Golanty v. Commissioner, supra; White v.
Commissioner, 23 T.C. 90, 94-95 (1954), affd. 227 F.2d
779 (6th Cir. 1955).

The regulations provide that a series of losses beyond
the start-up stage may be indicative of the absence of a
profit motive unless such losses can be blamed on
unforeseen or fortuitous circumstances beyond the
taxpayer’s control. Sec. 1.183-2(b)(6), Income Tax
Regs. Although there were fortuitous circumstances
beyond the control of petitioners, such as the delay in
the breeding of Kunasata because of the inability of Dr.
Kennedy to provide a stud and the ruptured uterus that
Kunasata suffered, it was not shown that had these
events [*25] not occurred, Shantoma nevertheless
would have been profitable. In the best of
circumstances, were Kunasata to have whelped a litter
of nine pups by the middle of 1977 and remained
healthy 9, petitioners still would not have been able to
surmount their already substantial losses 10 through the
sale of such a hypothetical 1977 litter and all
subsequent litters that might have been whelped by a
healthy Kunasata. The unlikelihood that Shantoma’s
revenues could ever exceed its substantial losses

9 It was not until March of 1977, when petitioners were ready
to breed Kunasata following her wins at the National Speciality
Show and the Westminster Kennel Club Show, that matters
could be said to have been taken out of their control.

10 By the end of 1977, the losses exceeded $88,000.

1985 Tax Ct. Memo LEXIS 107, *21

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militate in favor of a finding that petitioners did not
possess a profit objective.

Petitioners rely on their long hours and hard work, Sec.
1.183-2(b)(3), Income Tax Regs., their preference not to
socialize within the dog business community (doing so
only when it would help “business”), and the fact that
they had no particular affection for the dogs as
sufficient evidence [*26] that their motive must have
been to make a profit. Engdahl v. Commissioner, supra
at 670-671. Accepting arguendo petitioners’ self-serving
statements that they devoted both long hours and
substantial energy to the enterprise, we believe that
such dedication was motivated by their desire to obtain
recognition in the dog breeding community, i.e., by
breeding winners. While petitioners were testifying, we
observed each derived gratification and pride from the
success of their dogs. Unquestionably, an enterprise is
no less a “business” because the entrepreneur gets
satisfaction from his work; 11 however, where the
possibility for profit is small (given all the other factors)
and the possibility for gratification is substantial, it is
clear that the latter possibility constitutes the primary
motivation for the activity. Bessenyey v. Commissioner,
supra at 275. “The gratification derived from an
occupation worth doing, possibly beneficial to others,
and probably requiring long hours of arduous labor must
still ot be confused with an intention to [*27] return a
profit.” White v. Commissioner, 23 T.C. at 94.

The high costs of deriving such personal gratification
were offset by the deductions claimed by petitioners.
Due to Dr. Burger’s substantial income from his medical
practice and his employment with Alcoa, petitioners’
marginal tax rate, before Shantoma’s losses, was high
enough (62% in 1978, 64% in both 1979 and 1980) that
the deduction of the expenses of Shantoma resulted in
a reduction in their tax liabilities during [*28] the years
in issue sufficient to offset most of the losses incurred.
This, in essence, afforded petitioners the opportunity of
engaging in an expensive hobby while the government

11 It does seem to me that if a man does not expect to make
any gain or profit out of the management of the farm, it cannot
be said to be a business for profit, and while I should be the
last to say that the making of a profit was not in itself a
pleasure, I hope I should also be one of those to agree there
were other pleasures than making a profit. Indeed, it makes
no difference whether a man is engaged in a business which
gives him pleasure, if it be a business * * *. But it does make a
difference whether the occupation which gives him pleasure
can honestly be said to be carried on for a profit. Thacher v.
Lowe, 288 F. 994, 995 (S.D.N.Y. 1922) (Learned Hand, J.).

subsidized most of the costs. Engdahl v.
Commissioner, supra at 670; Golanty v. Commissioner,
supra at 429.

Petitioners claim that their financial status once Dr.
Burger retires must be considered, rather than their
current financial status. We do not agree since the tax
benefits at issue herein are a function of current income
(cf. Engdahl v. Commissioner, supra at 670).

In the final analysis, we are not able to find that
petitioners exercised the vigilance necessary to keep
costs to a level which would make the realization of a
profit possible. The speed at which petitioners’ losses
from Shantoma mounted, the magnitude of the losses,
the duration over which they accumulated, the
improbability that Shantoma would ever yield an overall
profit, and the tax benefits derived by petitioners make
clear that Shantoma was not an activity in which
petitioners engaged with a bona fide objective of making
a profit. Accordingly, petitioners may [*29] not deduct
any expenses incurred with respect to Shantoma, other
than those allowed under section 183(b).

Having found that petitioners’ dog breeding activity was
an “activity not engaged in for profit” within the purview
of section 183, we need not address respondent’s
alternative position.

Accordingly,

Decision will be entered for respondent.

1985 Tax Ct. Memo LEXIS 107, *25

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Table1 (Return to related document text)

Year Deficiency
1978 $24,043.44
1979 $30,553.31
1980 $29,300.87

Table1 (Return to related document text)

Table2 (Return to related document text)

Date of Purchase

Name Type Purchase Price
Adhara Female Feb. 22, 1975 $2,000
Tutenkyor Male March 29, 1975 5,000
Kunasata Female May 10, 1975 5,000

Table2 (Return to related document text)

Table3 (Return to related document text)

Alcoa Medical Net Gross Receipts Expenses

Wages Earnings (Shantoma) (Shantoma)
1975 $26,775.00 $79,064.68 $0 ($13,702.00)
1976 30,797.30 90,831.44 0 (26,098.00)
1977 31,254.42 69,408.93 0 (48,299.06)
1978 32,504.42 85,070.61 0 (46,374.24)
1979 35,105.77 93,049.59 4,650.00 (59,249.11)
1980 37,676.48 108,937.74 3,890.21 (54,596.31)

Table3 (Return to related document text)

End of Document

1985 Tax Ct. Memo LEXIS 107, *29

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