Topping v. Comm’r, T.C. Memo. 2007-92 (2007).

T.C. Memo. 2007-92
UNITED STATES TAX COURT

TRACEY L. TOPPING, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 22589-04. Filed April 17, 2007.

David D. Aughtry and Hale E. Sheppard, for petitioner.
Travis T. Vance III, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

GOEKE, Judge: Respondent determined the following

deficiencies in petitioner’s Federal income tax:
Year Deficiency
1999 $47,425

2000 91,967

2001 112,070

- 2

After concessions,1 the issues for decision are: (1)
Whether petitioner conducts her equestrian and related activities
as part of her design business; (2) whether these activities are
for profit under section 183(a);2 and (3) if the activities are
for profit, whether the expenses associated with the equestrian
activity are ordinary and necessary expenses under section
162(a). We hold that: (1) Petitioner conducts her equestrian
and related activities as part of her design business; (2)
petitioner’s design and equestrian activities are conducted for
profit; and (3) the equestrian-related expenses associated with
her activity are ordinary and necessary expenses.

FINDINGS OF FACT

Some of the facts have been stipulated, and the stipulated
facts are incorporated in our findings by this reference.
Petitioner resided in Wellington, Florida, at the time of filing
the petition.

In 1998, petitioner was 46 years old and in the middle of a
bitter divorce. She had no means of supporting herself.
Petitioner held no job, had no college degree, and had not had

1Petitioner concedes that she is not entitled to claim
Schedule C, Profit or Loss From Business, expenses amounting to
$26,158 and $7,402 for her interior design activity in 1999 and
2000, respectively.

2All section references are to the Internal Revenue Code in
effect for the years at issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure, unless otherwise
indicated.

- 3 -

any full-time employment for the past 25 years. Her significant
assets consisted of a 16-year-old horse and a debt-encumbered
condo in Wellington, Florida.

Forced to make a living to support herself, petitioner
developed a plan to use her prominence in the equestrian world to
build a business designing horse barns and homes. Her plan was
to establish and maintain herself as a peer worthy of trust among
the exceptionally wealthy families who participate in the upper
realms of the equestrian circuit, own multiple residences, and
use interior designers. Even though she had no written business
plan, she discussed her plan for her business venture with her
certified public accountant, Jeffrey Borofsky (C.P.A. Borofsky).
She also discussed her plan with a longtime friend who had
successfully started her own business. Petitioner did not
conduct a formal market study, nor did she prepare any cashflow
projections in anticipation of starting her new business. She
did not have any experience in design other than taking a few
design courses in college. However, petitioner possessed the
artistic ability to draft structural designs freehand.
Petitioner also was an experienced equestrian, having ridden
horses and competed on an amateur level since she was 12 or 13
years old.

In 1999, petitioner formed a limited liability company,
Topping White Design, L.L.C. (Topping White), in Florida. The

- 4 -

address of Topping White is in West Palm Beach, Florida, which is
also petitioner’s place of residence. Petitioner uses her home
office to handle all financial aspects of her design business.
The assets of petitioner’s activities include horses, a truck, a
trailer, and an automobile. Petitioner uses the truck, trailer,
and automobile for both the equestrian and design activities. In
May of 1999, petitioner hired Deborah Martin (Ms. Martin). Ms.
Martin’s primary responsibilities include general administrative
work, such as preparing invoices, dealing with clients,
collecting money, ordering supplies, scheduling contractors, and
entering information into a computer. Petitioner also relies
upon trainers both to refer clients and improve her performance
as a competitor. Moreover, petitioner works with architects,
electricians, plumbers, furniture manufacturers, and other
experts in their trades in order to run the interior design
aspect of her business. Every one of the trainers that
petitioner has worked with has referred at least one design
client to petitioner. Petitioner also engages C.P.A. Borofsky to
handle her accounting matters.

Petitioner’s business methodology consists of entering in
and attending horse shows, and making contacts with prospective
clients at the shows. Potential clients develop from horse show
contacts, and then petitioner and Ms. Martin meet with the
potential client. Early on in her business, petitioner tried to

- 5 -

develop clients through her longtime experience playing golf.
When golf failed to produce any clients, she dropped her golf
club membership.

Petitioner develops her equestrian contact clients for
Topping White while competing during the Winter Equestrian
Festival, which takes place at the Jockey Club. The Jockey Club
is an elite, private club, which is not open to the general
public. The Jockey Club consists of a large concentration of
extraordinarily wealthy people. Most of the attendees in the
Jockey Club own horses, and all come to watch the equestrian
competition on either side of the competing rings. The Jockey
Club has up to 90 tables with six seats per table. These tables
are reserved at the beginning of the season. During the period
1999 through 2001, the cost of a table reservation was $5,000 for
the 7-week season. Since then, the price has climbed to $25,000.
Petitioner originally owned a table at the Jockey Club, but when
the cost of a table increased, she initially split the cost with
one client, and then later split the cost with two clients.

At the Jockey Club there is a rectangular tent situated
between two competing rings–the DeNemethy Ring, where petitioner
sometimes competes, and the Grand Prix Ring, where petitioner
frequently competes. The rings contain large leaderboards that
are visible throughout the Jockey Club. The events are announced
over the loudspeaker, which can be heard throughout the Jockey

- 6 -

Club. When petitioner enters the Grand Prix Ring during
competition, her name is flashed on the leaderboards and
announced over the loudspeaker as the owner of the horse and once
again as the rider. She rides her horses in the Grand Prix Ring
where the amateur-owner classes are held. The Grand Prix Ring is
a grass field where riders compete with jumps that can exceed 4
to 6 feet in height. Those who compete must finish within a
prescribed period without any faults to be successful. Those who
successfully complete the first round advance to the second
round. When petitioner advances to the second round, upon entry
into the ring, her name is once again flashed on the leaderboards
and called over the loudspeaker. If she finishes in the ribbons
class, her name is displayed yet again on the leaderboards and
announced over the loudspeaker. Win or lose, petitioner returns
to the Jockey Club among competitors and observers, where
conversations take place over the just-completed competition. To
continue to develop her design business, petitioner believes she
cannot rest on her reputation and disappear from the scene, but
she must continue her client development efforts on the
equestrian circuit.

The membership requirements for the Jockey Club do not
necessitate ownership of a horse or to be a competitor. However,
petitioner believes that if she were to sell all of her horses or
were to give up amateur riding, both current and prospective

- 7 -

clients would perceive that she had failed financially, would not
rely on her as a designer, and thus not trust her with the keys
to their homes and their barns. Petitioner also testified that
she has to maintain the reputation she has cultivated as a
skilled competitor in order to keep her existing relationships
and to cultivate new ones. We find petitioner’s testimony
plausible in this regard.

Petitioner does not advertise her interior design business
through advertising media such as equestrian-related magazines,
Web sites, or newspapers. In addition, she does not display
banners or sponsor any events through Topping White. Petitioner
intentionally rejects this type of advertising because the ethos
of the Jockey Club and its members perceive that kind of generic
advertising of a personal service business as tacky or gauche.
In addition, petitioner does not want to convey the impression
that she is desperate for or needs the work. Rather, petitioner
relies on her exposure and reputation as both a rider and owner,
and also her popularity among the members of the Jockey Club.
Instead of actively seeking new clients, petitioner adopts a more
subtle approach to attracting prospective clients by making
herself available at the Jockey Club during key times in order
for prospective clients to find her. In addition, petitioner
also relies on word of mouth and referrals by members of the
Jockey Club.

- 8

The normal evolution of a design project involves a
prospective client’s contacting petitioner at a horse show.
Normally, the Monday after the horse show, Ms. Martin arranges a
meeting between petitioner and the prospective client. The
meeting typically takes place at the design site with the
potential client, petitioner, and Ms. Martin. In most meetings,
approximately half of the discussion is design-related to the
actual project, while the other half consists of discussion on
equestrian-related subjects. For each of her clients, petitioner
has designed at least one horse barn. Petitioner’s clients,
often very wealthy, entrust her with the keys to their home, even
after the projects are completed.

Petitioner uses her general knowledge of horses and
specifically her knowledge of the idiosyncracies of each of her
client’s horses to evolve her barn designs. For example, her
knowledge of a horse’s particular injury or temperament leads her
to design a barn with stalls tailored to each horse’s individual
needs. Interior design of a client’s home often requires
knowledge related to horses. Though generally most families do
not want an equestrian theme of decoration in their homes, the
designing process requires petitioner to know the needs of the
families who are essentially “horse people”. Some of the designs
incorporate mudrooms and expanded storage for boots, saddles, and
other equipment. In addition, in the interior design process,

- 9 -

petitioner has to consider bringing “the outside lifestyle as
coming to the inside” by testing fabrics for durability, cleaning
ability, and recovery relative to the client’s everyday
livability.

Petitioner keeps records for her horse barn/interior design
activities. All of the files relating to client development and
design implementation are kept together by year. Petitioner
maintains records that keep an inventory of expenses related to
both interior design and equestrian-related activities.
Initially, petitioner used a manual accounting system, but then
upgraded to Excel and then QuickBooks. Petitioner uses
QuickBooks to keep records for both the equestrian and interior
design activities on a consolidated basis. Petitioner does not
keep records of training costs or costs associated exclusively
with horse shows for the purposes of projecting a budget. Nor
does she or C.P.A. Borofsky prepare monthly budgets or cashflow
projections for either the interior design or equestrian
activities. According to petitioner, that is because there is no
way to predict what those costs will be from month to month, and
that the equestrian circuit is not her business but is part of
her overall plan to develop her interior design clientele. At
trial, petitioner produced documentary evidence of a profit or
loss statement prepared by C.P.A. Borofsky that tracked expenses
for both her equestrian and interior design activities.

- 10 -

Petitioner also invested in some horses with one of her
clients. Petitioner and her client formed a partnership to make
these investments. The choice of horses to invest in was based
on the recommendations of trainers, at least one of whom was a
world champion. The horses petitioner invested in were sold at
an overall tax gain because of the depreciation, but the majority
resulted in a substantial economic loss on petitioner’s
investment.3

Petitioner filed her Form 1040, U.S. Individual Income Tax
Returns, under a married filing separate status for the taxable
years 1998, 1999, and 2000, and single status for the taxable
years 2001, 2002, and 2004. C.P.A. Borofsky prepared
petitioner’s Forms 1040 for the years 1998 through 2004. For the
tax years 1999 through 2001, C.P.A. Borofsky filed separate
Schedules C, Profit or Loss From Business, for the horse and
design activities with petitioner’s tax returns. Starting in
2002, C.P.A. Borofsky combined the activities on one Schedule C.
Petitioner reported net losses from her horse activities and net
income from Topping White as follows:

3Petitioner took depreciation deductions for the horses
during the tax years at issue, but she did not sell most of them
until after the close of those years. Petitioner did sell one
horse named Sonic in 2002 and reported taxable gain on the sale
of $34,896. Petitioner did not realize an economic loss on the
sale–in fact, she broke even, selling the horse for exactly what
her purchase price was.

- 11

Net Loss of Net Income of
Tax Year Horse Activity Topping White

1998 $47,123 $200,908
1999 80,735 157,239
2000 206,080 499,908
2001 275,169 322,459

On a consolidated basis, however, petitioner’s overall business

enjoyed a net profit 6 of the first 7 years of the business:

Year Gross Income Cash Expenses Net Income
1998 $253,965 $100,180 $153,785
19991 276,453 199,949 76,504
20001 707,521 413,693 293,828
20011 542,183 494,893 47,290
2002 523,038 485,279 37,759
2003 841,564 495,422 346,142
2004 498,826 506,887 (8,061)
1 Years at issue.

Petitioner is a beneficiary of the Daniel Topping Trust (the
trust) from which she received taxable income from 1998 through
2004. For the years in question, that income consisted of
$14,060 for 1999, $12,053 for 2000, and $11,882 for 2001. For
all of the other years, the amount received from the trust was
under $20,000.

On August 26, 2004, respondent mailed to petitioner a notice
of deficiency asserting deficiencies for the taxable years 1999,
2000, and 2001. The notice contained no determination regarding
the relationship between the horse circuit and the horse
barn/interior design activities. The first two adjustments
shifted the gross income which petitioner reported from her horse

- 12 -

competition winnings and gain from the sale of one of her horses

from her Schedule C to “other income”. Further, the notice

disallowed all of petitioner’s Schedule C horse-related expenses,

explaining:

It has been determined that the amounts claimed as

Schedule C horse racing expenses for the tax years

ending 12/31/99, 12/31/2000 and 12/31/2001 are not

allowable as such since said activity is deemed to be

an activity not engaged into for profit. It has

further been determined that said expenses are

allowable as Schedule A expenses subject to the

applicable Adjusted Gross Income limitations.

Accordingly, your taxable income is increased by the

disallowed expenses adjustment amounts.

The notice also disallowed some of the expenses associated

with petitioner’s horse barn/interior design activity,

explaining:

It has been determined that adjustments are
warranted to correct your claimed Schedule C expenses
from your Interior Decorating Activity for the tax
years ending 12/31/1999 and 12/31/2000. The
adjustments are a result of a disallowance of expenses.
The expenses have been disallowed because you have not
established that these amounts were incurred, or, if
incurred, paid by you during the taxable year for
ordinary and necessary business purposes, or that these
expenses were deductible under the provisions of the
Internal Revenue Code. Accordingly, your taxable
income is increased by the adjustment amounts.

Petitioner timely filed her petition with this Court. In

her petition, petitioner assigned error to respondent’s

segregation of the equestrian and interior design activities and

- 13 -

also for all other disallowed expenses related to her interior
design and equestrian activities.

OPINION

Section 183 restricts taxpayers from deducting losses from
an activity that is not “engaged in for profit”. Sec. 183(a).
An activity is engaged in for profit if the taxpayer entertained
an actual and honest profit objective in engaging in the
activity. Dreicer v. Commissioner, 78 T.C. 642, 645 (1982),
affd. without opinion 702 F.2d 1205 (D.C. Cir. 1983); sec.
1.183-2(a), Income Tax Regs. The taxpayer’s expectation of
profit must be in good faith. Allen v. Commissioner, 72 T.C. 28,
33 (1979) (citing sec. 1.183-2(a), Income Tax Regs.).

I. Burden of Proof
Petitioner argues that under section 7491(a), the burden of
proof has shifted to respondent. Conversely, respondent contends
the burden has not shifted because petitioner was not cooperative
within the meaning of section 7491(a), and because petitioner
failed to introduce credible evidence necessary for the burden to
shift. It is unnecessary for us to address the parties’
disagreements and to determine whether the burden of proof has
shifted because the outcome of this case is determined on the
preponderance of the evidence after trial and is unaffected by
section 7491. Estate of Bongard v. Commissioner, 124 T.C. 95
(2005) (citing Blodgett v. Commissioner, 394 F.3d 1030, 1035 (8th

- 14 -
Cir. 2005), affg. T.C. Memo. 2003-212; Estate of Stone v.
Commissioner, T.C. Memo. 2003-309).

II. Application of Section 183
Before we address whether petitioner had the requisite
profit motive based on the facts and circumstances, we first must
address the threshold issue of whether petitioner’s equestrian
and design undertakings constitute a single activity for purposes
of deciding whether petitioner had the requisite profit motive
under section 183. We believe in this case that the resolution
of this issue skews all of the remaining issues in favor of the
party who prevails. Petitioner’s arguments for profit motive all
revolve around the assumption that the undertakings constitute
one activity, while respondent’s arguments isolate the equestrian
undertaking and its losses to argue that petitioner did not have
the requisite profit motive.

Whether Petitioner’s Undertakings May Be Treated as One
Activity
Multiple undertakings of a taxpayer may be treated as one
activity if the undertakings are sufficiently interconnected.
Sec. 1.183-1(d)(1), Income Tax Regs. The most important factors
in making this determination are the degree of organizational and
economic interrelationship of the undertakings, the business
purpose served by carrying on the undertakings separately or
together, and the similarity of the undertakings. Id. The
Commissioner generally accepts the taxpayer’s characterization of

- 15 two
or more undertakings as one activity unless the
characterization is artificial or unreasonable. Id.

We have considered these and other factors in determining
whether the taxpayer’s characterization is unreasonable. The
other factors so considered include: (a) Whether the
undertakings are conducted at the same place; (b) whether the
undertakings were part of the taxpayer’s efforts to find sources
of revenue from his or her land; (c) whether the undertakings
were formed as separate activities; (d) whether one undertaking
benefited from the other; (e) whether the taxpayer used one
undertaking to advertise the other; (f) the degree to which the
undertakings shared management; (g) the degree to which one
caretaker oversaw the assets of both undertakings; (h) whether
the taxpayer used the same accountant for the undertakings; and

(i) the degree to which the undertakings shared books and
records. Mitchell v. Commissioner, T.C. Memo. 2006-145 (citing
Keanini v. Commissioner, 94 T.C. 41, 46, (1990); Tobin v.
Commissioner, T.C. Memo. 1999-328; Estate of Brockenbrough v.
Commissioner, T.C. Memo. 1998-454; Hoyle v. Commissioner, T.C.
Memo. 1994-592; De Mendoza v. Commissioner, T.C. Memo. 1994-314;
Scheidt v. Commissioner, T.C. Memo. 1992-9)).
We find petitioner’s characterization of the equestrian and
design undertakings as a single activity for purposes of section
183 to be supported by the facts of this case. A close

- 16 -

organizational and economic relationship exists between the
equestrian and design undertakings. Petitioner’s success as an
equestrian competitor creates goodwill that benefits her design
business. See Keanini v. Commissioner, supra. Petitioner formed
the equestrian and design undertakings as a single integrated
business. Petitioner had been a competitor for most of her adult
life, and she transformed this sport experience into an avenue to
establish goodwill as an interior designer of horse barns and
second homes. She had a plan for an integrated equestrian-based
design business. Petitioner and her assistant manage and oversee
both undertakings and their assets and also use the same books
and records to track both undertakings.

Further, petitioner’s equestrian activities significantly
benefit her design business, and we find a significant business
purpose for the combination of these undertakings. Her
prominence as a competitor has gained respect among her peers and
causes them to seek her out when they are in need of a designer
for their horse barns and recreational homes.

Respondent faults petitioner for not advertising in a
conventional sense, such as putting up ads in equestrian
magazines or banners at horse shows. Respondent argues that
petitioner’s failure to specifically advertise the name of
Topping White through conventional media is indicative of the
lack of an economic relationship between the two undertakings.

- 17 -

However, petitioner testified and had witnesses corroborate that
traditional advertising of a personal service business is not
welcomed by the clientele petitioner sought. Thus, petitioner
made a business decision not to advertise conventionally. The
question is not whether a particular mode of doing business is
wise, but whether the taxpayer honestly believed the method
employed would turn a profit for him. In this case, petitioner’s
judgment has proven prophetic. In Dreicer v. Commissioner, 78

T.C. 642 (1982), affd. without opinion 702 F.2d 1205 (D.C. Cir.
1983), we elucidated that the purpose of section 183 is “to allow
deductions where the evidence indicates that the activity is
actually engaged in for profit even though it might be argued
that there is not a reasonable expectation of profit. * * * This
is the proper legal standard under section 183.” Id. at 645.
Further, the evidence demonstrates that petitioner
demonstrated good business judgment. Her equestrian contacts are
responsible for more than 90 percent of her client base, and her
overall business produced a sizable net profit for all of the
years at issue. Therefore, petitioner has not only demonstrated
that she honestly believed that her mode of advertising would
turn a profit, but also has proven that it has been successful
and that adopting respondent’s suggestion would probably have
backfired.

- 18

Respondent cites several cases where we held that the
taxpayer’s activities could not be aggregated and argues that
those cases are analogous to the facts in this situation. In De
Mendoza v. Commissioner, supra, the Court refused to aggregate
the taxpayer’s farming/polo activity and his real estate law
practice, despite the taxpayer’s position that one reason he
began playing polo was to meet clients for his law firm. Based
on the evidence, the Court concluded that the farm was formed and
operated as a separate business, and the Court was not convinced
that the taxpayer began the polo activity to generate legal
business or that the activity materially benefited the taxpayer’s
law practice. In Wilkinson v. Commissioner, T.C. Memo. 1996-39,
we held that a plastic surgeon’s horse ranch activities and his
medical practice were not interrelated business activities,
despite the taxpayer’s claim that the publicity he derived from
playing polo and hosting social gatherings helped him get
patients for his cosmetic surgery practice. Id. In Zdun v.
Commissioner, T.C. Memo. 1998-296, affd. without published
opinion 229 F.3d 1161 (9th Cir. 2000), we held that a dentist’s
organic apple orchard was not part of the same activity as his
holistic dental practice even though the apples were sold to the
dental practice’s patients at the office.

We do not find any of the cases respondent relies on to be
analogous to petitioner’s situation. None of the activities in

- 19 those
cases have the same level of integration and
interdependence that petitioner’s equestrian and design
activities did. We are persuaded that petitioner’s equestrian
activities are necessary to the success of her design business.
In the equestrian-related cases that respondent cites, it is
apparent that the recreational activities were an afterthought to
the taxpayer’s primary business, and were more of a social
opportunity than an integrated part of a symbiotic business plan.
In both De Mendoza and Wilkinson, the Court found that the
benefit of the ranching activities was “incidental” to the
taxpayers’ law and medical practices, respectively. Similarly,
in De Mendoza, we were not convinced that the taxpayer’s polo
activity materially benefited his business. In Zdun v.
Commissioner, only 10 to 15 percent of the taxpayer dentist’s
patients actually took the apples he offered, even when he
provided the apples to them for no cost.

Here, virtually all of petitioner’s clients are equestrian-
related contacts who depend on her knowledge and expertise of
horses in designing their barns and homes. In addition, the
success of petitioner’s interior design business is far from
incidental to her equestrian contacts. The evidence shows,
rather, that petitioner’s interior design business materially
benefits from her equestrian-related activities, which is
consistent with the distinctions made between incidental and
material benefit in De Mendoza and Wilkinson. The evidence

- 20 -

demonstrates that petitioner’s involvement in the equestrian
world is the cornerstone of her cultivation of relationships with
her clientele. Given the nature of petitioner’s clientele, we
find her testimony about the relationship between her equestrian-
related activities and her design business to be credible and
logical.

Respondent argues that petitioner did not start riding
horses for the purpose of promoting her interior design business,
citing the fact that petitioner had competed for sport since a
young age. We recognize that petitioner’s interest in horses and
participation in competition preceded the formation of her
equestrian-based design activity. Petitioner’s business plan as
executed abruptly converted her preexisting hobby into part of an
integrated business venture after her divorce.

Respondent also relies on the existence of the L.L.C.
entitled “Topping White Design” to argue that petitioner’s design
business was separate from her equestrian activities. Respondent
argues that petitioner should be held to the form of her
structure, citing the fact that petitioner used the name of
Topping White in dealing with third parties. However, there is
no basis to restrict petitioner’s overall activities to Topping
White. Petitioner deals with clients and is known in the
equestrian world as “Tracy Topping”. Petitioner conducts both
aspects of her business through Topping White, using the same

- 21 -

assets, computer program, and files. The fact that petitioner is
known on the basis of her name to her clients in the equestrian
world does not somehow make her activities with her equestrian-
related contacts separate from her design business, which also
bears her name.

We also are aware that for the years at issue, C.P.A.
Borofsky reported the activities on two separate Schedules C.
Positions taken by a taxpayer in a tax return are treated as
admissions and cannot be overcome without cogent proof that they
are erroneous. Mendes v. Commissioner, 121 T.C. 308, 312 (2003);
Estate of Hall v. Commissioner, 92 T.C. 312, 337-338 (1989).
Based on the plethora of evidence that the two undertakings
constitute a single activity, we find that petitioner has
overcome that position.

We find that a close organizational and economic
relationship exists between the equestrian and the design
undertakings. Accordingly, we determine that for purposes of
section 183, the equestrian undertaking and the design operation
constitute a single activity. We need not consider whether
petitioner engaged in the equestrian-based design business with
the objective of making a profit because the combined activities
were profitable in each of the years at issue.4

4Petitioner argues that the presumption under sec. 183(d)
applies. Under sec. 183(d), in the case of an activity
consisting in major part of the breeding, training, showing, or

(continued…)

- 22 -

III. Petitioner’s Equestrian Expenses Are Ordinary and Necessary
in Carrying On the Activities of Topping White
Section 162(a) of the Internal Revenue Code allows the

deduction of “all the ordinary and necessary expenses paid or

incurred during the taxable year in carrying on any trade or

business.” INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 83 (1992)

(citing sec. 162(a)). Respondent argues that even if we

determine that the equestrian and design undertakings constitute

a single activity and that petitioner had a profit motive,

petitioner failed to establish all the equestrian expenses were

ordinary and necessary. To be “necessary”, an expense must be

appropriate and helpful to the taxpayer’s business. See Welch v.

4(…continued)
racing of horses, if the gross income derived from the activity
exceeds the deductions for any 2 of 7 consecutive taxable years,
then the activity shall be presumed to be engaged in for profit
unless the Commissioner establishes to the contrary. See Bunney

v. Commissioner, T.C. Memo. 2003-233 (citing Golanty v.
Commissioner, 72 T.C. 411, 425 (1979), affd. without published
opinion 647 F.2d 170 (9th Cir. 1981)). We find that petitioner’s
equestrian activities were secondary to her activities as a
designer. Therefore, this part of the presumption does not
apply. Sec. 183(d) presumes an activity is conducted for profit
if the gross income exceeds the attributable deductions for 3 out
of 5 consecutive years (the gross income test). The presumption
applies only after the third profit year. Mitchell v.
Commissioner, T.C. Memo. 2006-145 (citing sec. 183(d)). Since we
found that petitioner’s equestrian and design activities
constitute a single undertaking, the sec. 183(d) presumption
applies for the years 2001 and 2002. However, we do not analyze
the factors in terms of the presumption because we find that this
case turns on the fact that the equestrian and design
undertakings were an integrated business. Therefore, we find the
presumption to be unnecessary since the characterization of
petitioner’s design undertaking and equestrian undertaking as a
single activity carries the day.

- 23 -

Helvering, 290 U.S. 111, 113 (1933); Carbine v. Commissioner, 83

T.C. 356, 363 (1984), affd. 777 F.2d 662 (11th Cir. 1985). To be
“ordinary”, the transaction giving rise to the expense must be of
common or frequent occurrence in the type of business involved.
Deputy v. Dupont, 308 U.S. 488, 495 (1940). Even if it is
determined that the expenses are ordinary and necessary, they are
deductible under section 162 only to the extent that they are
reasonable in amount. United States v. Haskel Engg. & Supply
Co., 380 F.2d 786, 788-789 (9th Cir. 1967); Gill v. Commissioner,
T.C. Memo. 1994-92, affd. without published opinion 76 F.3d 378
(6th Cir. 1996).
Respondent asserts that the expenses of petitioner’s
equestrian activities are unreasonable and are not ordinary and
necessary because they represent personal expenditures of
petitioner. See sec. 262(a). Respondent relies on Henry v.
Commissioner, 36 T.C. 879 (1961), to support his argument. In
that case, the taxpayer, a C.P.A., sought to deduct the expenses
for his boat, upon which he flew a flag bearing the numerals
“1040”. He asserted that the flag provoked inquiries to which he
would reply that he was a C.P.A. and a lawyer experienced in tax
law. In disallowing the expenses of the boat, the Court held
that the taxpayer failed to prove that the flag made his yacht
expenditures “necessary” to his practice. He failed to show
exactly how and under what circumstances his boating activities

- 24 -

produced a single client. Id. at 885. Further, the taxpayer
failed to prove that it was ordinary for people in his profession
to incur such expenses. Id.

While we are mindful that expenses for personal pursuits do
not become deductible expenses simply because they afford
contacts with possible future clients, the situation in this case
is entirely different from the facts in Henry. Petitioner has
proven that her equestrian activities are necessary to her
success as an interior designer. The unique nature of
petitioner’s design business made it an ordinary expense to
partake in equestrian-related activities to achieve the peer
acceptance to attract clients. We have found that petitioner’s
design and equestrian activity is part of an integrated business
plan and that petitioner’s clientele is almost exclusively
derived from her equestrian contacts. Petitioner also offered
corroborating testimony that individuals in service businesses
who use conventional advertising evoke a negative reaction from
the people at the Jockey Club. Respondent’s arguments focus on
petitioner’s means to an end, but neglect the most important fact
of all–petitioner’s plan worked. Her startup business was a
success from the beginning and continues to be successful,
despite a slight loss in 2004. Petitioner has credibly
demonstrated that the measures she takes to build her client base
are both ordinary and necessary.

- 25

The evidence does not establish and respondent has not
argued convincingly that any particular expense was unnecessary
or excessive. Obviously, keeping and maintaining horses is
expensive. Petitioner demonstrated that she has done what she
can to keep costs down, from choosing less expensive travel to
sharing the cost of a table at the club. Respondent offers
numerous ratios of the expenses associated with the equestrian
activities to the profit from Topping White. Petitioner does
what is necessary to maintain her reputation in the equestrian
world, and we find that she does not do so in an extravagant
manner. The fact remains that petitioner’s design business
depends heavily on her equestrian-related activities for its
success. We therefore find and hold that not only are
petitioner’s equestrian expenses ordinary and necessary, but that
they are reasonable in amount.
Conclusion

Petitioner’s equestrian and design activities constitute a
single undertaking. In addition, the expenses associated with
the equestrian-related activities are ordinary, necessary, and
reasonable in amount.

To reflect the foregoing and concessions by petitioner,

Decision will be entered
under Rule 155.

Bookmark to:

April 17th, 2007 | No Comments »

Kovitch v. Commissioner, 128 T.C. 9 (2007).

128 T.C. No. 9

UNITED STATES TAX COURT

LISA SUSAN KOVITCH, Petitioner, AND RICHARD P. KOVITCH, Intervenor v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 12281-05. Filed April 4, 2007.

R determined a deficiency with respect to the joint return that P and I filed for 2002. P filed a petition in which the only issue raised was her entitlement to spousal relief pursuant to sec. 6015, I.R.C. I did not file a petition. R notified I of P’s petition and his right to intervene pursuant to sec. 6015(e)(4), I.R.C., and Rule 325 of the Tax Court Rules of Practice and Procedure. I filed a notice of intervention and shortly thereafter filed for bankruptcy. Pursuant to 11 U.S.C. sec. 362(a)(8) (2000), a bankruptcy filing gives rise to an automatic stay of proceedings in the Tax Court “concerning the debtor.” The automatic stay with respect to I’s bankruptcy case has not been terminated.

Held: The automatic stay imposed by 11 U.S.C. sec. 362(a)(8) applies only to Tax Court proceedings that affect the tax liability of the debtor. Whether P is entitled to sec. 6015, I.R.C., spousal relief will not affect I’s joint tax liability because I will remain liable for the 2002 tax liability regardless of whether or not P remains jointly liable. Accordingly, the automatic stay imposed by 11 U.S.C. sec. 362(a)(8) does not prohibit this Court from proceeding to determine whether P is entitled to spousal relief, nor does it prohibit I from participating as an intervenor.

Lisa Susan Kovitch, pro se.

Richard P. Kovitch, pro se.

Jack T. Anagnostis, for respondent.

OPINION

RUWE, Judge: The issue that we decide in this Opinion is

whether we may proceed to adjudicate petitioner’s claim for

spousal relief in light of the fact that petitioner’s former

husband intervened and subsequently filed for bankruptcy, giving

rise to the automatic stay imposed by 11 U.S.C. section 362(a)(8)

(2000). The automatic stay prevents the commencement or

continuation of a proceeding before the United States Tax Court

concerning the debtor.1

1 Petitioner requested to have this case decided under the small tax case procedures provided in sec. 7463. However, because the issue we decide in this Opinion is an issue of first impression, we removed the small tax case designation and will proceed under the normal procedural Rules of the Tax Court. See Rule 171(c), Tax Court Rules of Practice and Procedure.

- 3

Background

Petitioner and her former husband, Richard P. Kovitch, filed a joint Federal income tax return for their tax year 2002. They have since divorced. On April 7, 2005, respondent issued a notice of deficiency to petitioner and Mr. Kovitch for 2002. Petitioner timely filed a petition. The only issue raised in her petition is whether she is entitled to relief from joint and several liability pursuant to section 6015.2 Petitioner is not challenging the underlying deficiency. Mr. Kovitch did not file a petition.

Pursuant to Rule 325(a) and King v. Commissioner, 115 T.C. 118 (2000), respondent sent a timely notice of filing of petition and right to intervene to Mr. Kovitch, who then filed a notice of intervention. By filing his notice of intervention, Mr. Kovitch became a party to this case. See sec. 6015(e)(4); King v. Commissioner, supra. Shortly after Mr. Kovitch filed his notice of intervention,3 he filed for bankruptcy.4 Mr. Kovitch’s

2 Unless otherwise indicated, all section references are to the Internal Revenue Code for the year at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.

3 There is a question as to the timeliness of Mr. Kovitch’s notice of intervention. Pursuant to Rule 325(b), a notice of intervention should be filed “not later than 60 days after service of the notice by the Commissioner of the filing of the petition, unless the Court directs otherwise.” Mr. Kovitch suggests that any delay may be due to his change of address, and we note that he originally sent the notice of intervention to respondent, who apparently forwarded it to the Court. Respondent (continued…)

bankruptcy filing gave rise to the automatic stay imposed by 11

U.S.C. section362(a)(8) that prohibits the commencement or

continuation of Tax Court proceedings “concerning the debtor.” The automatic stay has not been terminated. Before we can proceed to adjudicate whether petitioner is entitled to relief under section 6015, we must decide whether the automatic stay prevents us from doing so.

Discussion

I. Nature of Joint Liability and Section 6015 Relief

Spouses who file joint returns are jointly and severally liable for the entire tax liability, which may be collected from either spouse. See sec. 6013(d)(3). However, section 6015 provides that, notwithstanding section 6013(d)(3), a joint filer may elect to seek relief from joint and several tax liability.

Congress vested this Court with jurisdiction to review a taxpayer’s claim for relief from joint and several liability under specified circumstances. Maier v. Commissioner, 119 T.C.

3(…continued) has not objected to the notice of intervention, and any delay in filing the notice of intervention does not appear to have caused harm to any of the parties. In any event, we would use our discretion, as provided in Rule 325(b), to allow the notice of intervention to be filed.

4 Mr. Kovitch’s bankruptcy case was initially a ch. 7 proceeding; however, on May 1, 2006, the case was converted to a ch. 13 proceeding.

267, 270 (2002), affd. 360 F.3d 361 (2d. Cir. 2004); see also King v. Commissioner, supra at 121-122; Corson v. Commissioner, 114 T.C. 354, 363-364 (2000). Claims for spousal relief can be raised in several different types of proceedings including petitions filed under section 6015(e), 6330, or 6213. Drake v. Commissioner, 123 T.C. 320, 323 (2004); King v. Commissioner, supra at 121-122. Petitioner requested such relief by raising the matter as an affirmative defense in a deficiency proceeding under section 6213(a). See Drake v. Commissioner, supra at 323; see also Butler v. Commissioner, 114 T.C. 276, 287-288 (2000).

For cases involving requests for spousal relief, section 6015(e)(4) directs the Court to establish rules to provide notice to the nonrequesting spouse and an opportunity to become a party to the proceeding. Pursuant to Rule 325 and King, Mr. Kovitch was notified of petitioner’s petition seeking relief from joint and several liability and of his right to intervene in petitioner’s case. By intervening, Mr. Kovitch became a party. See Tipton v. Commissioner, 127 T.C. 214, 217 (2006). An intervening party is not granted rights or immunities superior to those of the other parties, may not enlarge the issues or alter the nature of the proceeding, and must abide by the Court’s Rules. Id. The instant proceeding concerns only whether petitioner is entitled to relief from her joint tax liability.

Mr. Kovitch’s liability is not at issue.

II. The Automatic Stay in Bankruptcy Cases

A bankruptcy filing generally triggers an automatic stay of Tax Court proceedings concerning the debtor. Actions which are subject to the automatic stay are set forth in 11 U.S.C. section 362(a).5 At the time Mr. Kovitch filed for bankruptcy, 11 U.S.C. section 362(a) provided in relevant part:

§ 362. Automatic stay

(a) Except as provided in subsection (b) of thissection, a petition filed under section 301, 302, or 303 of this title, or an application filed under section 5(a)(3) of the Securities Investor Protection Act of 1970, operates as a stay, applicable to all entities, of–

*******

5 Pars. (1)-(7) of 11 U.S.C. sec. 362(a) (2000) generally operate to temporarily bar actions “against” the debtor or property of the debtor or the bankruptcy estate. People Place Auto Hand Carwash, LLC v. Commissioner, 126 T.C. 359, 361-362 (2006). Par. (8) of 11 U.S.C. sec. 362(a), as in effect here, specifically stays Tax Court proceedings “concerning the debtor.” Id. at 362.

(8) the commencement or continuation of aproceeding before the United States Tax Court concerning the debtor.[6]

The automatic stay generally operates to temporarily bar actions against or concerning the debtor or property of the debtor or the bankruptcy estate. Allison v. Commissioner, 97 T.C. 544, 545 (1991). In a chapter 13 bankruptcy, such as that of Mr. Kovitch, an automatic stay is generally lifted only at “the time a discharge is granted or denied.” 11 U.S.C. sec. 362(c)(2)(C) (2000).

This Court has jurisdiction to determine whether the automatic stay under 11 U.S.C. section 362(a)(8) prevents us from proceeding. See Moody v. Commissioner, 95 T.C. 655, 658 (1990). We have construed the phrase “concerning the debtor” in 11 U.S.C. section 362(a)(8) narrowly to mean that the automatic stay should not apply unless the Tax Court proceeding possibly would affect the tax liability of the debtor in bankruptcy. People Place Auto Hand Carwash, LLC v. Commissioner, 126 T.C. 359, 363 (2006); 1983

6 The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. 109-8, sec. 709, 119 Stat. 127, amended sec. 362(a)(8) of the Bankruptcy Code by striking out “the debtor” and inserting “a corporate debtor’s tax liability for a taxable period the bankruptcy court may determine or concerning the tax liability of a debtor who is an individual for a taxable period ending before the date of the order for relief under this title”. This provision became effective with respect to petitions for relief under the Bankruptcy Code filed on or after Oct. 17, 2005. See id. sec. 1501, 119 Stat. 216. Because Mr. Kovitch commenced his bankruptcy case on Oct. 14, 2005, this amendment does not apply here.

W. Reserve Oil & Gas Co. v. Commissioner, 95 T.C. 51 (1990),

affd. without published opinion 995 F.2d 235 (9th Cir. 1993).7

Thus, we must decide whether the current proceeding involving

petitioner’s request for section 6015 spousal relief affects Mr.

Kovitch’s tax liability for purposes of applying the automatic

stay.

7 This construction is consistent with the recently amended language of 11 U.S.C. sec. 362(a)(8). People Place Auto Hand Carwash, LLC v. Commissioner, supra at 364; see also Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 sec. 709. There is no indication in the legislative history that the change from “concerning the debtor” to “concerning the tax liability of the debtor” should alter the way the statute is interpreted with regard to the debtor. Rather, this amendment clarifies how the statute had been interpreted by the courts before the amendment. The legislative history describes the purpose of this amendment as follows:

“Under current law, the filing of a petition for relief

under the Bankruptcy Code activates an automatic stay

that enjoins the commencement or continuation of a case

in the United States Tax Court. This rule was arguably

extended in Halpern v. Commissioner [96 T.C. 895

(1991)], which held that the tax court did not have

jurisdiction to hear a case involving a postpetition

year. To address this issue, section 709 of the Act

amends section 362(a)(8) of the Bankruptcy Code to

specify that the automatic stay is limited to an

individual debtor’s prepetition taxes (taxes incurred

before entering bankruptcy). The amendment clarifies

that the automatic stay does not apply to an individual

debtor’s postpetition taxes. In addition, section 709

provides that the stay applies to both prepetition and

postpetition tax liabilities of a corporation so long

as it is a liability that the bankruptcy court may

determine. [H. Rept. 109-31 (Pt. 1), at 102 (2005).]”

People Place Auto Hand Carwash, LLC v. Commissioner, supra at 362

n.6.

Mr. Kovitch’s tax liability is a liability to the United States, and whether or not spousal relief is granted to petitioner, Mr. Kovitch remains liable. The only issue to be decided is the extent to which petitioner will remain liable for the 2002 tax liability. As the Court of Appeals for the Ninth Circuit has observed, the Tax Court’s determination regarding relief under section 6015 does not affect the intervening former spouse’s personal tax liability. Baranowicz v. Commissioner, 432 F.3d 972, 974 (9th Cir. 2005).8

Regardless of whether we grant or deny relief to petitioner under section 6015, our decision in this case can neither increase nor decrease Mr. Kovitch’s tax liability and thus will not affect whether Mr. Kovitch is liable for the entire amount. Therefore, petitioner’s request for section 6015 relief does not concern the tax liability of Mr. Kovitch.9 Accordingly, we hold

8 The Court of Appeals for the Ninth Circuit decided that an intervening former spouse lacked standing to appeal the Tax Court’s determination regarding sec. 6015 relief. Baranowicz v. Commissioner, 432 F.3d 972 (9th Cir. 2005). In Baranowicz, the intervenor argued that, although the deficiencies determined by the Tax Court or the Court of Appeals would not change his obligation to pay, the determination granting spousal relief to the requesting spouse constituted actual injury. The Court of Appeals disagreed, holding that “Absent a showing of some concrete harm, we must reject * * * [the intervenor’s] argument that the mere grant of participation rights in the Tax Court under § 6015(e)(4) is sufficient to confer on him standing to appeal.” Id. at 976.

9 We recognize that a decision granting petitioner’s request for relief could conceivably have a financial impact on Mr. (continued…)

that the automatic stay imposed by 11 U.S.C. section 362(a)(8) does not preclude this Court from proceeding in this case to determine whether petitioner is entitled to relief, nor does it prohibit Mr. Kovitch from participating as an intervenor in this case.

To reflect the foregoing,

An appropriate order will

be issued.

9(…continued) Kovitch in the future. For example, if petitioner’s request for relief were denied, respondent might collect the joint liability from petitioner as opposed to Mr. Kovitch. We do not believe that such speculative possibilities are sufficient to make this a proceeding concerning the tax liability of the debtor in bankruptcy. Our decision in this case will not alter Mr. Kovitch’s tax liability.

Bookmark to:

April 4th, 2007 | 1 Comment »