MEMORANDUM FINDINGS OF FACT AND OPINION
CLAPP, Judge: Respondent determined deficiencies in petitioners' 1978 and 1979 Federal income taxes in the amounts of $15,439 and $18,111, respectively. The issues for decision are: (1) whether petitioners' rental of real property was an activity engaged in for profit; (2) whether petitioners' horse operations constituted an activity engaged in for profit; 1 and (3) whether petitioners' gain on the sale of their principal residence must be recognized.
FINDINGS OF FACT
Some of the facts have been stipulated and are found accordingly. The stipulation of facts and the exhibits attached thereto are incorporated by this reference.
Petitioners resided in Rogue River, Oregon at the time they filed their petition in this case.
Petitioner-husband worked for Ford Aerospace and Communications Corporation (Ford Aerospace). He planned to retire from Ford Aerospace in 1979 or 1980. Petitioners thought that their income would be insufficient after petitioner-husband retired. Thus, they decided that they would need a new source of income and that a horse ranch would provide the additional income they would need.
In May 1971, petitioners purchased land in Rogue River, Oregon (the Oregon ranch) which they planned to use for a horse ranch after petitioner-husband retired. In September 1971, while petitioner-husband worked for Ford Aerospace, petitioners purchased a ranch in Morgan Hill, California (the California ranch). Petitioners resided at the California ranch until Ford Aerospace transferred petitioner-husband to Colorado in 1973. In October 1977, petitioners purchased a ranch in Peyton, Colorado (the Colorado ranch). Petitioner-wife moved to the Oregon ranch in December 1978. Petitioners sold the Colorado ranch in January 1979. Petitioner-husband resigned from Ford Aerospace and moved to the Oregon ranch in February 1979.
Rental Property
In May 1971, petitioners purchased the Oregon ranch which had 35 acres of land and a house. Petitioners rented the house and land separately; they rented the house to a tenant from 1971 to 1979 and the land to farmers from 1973 through 1978 as follows:
| Period | Usage |
| 1973-1974 | Field Crops and Cattle Grazing |
| 1975-1976 | Not rented |
| 1977 | Hay Production |
| 1978 | Cattle Grazing |
In anticipation of moving to the property in 1980, petitioners made periodic improvements to the land as follows:
| Year | Improvements |
| 1976 | Underground irrigation system, |
| planting with orchard grass/clover |
| mix, pump/irrigation pipe |
|
| 1977 | Fence repair |
|
| 1979 | Cross fencing installation, barn/ |
| arena construction |
On Schedule F of their 1978 Federal income tax return, petitioners reported income and expenses from their rental operations as follows:
| Income |
|
| Rental of house and land | | $ 1,960.00 |
|
| Expenses |
|
| Repairs, maintenance | $ 253.00 |
| Supplies purchased | 451.00 |
| Fuel (10,421 miles) | 1,772.00 |
| Taxes | 109.00 |
| Insurance | 183.00 |
| Freight, trucking | 100.00 |
| Land cleaning expenses | 697.00 |
| Abandonment-fence | 1,393.00 |
| Board and Lodging | 345.00 |
| Telephone | 19.00 |
| Airfare | 333.00 |
| Misc. Expenses | 93.00 |
| Depreciation (house & equipment) | $5,956.00 |
|
| Total expenses | | $11,704.00 |
|
| Net Oregon Property Profit (Loss) | | ($ 9,744.00) |
On a separate Schedule F of their 1978 Federal income tax return, petitioners reported income and expenses from their horse activity at their Colorado ranch as follows:
| Peyton, Colorado Property |
|
| Income |
|
| Sales of Hay | | $ 120.00 |
|
| Expenses |
|
| Repairs, maintenance | $ 687.00 |
| Feed purchased | 1,288.00 |
| Supplies purchased | 399.00 |
| Breeding fees | 550.00 |
| Vet. fees, medicine | 1,271.00 |
| Fuel (16,084 miles) | 2,658.00 |
| Taxes and licenses | 46.00 |
| Insurance | 79.00 |
| Utilities | 371.00 |
| Freight, trucking | 687.00 |
| Telephone | 117.00 |
| Dues and Subscriptions | 48.00 |
| Show Expense | 135.00 |
| Farrier | 104.00 |
| Board for horses | 6,020.00 |
| Labor-training | 3,222.00 |
| Advertising | 266.00 |
|
| $17,948.00 |
|
| Depreciation | 4,938.00 |
| (on horses, property & equipment) |
|
| Total expenses | | $22,886.00 |
|
| Net Colorado Property Profit (Loss) | | ($22,766.00) |
In 1979, the house remained rented but petitioners used the land for their horse operations. On Schedule F of their 1979 Federal income tax return, petitioners reported the combined income and expenses from the rental and horse operations as follows:
| Income |
|
| Sales of Hay | $ 860.00 |
| Rental of House | 800.00 |
| Rent of Pasture | 459.00 |
| Sale of Colt | 1,850.00 |
|
| | $ 3,969.00 |
|
| Expenses |
|
| Repairs, maintenance | 1,204.00 |
| Feed purchased | 1,314.00 |
| Fertilizer, lime, chemicals | 246.00 |
| Supplies purchased | 1,791.00 |
| Breeding fees | 1,100.00 |
| Veterinary fees, medicine | 1,045.00 |
| Fuel | 2,185.00 |
| Taxes and Licenses | 286.00 |
| Insurance | 425.00 |
| Utilities | 643.00 |
| Freight, trucking | 351.00 |
| Board & Lodging | 150.00 |
| Casual labor | 254.00 |
| Equipment Rental | 1,061.00 |
| Advertising | 1,166.00 |
| Board of Horses | 6,955.00 |
| Training of Horses | 5,785.00 |
| Dues & Subscriptions | 480.00 |
| Depreciation | $8,072.00 |
| (horses, house & equipment) |
|
| Total Expenses | | $34,513.00 |
|
| Net Oregon Property Profit (Loss) | | ($30,544.00) |
Horse Operations
Petitioners decided to acquire experience in various horse activities while petitioner-husband worked at Ford Aerospace and, to engage in horse operations full time after petitioner-husband retired. To acquire experience, petitioners purchased the California, Colorado and Oregon ranches.
Petitioners resided and kept five horses, three appaloosas and two quarterhorses, at the California ranch. They also kept two horses at a breeding ranch in Idaho. In 1973, Ford Aerospace transferred petitioner-husband to Colorado. Petitioners sold the horses located at the California ranch and moved to a home in Colorado Springs, Colorado. The two horses located in Idaho were transported to Colorado and boarded at a horse ranch.
Upon moving to Colorado, petitioners attempted to locate a ranch. In October 1977, petitioners purchased the Colorado ranch which had 15 acres. While in Colorado, petitioners purchased eight horses, sold four horses, and their horses had six foals.
Petitioner-wife moved to the Oregon ranch on December 28, 1978 in anticipation of their entering the horse business full time. Petitioners sold their Colorado ranch on January 5, 1979. Petitioner-husband lived in an apartment while he remained in Colorado to finish his assignment with Ford Aerospace. Upon completion of his assignment, he resigned from Ford Aerospace and moved to the Oregon ranch on February 5, 1979.
At the California and Colorado ranches, petitioners performed the normal duties of cleaning stalls, grooming and feeding. They also purchased, sold and bred horses.
The following chart reflects petitioners' horses which were foaled, purchased and/or sold:
| PURCHASE | DEPR. | SELLING | NET |
| NAME | ($ ) | DATE | ($ ) | ($ ) | DATE | ($ ) |
| Go's Elsano | 400 | (7/71) | | 250 | (1/76) | (150) |
| Ring O'Fire | 900 | (8/71) | 346 | 600 | (12/74) | 46 |
| Miss Bammy Bar | 500 | (8/71) | 900 |
| Maya Monday | foal | (4/72) | | 350 | (3/74) | 350 |
| About to Win | 855 | (5/72) | 305 | 600 | (9/75) | 50 |
| Nug Waggoner | 655 | (5/72) | 148 | 400 | (1/74) | (107) |
| Doc's Moonraker 2 | foal | (4/73) | 3500 |
| Miss Moonlight Jet | foal | (3/74) | 417 | 725 | (4/77) | 1142 |
| Shes Otoes Flash | 1000 | (11/74) | 310 | 245 | (4/77) | (445) |
| Melodys Mamie | 2700 | (8/75) | 2700 |
| Docs Marauder | foal | (3/76) | | 1850 | (12/79) | 1850 |
| Tivio Prince | foal | (4/76) | | 800 | (4/77) | 800 |
| Spanish Sin | 2500 | (7/76) | 2083 | put down | (10/82) | (417) |
| Docs Monarch | foal | (4/77) | | 5500 | (10/80) | 5500 |
| Jans Melody | foal | (4/77) | | 4500 | (1/80) | 4500 |
| Anna B Badger | 2350 | (5/77) | 1899 | 750 | (1/83) | 299 |
| Skips Gray Ghost | | (5/77) | | traded | (12/81) |
| | | | for training |
| Skips Judy | 1000 | (5/77) | 190 | 814 | (10/78) | 4 |
| Skips Interest | 1750 | (6/77) | 1100 | 1050 | (1/83) | 400 |
| Skips Mary Ann | 1000 | (8/77) | 489 | 650 | (5/81) | 139 |
| Shasta Skipadoo | 600 | (9/77) | 539 |
| Mildady Doc | foal | (4/78) |
| A Skip Named Sue | foal | (3/79) |
| Moonrakers Star | foal | (5/79) | | 750 | (5/81) | 750 |
| Moonrakers Bucky | foal | (3/80) | | 1850 | (5/84) | 1850 |
| Docs Nomad | foal | (4/80) |
| Moonrakers Knight | foal | (4/80) | | 933 | (5/82) | 933 |
| Skip To The Doc | foal | (6/80) | | 750 | (5/81) | 750 |
| Docs Copper Cutter | foal | (4/81) |
| Docs Classy Sox | foal | (4/81) | | 1000 | (7/84) | 1000 |
| Skippza Doll | foal | (5/81) | | put down | (6/82) |
| Shasta Summer | foal | (5/81) | | 650 | (1/83) | 650 |
| Bruces Moonraker | foal | (4/82) | | traded | (2/84) |
| | | | for training |
| Docs Cascade Lady | foal | (5/82) | | 775 | (1/83) | 775 |
| Shastas Misty Lady | foal | (5/82) |
| Docs Cascade Bar | foal | (5/83) |
| Unnamed | foal | (3/84) |
| Unnamed | foal | (4/84) |
| Unnamed | foal | (4/84) |
Petitioners conducted horse breeding as follows:
| MARE | SIRE | FOAL |
| Miss Bammy Bar | (Purchased 8/71) |
| Docs Dynamo | Doc's Moonraker (4/73) |
| Cosmo Jet | Miss Moonlight Jet (3/74) |
| Docs Dynamo | Doc's Marauder (3/76) |
| Docs Dynamo | Doc's Monarch (4/77) |
| Docs Dynamo | Milady Doc (4/78) |
| Docs Wapati | Doc's Nomad (4/80) |
| Docs Wapati | Doc's Copper Cutter (4/81) |
| Docs Tivio Bar | Doc's Cascade Bar (5/83) |
| Melody's Mamie | (Purchased 8/75) |
| Poco Tivio | Tivio Prince (4/76) |
| Docs Moonraker | Jan's Melody (4/77) |
| Docs Moonraker | Moonraker's Buck (3/80) |
| Docs Moonraker | Bruce's Moonraker (4/82) |
| Docs Moonraker | Unnamed (4/84) |
| Spanish Sin | (Purchased 7/76) | None |
| (put to sleep) |
| Anna B. Badger | (Purchased 5/77) |
| Son O Skip | Skip's Gray Ghose (5/77) |
| Son O Skip | A Skip Named Sue (3/79) |
| Docs Moonraker | Moonrakers Knight (4/80) |
| Docs Moonraker | Docs Classy Sox (4/81) |
| Skip's Interest | (Purchased 6/77) |
| Docs Moonraker | Skippza Doll (5/81) |
| Skips Mary Ann | (Purchased 8/77) |
| Doc's Moonraker | Moonrakers Star (5/79) |
| Docs Moonraker | Skip to the Doc (6/80) |
| Shasta Skipadoo | (Purchased 9/77) |
| Doc's Moonraker | Shasta Summer (5/81) |
| Docs Moonraker | Shastas Misty Lady |
| | Unnamed (3/84) |
| Milady Doc | (Foaled 4/78 from | Miss Bammy Bar) |
| Sir Skipa | Unnamed (4/84) |
| Go's Elsano | (Purchased 8/71) | Maya Monday (4/72) |
While petitioner-husband was employed by Ford Aerospace, petitioners worked 30 hours per week on their horse operations. They worked 55 hours per week on their operations after petitioner-husband retired.
Petitioners maintained complete and accurate books and records of their activities. They culled their herd. They advertised through trade publications and by sending their prize horse to stallion parades.
Petitioners reported the results of their horse operations on their Federal income tax return as follows:
| Year | Net Income |
| (Loss) |
| 1971 | (5,710) |
| 1972 | (7,731) |
| 1973 | (8,299) |
| 1974 | (10,573) |
| 1975 | (16,691) |
| 1976 | (17,314) |
| 1977 | (19,481) |
| 1978 | (32,484) |
| 1979 | (30,544) |
| 1980 | A loss, but the loss was less than |
| the year before |
| 1981 | A loss, but the loss was less than |
| in 1980 |
Petitioners' operations were impacted adversely by two events: petitioner-husband was transferred from California to Colorado in 1973 and their prize horse broke its leg in 1975. Petitioners shifted their emphasis from horse sales to horse and cattle boarding to make their operations profitable.
Petitioners' adjusted gross income before taking into account their Schedule F losses was as follows:
| Year | Amount |
| 1978 | $73,377 |
| 1979 | $54,502 |
| 1980 | Approximately $20,000 |
| 1981 | Approximately $20,000 |
Deferred Gain on Sale of Principal Residence
Petitioners bought a house in Colorado on July 16, 1973 and a second residence in Colorado on October 4, 1977. They sold the first house for a gain on December 5, 1977. On their 1977 Federal income tax return petitioners claimed nonrecognition of the gain pursuant to section 1034.
Petitioners conducted horse operations at their second residence. As part of their operations, they depreciated fencing, a barn and an outbuilding. They sold the second residence to its original owner on January 5, 1979, 13 months after the sale of the first house. Petitioners realized a gain on the sale of the residence including the depreciated property. On Form 2119 of their 1979 Federal income tax return, they claimed nonrecognition of the entire gain.
ULTIMATE FINDINGS OF FACT
Petitioners' rental of real property was not an activity engaged in for profit.
Petitioners' horse operation was an activity engaged in for profit.
OPINION
The first two issues for decision are whether petitioners' rental of real property and operations involving horses were activities engaged in for profit within the meaning of section 183.
Section 183(a) 3 provides generally, if an activity is not engaged in for profit, no deduction attributable to such activity shall be allowed except as otherwise provided for in that section. Section 183(c) defines "activity not engaged in for profit" as "any activity other than one with respect to which deductions are allowable * * * under section 162 or * * * paragraph (1) or (2) of section 212." Section 1.183-2(b), Income Tax Regs., provides a list of nine factors to consider in the determination of whether an activity is engaged in for profit. 4 However, the resolution of the issue is to be based on all the facts and circumstances. Engdahl v. Commissioner,72 T.C. 659, 666 (1979). In order for the taxpayer to prevail, the facts and circumstances must indicate that the taxpayer entered into, or continued, the activity with an actual and honest objective of making a profit. Dreicer v. Commissioner,78 T.C. 642, 645 (1982), affd. without opinion 702 F.2d 1205 (D.C. Cir. 1983).
Rental Property
Petitioners purchased the Oregon property with the intention of using it for their horse operations when petitioner-husband retired from Ford Aerospace. Petitioners were able to rent the land to farmers in 1973, 1974, 1977 and 1978. The land was not rented in 1975 or 1976. During this two-year hiatus, petitioners upgraded the land in anticipation of their moving to it in 1980. Petitioners rented the house on the land from 1971 through 1979. 5
Petitioners' concern for the property focused primarily on its future use as a horse farm. Its ability to generate rental income was fortuitous, and only of second importance. Although petitioners mitigated the carrying costs of the land from the time of purchase to the time they moved to Oregon through rent income and tax deductions, they did not enter into, or continue, the rental of the property with an actual and honest objective of making a profit.
Horse Operations
Petitioners wanted a steady income after petitioner-husband retired from Ford Aerospace in 1980. To effect their desire, they decided they would work full time in various horse related activities after petitioner-husband retired. They, however, did not want to begin their horse operations full time without first gaining some experience.
Petitioners gained a great deal of experience at the California and Colorado ranches. They participated in the daily chores and bred, purchased and sold horses. Petitioners' efforts to gain experience prior to undertaking the activities full time are an indication that their activities were engaged in for profit.
At each of their ranches, petitioners carried on their activities in a business like manner. They kept complete and accurate books and records. They culled their herd. They advertised through trade publications and by sending their prize horse to stallion parades. Finally, they took steps to make their business profitable by shifting their emphasis from horse sales to horse and cattle boarding.
Petitioners expended a substantial amount of time and effort in carrying on their horse operations. They worked 30 hours per week on their horse activities while petitioner-husband was employed by Ford Aerospace and 55 hours per week after they moved to the Oregon ranch.
Although petitioners' operations have a history of losses, petitioners' operations were impacted adversely by petitioner-husband's transfer to Colorado and their prize horse's suffering a broken leg. Petitioners' largest losses occurred in 1978 and 1979. These large losses, however, can be attributed in part to petitioners' shifting their operations from part time to full time and the nonrecurring expenses associated with this transition. The losses began to decrease in the years immediately following 1978 and 1979.
Finally, although petitioners had an adjusted gross income, before taking into account their Schedule F losses, of $73,377 and $54,502 in 1978 and 1979, respectively, their income decreased dramatically after petitioner-husband retired from Ford Aerospace. Thus, petitioners' financial status does not clearly indicate whether or not petitioners' operations were engaged in for profit.
Based on the entire record, we find that petitioners' horse operations were engaged in for profit.
Deferred Gain on Sale of Principal Residence
Realized gains on the sale or exchange of property are generally recognized. Section 1001(c). An exception to the general rule is that realized gains are not recognized if they result from the sale or exchange of a principal residence pursuant to section 1034. Section 1034(a), as in effect in 1979, provided in relevant part:
(a) Nonrecognition of Gain. -- If property (in this section called "old residence") used by the taxpayer as his principal residence is sold by him and, within a period beginning 18 months before the date of such sale and ending 18 months after such date, property (in this section called "new residence") is purchased and used by the taxpayer as his principal residence, gain (if any) from such sale shall be recognized only to the extent that the taxpayer's adjusted sales price * * * of the old residence exceeds the taxpayer's cost of purchasing the new residence.
Section 1304(d)(1), however, renders subsection (a) inapplicable if petitioners utilized the nonrecognition provisions of section 1034 within the 18 month period prior to the sale of their second residence. 6 Section 1034(d)(1). Furthermore, the limitation in section 1034(d)(1) does not apply, and the realized gain in question is not recognized, if section 1034(d)(2) applies. Subsection (d)(2) provides:
(d) Limitation. --
* * *
(2) Subsequent Sale Connected With Commencing Work at New Place. -- Paragraph (1) shall not apply with respect to the sale of the taxpayer's residence if --
(A) such sale was in connection with the commencement of work by the taxpayer as an employee or as a self-employed individual at a new principal place of work, and
(B) if the residence so sold is treated as the former residence for purposes of section 217 (relating to moving expenses), the taxpayer would satisfy the conditions of subsection (c) of section 217 (as modified by the other subsections of such section).
Section 217 (c) provides:
(c) Conditions for Allowance. -- No deduction shall be allowed under this section unless --
(1) the taxpayer's new principal place of work --
(A) is at least 35 miles farther from his former residence than was his former principal place of work, or
(B) if he had no former principal place of work, is at least 35 miles from his former residence, and
(2) either --
(A) during the 12-month period immediately following his arrival in the general location of his new principal place of work, the taxpayer is a full-time employee, in such general location, during at least 39 weeks, or
(B) during the 24-month period immediately following his arrival in the general location of his new principal place of work, the taxpayer is a full-time employee or performs services as a self-employed individual on a full-time basis, in such general location, during at least 78 weeks, of which not less than 39 weeks are during the 12-month period referred to in subparagraph (A).
For purposes of paragraph (1), the distance between two points shall be the shortest of the more commonly traveled routes between such two points.
In the present case, section 1034(d)(1) would, but for subsection (d)(2), apply because petitioners utilized section 1034 when they sold their first house -- 13 months prior to selling their second residence. However, subsection (d)(2) applies. Subsection (d)(2)(A) is met because petitioners sold their second residence in connection with their move to Oregon to become self-employed in their full-time horse business. Subsection (d)(2)(B) is met because petitioners move from Colorado to Oregon meets the 35-mile distance requirement of section 217(c)(1) and petitioners activities lasted at least through 1981 which satisfies the 24-month time requirements of section 217(c)(2).
Because section 1034(d)(2) applies, section 1034(d)(1) does not apply and section 1034(a) applies. The realized gain on the sale of petitioners' principal residence is not recognized. Finally, to the extent any assets in the sale were not part of petitioners' principal residence and were part of petitioners' horse operations, section 1034 does not apply, e.g., any gain is realized from the sale of the depreciated fencing, barn, and outbuilding.
To reflect the foregoing, Decision will be entered under Rule 155.