## Facts

- Dr. Theodore N. Engdahl and Adeline M. Engdahl operated an American saddle-bred horse-breeding activity while Dr. Engdahl earned substantial income as an orthodontist.
- The couple began exploring horse breeding in the mid-1960s as a potential source of retirement income and consulted a trainer, veterinarians, and others, and reviewed industry materials indicating a 5–10 year start-up period.
- They performed most ranch work themselves, devoting substantial weekly time and treating the activity as a serious business operation.
- They maintained detailed, separate financial records for the horse activity, used a separate bank account for activity income, and used an accountant to prepare periodic summaries.
- They did not use the ranch or horses for recreation; they did not ride the horses and culled animals that did not meet breeding or showing standards.
- The activity produced losses over the years at issue (1971–1973), which the Engdahls deducted against other income; the ranch and horses appreciated in value.
- The Commissioner issued deficiency notices for 1971–1973 after disallowing losses and investment credits on the ground the activity was not engaged in for profit under I.R.C. § 183.

## Issues

1. Whether the horse-breeding activity was an “activity not engaged in for profit” under I.R.C. § 183(a), limiting deductions and related credits.
2. Whether, considering all facts and circumstances, the taxpayers had an actual and honest objective to make a profit from the activity.

## Decision

- The Tax Court held the horse-breeding activity was engaged in for profit within the meaning of I.R.C. § 183.
- The court rejected the Commissioner’s disallowance of the losses and related investment credits.
- Decision was entered for the petitioners.

## Legal Principles

- Under I.R.C. § 183, the controlling inquiry is whether the taxpayer had an actual and honest objective of making a profit, determined from all facts and circumstances.
- A history of losses and the presence of substantial outside income are relevant but not determinative of the profit-objective inquiry.
- Businesslike conduct—such as maintaining complete records, using separate accounts, and monitoring finances—supports a finding of profit objective.
- Seeking and relying on expert advice and conducting pre-operation investigation supports a finding of profit objective.
- Significant time and effort devoted to the activity supports a finding of profit objective, particularly where the activity is not conducted for recreation.
- Expected asset appreciation and long start-up periods in the relevant industry may support a profit objective even when early-year operating results are negative.

## Conclusion

The Tax Court found that the Engdahls’ horse-breeding activity, though loss-generating during the years at issue, was conducted in a businesslike manner with substantial effort, expert consultation, no recreational use, and a reasonable expectation of future profits and appreciation; therefore, § 183 did not bar the deductions and related credits.


Engdahl v. Commissioner, 72 T.C. 659 (1979)