## Facts

- Harry and Gail Osteen were full-time wage earners (a bank executive and a registered nurse) who began breeding Percheron horses in Florida.
- There were no established Percheron breeders or market for Percherons in Florida when the activity began.
- The Osteens intended to breed, train (including showing), use the horses in a horse-powered farm operation, and sell the horses.
- The horse activity generated losses over several consecutive years, which the Osteens deducted on their federal income tax returns.
- The Commissioner determined the activity was not engaged in for profit, disallowed the loss deductions, and assessed deficiencies and substantial-understatement penalties.

## Issues

1. Whether the Tax Court clearly erred in finding the horse-breeding activity was not engaged in for profit, making the losses nondeductible under I.R.C. §§ 162 and 183.
2. Whether substantial-understatement penalties were improper because substantial authority supported the taxpayers’ reporting position.

## Decision

- The Eleventh Circuit affirmed the Tax Court’s disallowance of deductions, holding the finding that the Osteens lacked a profit objective was not clearly erroneous.
- The Eleventh Circuit reversed the Tax Court’s imposition of the substantial-understatement penalty, holding there was substantial authority for the taxpayers’ position.
- Disposition: affirmed in part (deficiencies) and reversed in part (penalties).

## Legal Principles

- Expenses are deductible under I.R.C. § 162 only if incurred in carrying on a trade or business, which requires an actual and honest profit objective.
- I.R.C. § 183 limits deductions for activities “not engaged in for profit”; courts commonly use § 183 profit-motive factors to evaluate whether an activity qualifies as a trade or business for § 162.
- Profit objective is a factual determination; appellate review of the Tax Court’s finding is for clear error.
- A taxpayer may avoid substantial-understatement penalties (then governed by former I.R.C. § 6661) if the taxpayer’s treatment is supported by “substantial authority,” even if the taxpayer ultimately loses on the merits.

## Conclusion

The court upheld the IRS’s denial of horse-breeding loss deductions because the Tax Court’s no-profit-objective finding was not clearly erroneous, but it vacated the substantial-understatement penalties because existing legal authority provided substantial support for the taxpayers’ position despite their factual loss.


Osteen v. Comm’r, 62 F.3d 356 (11th Cir. 1995)