70 T.C. 715 (1978)
HERBERT A. DUNN and GEORGIA E. DUNN, PETITIONERS
COMMISSIONER of INTERNAL REVENUE, RESPONDENT
United States Tax Court
August 21, 1978
1. Petitioner-husband engaged in harness horse racing and breeding activities. Held, on the facts, he did not carry on a trade or business or engage in an activity for profit during the taxable years at issue. Sec. 183, I.R.C. 1954.
2. All of petitioner-wife's shares in a corporation, which held a General Motors franchise, were redeemed in 1970 under an agreement which provided for a 12-year payout of the redemption price, payments being subject to certain restrictions incorporated in the agreement in order to meet the requirements imposed on the corporation by General Motors as conditions to retention of its franchise. Stock of other shareholders was attributed to her but she filed the required agreement. She did not remain as an officer, director, or employee of the corporation. Held, petitioner-wife did not retain a prohibited interest under sec. 302(c)› (2)(A)(i), I.R.C. 1954, with the result that the attribution rules do not apply and the proceeds of the redemption are entitled to capital gain treatment under sec. 302(a), I.R.C. 1954.
Robert M. Tyle, for the petitioners.
Anthony M. Bruce, for the respondent.
Respondent determined deficiencies in petitioners' Federal income tax as follows:
The issues remaining for our decision are: (1) Whether Page 716
petitioner Herbert Dunn was engaged in the trade or business of harness horse racing and breeding and (2) whether the redemption of petitioner Georgia Dunn's stock in Bresee Chevrolet, Inc., constituted a complete termination of her interest in the corporation under sections 302(b)(3)
and 302(c)(2). GENERAL FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. The stipulations of facts, together with the exhibits attached thereto, are incorporated herein by this reference. Herbert A. Dunn and Georgia E. Dunn (Herbert, Georgia, or petitioners) resided in Liverpool, N.Y., at the time of filing the petition herein. Petitioners filed joint Federal income tax returns for 1970 and 1971 with the North-Atlantic Service Center, Andover, Mass. Herbert was born in 1893 and Georgia was born in 1897. FINDINGS OF FACT Trade or Business Issue
Herbert has been interested in horses since at least 1940. Prior to 1968, he owned various horses, which were stabled at his home and ridden by himself and his children for pleasure. He entered his horses in amateur exhibitions and horse shows to compete for ribbons. He later became interested in harness racing. In 1968, Herbert owned " Little Pumpkin" and " Crowning Glory." " Little Pumpkin" was entered in two races at Pompano Beach, Fla., and won a total of $104. The combined winnings of the first place winners in these two races was $800. On his 1968 Federal income tax returns, Herbert disclosed a net loss of $8,967.65 from the operations of his racing stable, including wagering. Petitioner took no deduction for this loss because, during 1968, Herbert considered himself an amateur and his racing activities as not being carried on for profit. In 1969, Herbert informed his lawyer that he contemplated retiring from the automobile business (see p. 721 infra ) and that he wanted his harness horse racing and breeding to be his future Page 717
business. Upon his lawyer's advice, he retained a certified public accountant to prepare the appropriate schedule for his income tax return. In 1969, Herbert continued to own " Crowning Glory" and he acquired " Miss Linda Sharp" and " Straight Shot." He did not enter any horses in races in 1969. In 1970, Herbert continued to own " Crowning Glory" and acquired " Henry Knauf." " Miss Linda Sharp" and " Straight Shot" were sold at losses of $1,680.23 and $2,182.28, respectively, which petitioners deducted as losses from the sale of section 1231 property. Prior to his sale, " Straight Shot" was entered in 11 races at Saratoga Springs, N.Y., winning a total of $734. The combined winnings of first place horses in these races was $4,200. " Straight Shot" was also entered in a " New York Sire Race" at Buffalo, N.Y., where he finished fourth and won $627.35. The winner of this race won $3,921. None of Herbert's other horses were entered in races in 1970. In 1971, Herbert continued to own " Henry Knauf" and " Crowning Glory." For the first time, he took a deduction for depreciation with respect to " Crowning Glory." " Henry Knauf" was entered in two races at Vernon Downs, Vernon, N.Y., where he won $93.75 for fifth place in one race and nothing in the other. The winner in the former race won $937.50. " Crowning Glory" was not entered in any races in 1971. Herbert continued to own " Crowning Glory" throughout 1972. " Henry Knauf" was sold at a loss in that year. Prior to his sale, he was entered in four races at Pompano Beach, where he won a total of $219, and was entered in eight races at Saratoga Springs, where he won a total of $240. The combined first place winnings in all these races was $11,570. " Crowning Glory" was not entered in any races in 1972. Subsequent to 1972, Herbert began winding down his horse racing and breeding activities and did not enter any more races. In each of the years 1973 and 1974, he sold a foal. He continued to own " Crowning Glory" until 1975. Herbert conducted his harness racing and breeding activities in both New York State and Florida. In 1970 and 1971, petitioners spent the winter in Florida. On their tax returns for 1969 through 1975, petitioners reported on Schedule C (Profit/or Loss from Business or Profession) all income from Herbert's breeding and harness Page 718
racing activities and deducted expenses such as board and training, stud fees, association fees, drivers, and accounting fees. The financial aspects of Herbert's horse racing and breeding activities may be summarized as follows:
|| Gross receipts 1
|| Profit (loss)
Petitioners' reported taxable income for the years 1968 through 1974 was as follows:
On October 31, 1972, Herbert, but not Georgia, signed a letter electing, pursuant to section 183(e), to defer the determination of whether the presumption in section 183(d) applies until the close of calendar year 1976. ULTIMATE FINDING OF FACT Herbert did not carry on a trade or business or engage in an activity for profit during the taxable years 1970 and 1971. OPINION
The question before us is whether Herbert's harness horse racing and breeding activities constitute a trade or business, as petitioners contend, or an activity not engaged in for profit, as respondent contends. Petitioners' entitlement to deductions for net operating losses and for ordinary losses incurred in the sale Page 719
of horses is dependent upon our resolving this issue in their favor. Section 183(d) provides that, if for any 2 of 7 consecutive taxable years (in the case of an activity which consists in major part of the breeding, training, showing, or racing of horses) the gross income derived from such activity exceeds the deductions, the activity shall be presumed to be engaged in for profit unless the Commissioner establishes to the contrary. If the taxpayer so elects under section 183(e), the applicability of the presumption shall not be determined before the close of the sixth taxable year following the year in which the taxpayer first engages in the activity. For this purpose, a taxpayer is treated as not engaged in any activity in a year beginning before January 1, 1970. In the event of such an election, the presumption shall apply to each taxable year in the 7-year period beginning with the first year in which the taxpayer engages in the activity, subject to certain conditions. The Commissioner contends that Herbert's purported election is invalid because not signed by Georgia. See section 12.9, Income Tax Regs., adopted as temporary regulations under section 183(e) by T.D. 7308, 1974-1 C.B. 64, and not yet made permanent. Petitioners urge us to give the election effect because they were told by respondent's agent that only Herbert need sign the election and the temporary regulation on which respondent relies was not published until March 1974, 17 months after Herbert signed his purported election. We find it unnecessary to resolve this dispute because, even assuming arguendo that the election is valid (compare Forrester v. Commissioner, 49 T.C. 499
(1968), with Corn Belt Hatcheries of Arkansas, Inc. v. Commissioner, 52 T.C. 636
(1969)), we think respondent has established that Herbert's activities were not engaged in for profit. An activity not engaged in for profit under section 183 is the other side of the coin of a trade or business under section 162. Section 183(c) defines an " activity not engaged in for profit" as " 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...