McMillan v. Commissioner of Internal Revenue, 061115 FEDTAX, 3720-12

Docket Nº:3720-12
Opinion Judge:HALPERN, JUDGE.
Attorney:Denise Celeste McMillan, pro se. Priscilla A. Parrett and Vanessa M. Hoppe, for respondent.
Case Date:June 11, 2015
Court:United States Tax Court

T.C. Memo. 2015-109




No. 3720-12

United States Tax Court

June 11, 2015

In the answer, R asserted an increased deficiency in income tax on account of his disallowance of a legal expense deduction P claimed on one Schedule C, Profit or Loss From Business, addressing her IT and database management activity and his disallowance of P's deduction for a loss claimed on a second Schedule C relating to her equine activity. In the answer, R also asserted an accuracy-related penalty.

Held: P is entitled to one-half of the claimed legal expense deduction.

Held, further, P may not deduct the equine activity loss because the activity was not engaged in for profit except that she may deduct the expense claimed for interest since R has failed to prove the indebtedness to which the interest was allocated was not incurred in a trade or business or in an activity engaged in for profit.

Held, further, R has not carried his burden of proving applicability of the accuracy-related penalty.

Denise Celeste McMillan, pro se.

Priscilla A. Parrett and Vanessa M. Hoppe, for respondent.



Respondent determined a deficiency of $457 in petitioner's 2009 Federal income tax. The deficiency resulted from respondent's adjustment increasing petitioner's 2009 gross income by $11, 718 on account of a retirement account distribution that she had received but had not reported as income. Petitioner assigned error to that adjustment but now concedes that it was correct. By the answer, respondent asserts (1) an increased deficiency for 2009 of $6, 776, resulting in a total deficiency of $7, 233, and (2) an accuracy-related penalty of $1, 447. The increased deficiency results because respondent would disallow two deductions that petitioner claimed in determining her taxable income: (1) a deduction of $26, 312 for legal expenses that petitioner claimed in connection with an activity she described as information technology and database management (IT activity), and (2) a deduction for a loss of $7, 486 that petitioner claimed on account of an activity she described as "horse breeding and showing" (equine activity).

Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for 2009, and all Rule references are to the Tax Court Rules of Practice and Procedure. All dollar amounts are rounded to the nearest dollar.

Because the only items remaining for decision are the increased deficiency and the penalty (a new matter), respondent bears the burden of proof. See Rule 142(a)(1).


We have, pursuant to Rule 91(f), deemed stipulated certain facts and the authenticity of certain documents. The parties have stipulated certain facts and the authenticity of certain documents. Those facts are so found, and the documents stipulated are accepted as authentic.


Petitioner resided in California when she filed the petition.

Petitioner's 2009 Form 1040

Petitioner prepared her 2009 Form 1040, U.S. Individual Income Tax Return, and timely filed it. Among the items that petitioner attached to that return are two Schedules C, Profit or Loss From Business, and a Form 8829, Expenses for Business Use of Your Home.

The first Schedule C relates to the IT activity (IT activity Schedule C). It reports gross income of $65, 000 and net income of $14, 809. It reports, among other expenses, $26, 312 for legal and professional services (legal expenses) and $17, 913 (carried over from the Form 8829) as an expense for the business use of petitioner's home. The Form 8829 reports 50% as the business use percentage for petitioner's business use of her home. The IT Schedule C also reports car and truck expenses, a depreciation expense, an office expense, and an expense for supplies.

The second Schedule C relates to the equine activity (equine activity Schedule C). It reports zero receipts and the following expenses:





Car and truck


Interest (other than mortgage)

15, 690

Rent or lease (other business property)


Other (magazines and tack clothing)



7, 486

1The interest expense relates to a line of credit petitioner obtained and money she borrowed in 2007 in order to pay the cost of transporting a horse to Australia. See discussion infra.

Legal Expenses

Petitioner resides in a condominium unit, in which she maintains a home office. A homeowners association (HOA) has various duties and responsibilities with respect to the condominium unit. The legal expenses relate to a dispute between petitioner, on the one hand, and her neighbors and the HOA, on the other. In 2005, petitioner, by counsel, filed a complaint for damages in State court naming as defendants the HOA and various unnamed persons (HOA litigation). The grounds for the complaint were breach of contract, breach of fiduciary duty, and nuisance, and petitioner sought injunctive and declaratory relief. Petitioner stated the following factual bases for her complaint: (1) dogs running wild, dogs barking, and dogs defecating around the property, (2) construction defects related to the presence of mold in her bathroom, and (3) construction defects that caused noise problems. The HOA litigation was settled in June 2010. In 2009, in connection with the HOA litigation, petitioner was involved in a separate legal action (separate action) involving misdemeanor criminal charges connected with her attempt to gather evidence for the HOA litigation. The legal expenses, $26, 312, consist of $5, 000 paid on March 31, 2009, to Gary A. Smith, PLC, for legal representation in the separate action; $21, 100 paid on various dates in 2009 to John A. Schlaff, Esq., for counsel and legal representation in connection with both the HOA litigation and the separate action; and $212 in sheriff's department and court costs.

Equine Activity

Petitioner testified that she is an international dressage rider and trainer. Dressage is a competitive equestrian sport designed to showcase a horse's physique and training where a horse and rider are expected to perform from memory a series of predetermined movements or tests such as "the halt", "the trot", and "the canter", to name a few. Petitioner testified that dressage competitions do not pay much and that income is earned in a dressage business from stud fees and from purchasing, training, showing, and selling horses. She testified that, in 2009, she trained horses, although a moving company had lost her records documenting that activity. Petitioner claims that she has been in the dressage business since the mid-1970s. She has an affinity for dressage.

Goldrush I (Goldrush) is a horse that petitioner owned from at least 1999 through January 2008.

During that period, petitioner owned no other horse, and, during the remainder of 2008 and during 2009, petitioner owned no horse.

From at least 1999 through 2009, petitioner did not compete in any horse shows with Goldrush or any other horse.

Before 1999, Goldrush sired five foals, and petitioner earned between $1, 000 and $1, 500 for each foal. From 1999 through 2009, petitioner did not breed Goldrush or any other horse.

In 2007, because petitioner was unsuccessful in breeding Goldrush in the United States, she decided to send him to Australia in the hope that his breed and bloodline would make him an attractive breeding stallion there. Unfortunately, in January 2008, after Goldrush arrived in Australia, he became unexpectedly ill and died.

Petitioner testified that her business plan was to search for the "right" horse, train the horse, show the horse, and sell the horse for a profit. She testified that her goal was to purchase a horse for $25, 000 to $30, 000, train and show the horse, and then sell it for an amount in excess of $100, 000 and potentially in excess of $1 million. She testified that she was sure that a recent European sale of a competition dressage horse had fetched millions of euro. She testified that, in 2009, she looked for a horse to purchase but did not find one that met her requirements. During 2009, she had all of her tack; i.e., the gear used in equipping a horse, including a saddle, a bridle, a martingale, etc.

Beginning at least with her 2004 Form 1040, petitioner included as part of her return a Schedule C for the equine activity. For none of those years did petitioner report any net income from the equine activity, and only for 2004 did she report any receipts, $588, from the activity. The following table shows petitioner's reported income from sources other than the equine activity and her equine activity receipts and expenses as reported on her 2004 through 2009 Forms 1040.


Net income from other sources

Equine activity receipts

Equine activity expenses


$61, 945


$36, 453


61, 166


22, 277


54, 818


33, 128


63, 143


51, 697




4, 203


14, 860


7, 486

Petitioner's reported net losses from the equine activity for 2004 through 2009 totaled $154, 656.


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