Wesinger v. Commissioner

T.C. Memo. 1999-372

UNITED STATES TAX COURT

RALPH E. WESINGER, JR. AND CATHERINE R. WESINGER, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 17610-97, 12694-98. Filed November 8, 1999.

Ps deducted losses sustained in their cattle-
ranching and aircraft-rental operations. R disallowed
these deductions on the grounds that the ranching and
rental activities were not engaged in for profit within
the meaning of sec. 183, I.R.C., and also assessed
accuracy-related penalties under sec. 6662, I.R.C.
Held: On the facts, the cattle-ranching and
aircraft-rental activities were not engaged in with a
profit objective, and Ps are not entitled to deduct the
losses therefrom.
Held, further, Ps failed to establish that they
exercised reasonable care in deducting such losses and
are thus liable for accuracy-related penalties based on
negligence. R’s determinations are sustained.

Steven J. Roth, for petitioners.

Andrew R. Moore and Caroline Tso Chen, for respondent.
 - 2 -

MEMORANDUM FINDINGS OF FACT AND OPINION

NIMS, Judge: In these consolidated cases, respondent

determined the following deficiencies and accuracy-related

penalties with respect to petitioners’ Federal income taxes for

the taxable years 1992 through 1995:

Year Deficiency Penalty
Sec. 6662(a)
1992 $10,616 $2,123
1993 23,276 4,655
1994 16,264 3,253
1995 4,521 904

Respondent also disallowed Schedule F deductions of $33,134 for

petitioners’ 1996 taxable year, thereby reducing the net loss

claimed for that year. However, respondent did not determine a

deficiency for 1996. We consider facts with relation to other

years to the extent we deem necessary to redetermine petitioners’

income tax liability for the years before the Court. See sec.

6214(b).

After concessions, the issues remaining for decision are:

(1) Whether petitioners’ cattle-ranching activities

constituted activities not engaged in for profit within the

meaning of section 183, for the taxable years 1992 through 1995;

(2) Whether petitioners’ rental of their personal aircraft

constituted an activity not engaged in for profit within the

meaning of section 183, for the taxable years 1992 and 1993;
 - 3 -

(3) Whether petitioners are liable for section 6662(a)

accuracy-related penalties on account of negligence, for the

taxable years 1992 through 1995.

Unless otherwise indicated, all section references are to

sections of the Internal Revenue Code in effect for the years in

issue, and all Rule references are to the Tax Court Rules of

Practice and Procedure.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

The stipulations filed by the parties, with accompanying

exhibits, are incorporated herein by this reference.

Ralph E. and Catherine R. Wesinger (petitioners) are married

and resided in Livermore, California, when they filed their

petitions. However, because no evidence was presented as to Mrs.

Wesinger’s involvement in the ranching and rental operations, our

discussion of these activities will focus upon Mr. Wesinger

(petitioner).

Petitioner was born and raised in Concord, Massachusetts.

He then attended the University of Massachusetts for 2 years and

took courses in computer science and general liberal arts, but he

did not earn a degree. Shortly after leaving the University of

Massachusetts, he was hired by Digital Equipment Corporation

(Digital). Petitioner remained with Digital for approximately 4

years and during that time worked as a computer systems
 - 4 -

specialist, a layout designer for a chip set, and a field service

representative. Then, in 1980, he left Digital and started his

own business, Scientific Research Management Corporation (SRMC),

in San Jose, California. SRMC was engaged in the building and

servicing of custom computers. By 1989, although SRMC was begun

without a formal business plan and with little capital, the

company’s annual gross income had reached $2.8 million.

In late 1989 and early 1990, petitioner purchased 282 acres

of unimproved land (parcel 1) in Modoc County, California, for

approximately $80,000. He intended to raise cattle on the

property and hoped, in the future, to change and slow down his

fast-lane lifestyle. Prior to acquiring this land, petitioner’s

experience with farming operations consisted of helping out

occasionally on two dairy farms near where he grew up and

visiting a ranch in New Zealand between five and seven times, for

1 to 2 weeks per visit. Petitioner did not seek any professional

assistance at the time he purchased parcel 1 with regard to

whether the land was suitable for cattle ranching. Petitioner

also did not prepare a formal business plan detailing how a

profit was to be made from the ranching operations. His plan was

to “buy cows, feed cows, sell cows.” However, due in part to

lack of rainfall, petitioner never grazed any cattle on parcel 1,

and he sold the land in June of 1996 for $156,000.
 - 5 -

During his ownership of parcel 1, in June of 1992,

petitioner purchased an additional 512 acres of unimproved land

in Modoc County (parcel 2) for approximately $145,000. Parcel 2

was near, but not contiguous with, parcel 1. As with parcel 1,

petitioner intended to raise cattle on parcel 2, but he neither

investigated the suitability of the land for grazing nor prepared

any formal business plans for operation of the ranch prior to

making the acquisition.

Then, in 1993, petitioner had fencing installed on parcel 2

and purchased 23 head of cattle from a neighbor. However, while

the cattle were still in the possession of the seller, petitioner

hired a cowboy in June of 1993 to perform an informal grass

survey. When this survey indicated that the grasses on parcel 2

would not support the cattle, and before the animals were placed

on the property, petitioner resold the cattle to the seller at

the same price.

Petitioner also did not graze any cattle on his land in 1994

and 1995. A well was dug on the property during these years,

and, in late 1995, petitioner began removal of sagebrush from the

land. In addition, in November of 1995, a field inventory report

from a United States Department of Agriculture soil

conservationist was obtained. This report identified the soil
 - 6 -

types on the property and the potential plant communities for

such soils, but it did not indicate the number of cattle the land

was capable of supporting in its current condition.

In 1996, petitioner placed cattle on his ranch for the first

time, grazing 23 head. Animals were also placed on parcel 2 in

1997 and 1998, when 40 and 33 head, respectively, were grazed.

With regard to other activity on the property, petitioner dug an

additional well in 1996, began ripping the land in 1997 for

purposes of growing alfalfa, and planted a 40-acre field of

winter wheat in 1998. He also obtained additional field

inventory reports in 1997 and 1998. The 1997 report recommended

grazing no more than 17 animals with the land in its current

condition, and all reports addressed the use of an irrigation

system to facilitate increased grass, crop, and animal

production. As of early 1999, no alfalfa had been planted, no

winter wheat had been harvested, and parcel 2 was not yet

irrigated.

Through 1996, petitioner visited his ranch 15 to 17 times

per year and stayed 3 to 4 days per visit. He kept no separate

books and records for his ranching operations, but he recorded

the checks and receipts relating to the ranch in a separate file

on his personal computer. He then gave this information each

year to his accountant for use in preparing petitioners’ tax

return.
 - 7 -

Also throughout the years in issue, petitioner worked 40 or

more hours per week at SRMC and received a salary for his

services. Petitioner Mrs. Wesinger was likewise employed by SRMC

during these years and was compensated for her work as the Human

Resources manager. However, during the period following

petitioner’s decision to embark upon a ranching venture, SRMC

began experiencing business reverses. An audit by the IRS and a

subsequent bank audit disrupted the company’s operations and

culminated in 1993 with the bank calling its outstanding loan to

SRMC of $2.8 million. SRMC was forced to seek sources of short-

term credit and eventually paid the debt in 1997. Meanwhile, in

1994, petitioner began the process of changing SRMC’s primary

line of business from custom hardware to Internet-related

software. Several patents dealing with this software either have

been issued to petitioner or are pending, and petitioner expects

the new technology to generate a profit in the future. As of

early 1999, SRMC (now known as NES) was not making money.

Yet another event affecting petitioners’ economic situation

during the years at issue was a hurricane which damaged property

they held in Hawaii. The damage occurred in late 1992 and

necessitated that time be spent in Hawaii during the following

winter, but the situation was largely resolved by the spring of

1993.
 - 8 -

One further item bearing upon petitioners’ income and

finances for the contested years was the rental of a personal

aircraft. Petitioner owned a 1979 Turbo Dakota plane. This

aircraft was both flown by petitioner for his personal use and

rented to SRMC for business use. Petitioner kept a handwritten

log of flight times, which indicated the number of hours flown

and the purpose of the usage. In 1992 and 1993, the years as to

which respondent disallowed plane losses, trips labeled business

accounted for an approximate 17 to 22 percent of the total usage.

Travel related to the ranch ranged between three-fourths and two-

thirds of the total hours. The remaining time was apparently

devoted to other personal use, as no evidence was presented of

rentals, or attempts to rent, to additional third parties.

Petitioner charged SRMC an hourly lease rate when the

company utilized the plane for traveling to customer premises.

He set the price by calling local businesses that rent aircraft

and inquiring what they charged for similar machines. He then

established a price consistent with the local market. Using this

practice, petitioner’s aircraft-rental operations reported losses

in 1990, 1992, 1993, and 1997. Profits were generated in 1991,

1994, 1995, and 1996.

The overall financial impact of the circumstances related

above is summarized in the following table. The ranch losses

deducted for 1992 through 1995, the years at issue, totaled
 - 9 -

$117,328. The aircraft-rental losses deducted for the contested

years, 1992 and 1993, totaled $6,907.

Year Claimed Gross Ranch Ranch Aircraft
Adjusted Income From Expenses Profits & Rental
Gross Ranch Losses Profits &
Income Losses
1
1990 $426,342 $0 $890 $0 -$4,065
1
1991 420,991 0 728 0 11,500
1992 446,673 0 23,714 -23,714 -2,999
1993 319,573 0 36,099 -36,099 -3,908

1994 157,390 0 26,931 -26,931 4,698
1995 63,407 0 30,584 -30,584 9,858
1996 -7,325 1,659 34,793 -33,134 2,275
1997 -96,744 33,784 39,024 -5,240 -158
2 2 2
1998 35,274 18,036 17,328

1
During these years, the property taxes for the ranch were deducted by
petitioners on Schedule A of their Form 1040.
2
$33,000 of the gross income in 1998 consists of consulting fees paid to
petitioner for the planning and building of a ranch. These are estimated
amounts because petitioners’ 1998 tax return had not been filed at the time of
trial.

OPINION

We must decide whether or not petitioners’ cattle ranching

and aircraft rental were activities engaged in for profit within

the meaning of section 183.

Petitioners contend that their objective with respect to

these ventures was at all times to make a profit, and that the

costs incurred were therefore properly deductible under section

162 as ordinary and necessary expenses of carrying on a trade or

business. Conversely, respondent argues that the requisite
 - 10 -

profit objective was lacking. Hence, according to respondent,

petitioners were not entitled to deduct losses sustained in the

ranching and rental operations and are liable for the

deficiencies determined by respondent. We agree with respondent

that, on these facts, petitioners failed to establish the

mandatory profit objective.

Evidentiary Issue

As a preliminary matter, before addressing the substantive

issues related to profit objective, an evidentiary objection

raised by respondent must be decided. Respondent filed a motion

in limine to exclude the testimony of petitioners’ expert,

Jonathan Cosby, a certified public accountant. The Court

permitted petitioners to make an offer of proof and reserved

ruling on the admissibility of the evidence.

Rule 702 of the Federal Rules of Evidence, which governs the

admissibility of expert testimony, reads as follows:

If scientific, technical, or other specialized
knowledge will assist the trier of fact to understand
the evidence or to determine a fact in issue, a witness
qualified as an expert by knowledge, skill, experience,
training, or education, may testify thereto in the form
of an opinion or otherwise.

Here, Mr. Cosby’s testimony fails to meet this standard.

His statements were neither specialized in nature nor helpful to

the Court. His in-court testimony consisted of broad

generalizations (e.g., neither absence of a business plan nor

failure to consult with experts necessarily indicates lack of
 - 11 -

profit objective). His written report largely restates facts

already in the record and offers no independent research. Mr.

Cosby has never been engaged in the business of cattle ranching

and has not made any study of profitable cattle operations upon

which to base his comparisons. Respondent’s motion in limine is

granted.

Statutory Provisions and Interpretation – For Profit Activity

Section 183(a) states the following general rule: “In the

case of an activity engaged in by an individual * * *, if such

activity is not engaged in for profit, no deduction attributable

to such activity shall be allowed under this chapter except as

provided in this section.” Section 183(b)(1) then goes on to

prescribe that, if an activity is not engaged in for profit, a

taxpayer may take those deductions which would be allowable

without regard to profit motive (e.g., certain interest and tax

expenses). Furthermore, if the activity is not engaged in for

profit, section 183(b)(2) permits the taxpayer to claim those

deductions which would be allowable if the activity were engaged

in for profit, “but only to the extent that the gross income

derived from such activity for the taxable year exceeds the

deductions allowable by reason of paragraph (1).” In other

words, because deductions for expenses related to a not-for-

profit activity are generally limited to the amount of gross
 - 12 -

income from that particular activity, the practical effect of

section 183 is to preclude a taxpayer from deducting losses

incurred in such ventures.

An “activity not engaged in for profit” is defined in

section 183(c) as “any activity other than one with respect to

which deductions are allowable for the taxable year under section

162 [trade or business expenses] or under paragraph (1) or (2) of

section 212 [expenses incurred in the production of income].”

See also sec. 1.183-2(a), Income Tax Regs. Deductions are

allowable under these sections only if a taxpayer’s “primary

purpose and intention in engaging in the activity is to make a

profit.” Golanty v. Commissioner, 72 T.C. 411, 425 (1979), affd.

without published opinion 647 F.2d 170 (9th Cir. 1981). The

taxpayer’s expectation of a profit need not be reasonable, but he

or she must possess an “actual and honest objective of making a

profit.” Keanini v. Commissioner, 94 T.C. 41, 46 (1990) (quoting

Dreicer v. Commissioner, 78 T.C. 642, 644-645 (1982), affd.

without opinion 702 F.2d 1205 (D.C. Cir. 1983)).

Conversely, no deductions are allowable under section 162 or

212 for “activities which are carried on primarily as a sport,

hobby, or for recreation.” Sec. 1.183-2(a), Income Tax Regs. In

determining the category into which a particular venture falls,

the taxpayer bears the burden of establishing the requisite

profit objective. Keanini v. Commissioner, supra at 46; Golanty
 - 13 -

v. Commissioner, supra at 426. However, greater weight is

accorded to objective facts and circumstances than to a

taxpayer’s mere statement of intent. See sec. 1.183-2(a), Income

Tax Regs.

A nonexclusive list of factors set forth in section 1.183-

2(b), Income Tax Regs., guides section 183 analysis by indicating

relevant facts and circumstances for consideration: (1) Manner in

which the taxpayer carries on the activity; (2) the expertise of

the taxpayer or his advisers; (3) the time and effort expended by

the taxpayer in carrying on the activity; (4) expectation that

assets used in activity may appreciate in value; (5) the success

of the taxpayer in carrying on other similar or dissimilar

activities; (6) the taxpayer’s history of income or losses with

respect to the activity; (7) the amount of occasional profits, if

any, which are earned; (8) the financial status of the taxpayer;

and (9) elements of personal pleasure or recreation.

Application – Cattle Ranching

1. Manner in which the taxpayer carries on the activity.

Section 1.183-2(b)(1), Income Tax Regs., provides that

carrying on an activity in a businesslike manner may be

indicative of profit objective. The regulations further identify

three practices consistent with businesslike operations: (1)

Maintaining complete and accurate books and records; (2)

conducting the activity in a manner substantially similar to
 - 14 -

profitable businesses of the same nature; and (3) attempting

changes in methods and techniques to improve profitability. See

id. A fourth practice, that of establishing a business plan, is

added by case law as likewise evidencing businesslike operations.

See Sanders v. Commissioner, T.C. Memo. 1999-208.

First, with respect to books and records, petitioner here

did not maintain separate books for his ranch operations.

Instead, petitioner simply recorded the checks and receipts

relating to the ranch in a separate file on his personal

computer. He then annually gave this information to his

accountant for use in preparing petitioners’ tax return. This

minimal record keeping, however, falls short of what has been

identified by courts as signaling a bona fide intent to profit.

For example, in Burger v. Commissioner, T.C. Memo. 1985-523,

affd. 809 F.2d 355 (7th Cir. 1987), the Court explained:

The purpose of maintaining books and records is more
than to memorialize for tax purposes the existence of
the subject transactions; it is to facilitate a means
of periodically determining profitability and analyzing
expenses such that proper cost saving measures might be
implemented in a timely and efficient manner.

Hence, while a sophisticated accounting system is not necessary,

“the usage of cost accounting techniques that, at a minimum,

provide the entrepreneur with the information he requires to make

informed business decisions” is essential. Id. The Court

reasoned that “Without such a basis for decisions affecting the

enterprise, the incidence of a profit in any given period would
 - 15 -

be a wholly fortuitous result.” Id. Given this standard, the

Court in Burger found the taxpayers’ annual posting to a ledger

from bills and receipts accumulated throughout the year, under

headings for revenues and expenses, to be insufficient. See id.

The Court declared the ledger inadequate for any meaningful cost

analysis, in part because it failed to allocate costs and

overhead among the animals of the taxpayers’ dog-breeding

operations. See id. As a result of this failure, the taxpayers’

records did not provide enough information for even determining

what the break-even point might be for dog sale purposes. See

id. The annual posting was also fatal to the taxpayers’

contentions because it precluded frequent monitoring of costs and

profitability. See id.

Similar focus on maintaining records useful in making

business decisions is found in Dodge v. Commissioner, T.C. Memo.

1998-89, affd. without published opinion 188 F.3d 507 (6th Cir.

1999). In that case the taxpayers kept invoices and receipts for

their horse-breeding business and maintained an itemized list of

expenses. See id. Nonetheless, the Court noted that

“petitioners did not prepare any business or profit plans, profit

or loss statements, balance sheets, or financial break-even

analyses for their horse-breeding activity.” Id. This lack of
 - 16 -

detail, keeping only the minimum records necessary to prepare tax

returns, was considered by the Court to be an indication that the

activity was not carried on for profit. See id.

Moreover, even in Golanty v. Commissioner, 72 T.C. at 430,

where the taxpayer kept a separate ledger on a monthly basis for

her horse-breeding enterprise, the Court stated that “there has

been no showing that books and records were kept for the purpose

of cutting expenses, increasing profits, and evaluating the

overall performance of the operation.” The Court labeled these

records merely “the trappings of a business” because the taxpayer

“failed to show that she used them to improve the operation of

the enterprise.” Id.

Petitioner here, like the taxpayers in Burger, Dodge, and

Golanty, appears to have kept the minimum records necessary to

prepare his tax returns. As indicated above, simply maintaining

lists or files of expenses and receipts, without any further cost

accounting or analysis, carries little weight in establishing a

profit objective.

Second, as regards similarity with comparable businesses,

neither petitioner nor respondent has offered any evidence as to

how profitable cattle ranches are run. However, it seems

unlikely that entrepreneurs seriously intending to profit from a
 - 17 -

ranching venture would allow land allegedly purchased for that

purpose to sit unused for 6 years before first placing cattle on

the property.

Third, concerning attempts to improve profitability through

changes in methods and techniques, petitioner’s efforts in this

area for the years in issue can again only be termed minimal.

Fencing was installed in 1993. Two wells were added to the

property between 1994 and 1996. Sagebrush removal was begun in

late 1995. Yet, 1996 was the first year any cattle were grazed.

Spreading a small number of improvements over the 7-year period

of ranch land ownership, from 1990 to 1996, cannot overcome

petitioner’s failure to abandon more expeditiously the provenly

unprofitable technique of grazing no cattle.

Fourth, regarding a business plan, petitioner is correct in

asserting that lack of a formal, written business plan is not

determinative of lack of profit objective. See Sanders v.

Commissioner, T.C. Memo. 1999-208. Nonetheless, some indication

of “a plan for success (i.e., profitability)” should be given.

Id. Petitioner’s situation and “buy cows, feed cows, sell cows”

testimony here seem analogous to that in Sanders, where the Court

stated: “Given the substantial, but expected, costs associated

with the Schedule F activity, we need more than petitioner’s

representation that he could make money if he sold enough horses

at high enough prices to conclude that petitioner had a plan to
 - 18 -

make a profit.” Id. Petitioner here testified, without any

supporting data, that he would need to sell approximately 40 cows

to make a profit, but in none of the years at issue did he ever

attempt to place 40 animals on his property. It is therefore

doubtful that petitioner had any plan to profit in those years.

Thus, based on the above considerations, petitioner’s cattle

ranch does not appear to have been operated in a businesslike

manner. This factor fails to indicate a profit objective.

2. The expertise of the taxpayer or his advisors.

Section 1.183-2(b)(2), Income Tax Regs., reads:

Preparation for the activity by extensive study of its
accepted business, economic, and scientific practices,
or consultation with those who are expert therein, may
indicate that the taxpayer has a profit motive where
the taxpayer carries on the activity in accordance with
such practices. * * *

Case law further explains that “While a formal market study is

not required, a basic investigation of the factors that would

affect profit is.” Burger v. Commissioner, T.C. Memo. 1985-523;

see also Engdahl v. Commissioner, 72 T.C. 659, 668 (1979);

Underwood v. Commissioner, T.C. Memo. 1989-625. Moreover, in

considering this factor, courts have made clear that the focus is

upon expertise and preparation with regard to the economic

aspects of the particular business, and failure to possess or

obtain expertise in this area will not be excused by study of

other aspects of the enterprise or by general business acumen.
 - 19 -

See, e.g., Golanty v. Commissioner, 72 T.C. at 432; Sanders v.

Commissioner, supra; Dodge v. Commissioner, supra; Underwood v.

Commissioner, supra; Burger v. Commissioner, supra.

For instance, in Golanty v. Commissioner, supra at 432, the

Court recognized that the taxpayer was an intelligent person who

had acquired a good deal of knowledge about horses and their

breeding. Nonetheless, the Court emphasized that because the

taxpayer “never consulted any books nor any person who gave her

advice regarding the business side of the operation”, she “failed

to show that she sought or acquired the expertise that would

enable her to turn the horse-breeding operation into a profitable

business.” Id.

Similarly, the Court in Burger v. Commissioner, supra, first

observed that the taxpayers there “read numerous books and

periodicals pertaining to the breeding of dogs and consulted with

individuals whom petitioners considered to be expert in the

field”. Again however, the Court found these activities not

indicative of a profit objective because the taxpayers undertook

the venture “without consulting with any experts on the business

end of the activity” and “with no concept of what their ultimate

costs might be, how they might operate at the greatest cost

efficiency, how much revenues they could expect, or what risks

could impair the generation of revenues.” Id.
 - 20 -

Cases following Burger are replete with analogous

statements. In Underwood v. Commissioner, supra, the taxpayers

were “successful in business” and “experienced investors”, but

“Despite this business background, * * * failed to adequately

investigate” their new venture before embarking. The Court in

Dodge v. Commissioner, T.C. Memo. 1998-89, likewise opined with

regard to a taxpayer admittedly “expert and knowledgeable about

horses”: “Significantly, petitioners did not seek professional or

economic advice on the economic aspects of horse breeding.” A

nearly identical emphasis is seen in Sanders v. Commissioner,

supra: “While petitioner received free and paid advice from

individuals he considered ‘experts’ in the cutting horse

industry, the advice did not focus on the economic aspects of the

activity.”

Viewing the present matter in light of these judicial

pronouncements, petitioner here is similarly bereft of the

requisite economic expertise. He had no previous experience with

the cattle-ranching business. No advice with regard to the

economic side of the venture was ever sought prior to or during

the years at issue. Furthermore, even attempts to gain expertise

regarding the operational side of a cattle ranch were both tardy

and minimal. Petitioner did not ask a cowboy for an informal

opinion on whether the land had sufficient grass for cattle until

June of 1993. He did not obtain a professional analysis of the
 - 21 -

soil on his property or its suitability for ranching until

November of 1995. He also did not receive any estimate of the

number of cattle his ranch could support (which turned out to be

only 17) until 1997. This scenario of holding ranch land for

years without even determining whether it could economically or

physically support a profitable operation is hardly consistent

with a profit objective.

3. The time and effort expended by the taxpayer in carrying on
the activity.

Section 1.183-2(b)(3), Income Tax Regs., specifies that

devoting much personal time to an activity, as well as withdrawal

from another occupation in order to devote such time, may be

evidence of a profit objective. Although the regulations do not

define the term “much”, cases offer some guidance as to

qualifying quantities. In a large percentage of decisions where

time spent was found to be probative of intent to profit, the

taxpayers were devoting more than 30 hours to the enterprise on a

weekly basis. See, e.g., Engdahl v. Commissioner, supra at 670

(taxpayers spending an average of 35 to 55 hours per week on

horse-breeding venture); Dodge v. Commissioner, supra (husband

and wife combining for approximately 35 hours per week spent

working on horse farm); McGuire v. Commissioner, T.C. Memo. 1992-

542 (taxpayer spending more than 40 hours per week on cattle

business); Haladay v. Commissioner, T.C. Memo. 1990-45 (husband

and wife combining for more than 80 hours per week spent working
 - 22 -

on farm activities); Ellis v. Commissioner, T.C. Memo. 1984-50

(taxpayer spending 30 to 35 hours per week engaged in care and

training of his horses). Also, even where lesser amounts have

been validated as evidence of profit objective, the expenditures

have typically been regular and consistent. See, e.g., Givens v.

Commissioner, T.C. Memo. 1989-529 (taxpayer spent 2 to 4 hours

daily on weekdays doing farm chores and more time on weekends);

Christensen v. Commissioner, T.C. Memo. 1988-484 (taxpayer worked

11 consecutive days at another occupation, during which time he

usually spent several evening hours on his challenged activities,

then worked 4 consecutive days of at least 8 hours each on his

challenged venture).

Here, in contrast, petitioner testified to going to the

ranch only 15 to 17 times a year during the years at issue and

spending 3 to 4 days per visit. No evidence was presented as to

the hours of labor expended while there. Furthermore, while

limited time spent may be excused where a taxpayer employs

competent personnel to carry on the activity, sec. 1.183-2(b)(3),

Income Tax Regs., petitioner offered no record of having hired

anyone to run his ranching operations. Thus, the time and effort

devoted by petitioner amounted, on average, to visiting

approximately once or twice a month, for the equivalent of a long

weekend. On these facts, petitioner’s level of involvement would

appear to be more akin to a hobby than a business.
 - 23 -

4. Expectation that assets used in activity may appreciate in
value.

Section 1.183-2(b)(4), Income Tax Regs., identifies asset

appreciation as potentially relevant to the profit analysis.

However, in the case of farm property, the standard for

determining if such appreciation may be considered differs

depending on whether land is held primarily for appreciation or

primarily for farming. See, e.g., Engdahl v. Commissioner, 72

T.C. at 668 n.4; Hoyle v. Commissioner, T.C. Memo. 1994-592;

Ellis v. Commissioner, supra. If land is held primarily to

profit from the increase in value, “the farming and holding of

the land will be considered a single activity only if the income

derived from farming exceeds the deductions attributable to the

farming activity which are not directly attributable to the

holding of the land”, such that “the farming activity reduces the

net cost of carrying the land”. Sec. 1.183-1(d)(1), Income Tax

Regs. Conversely, if asset appreciation is merely collateral to

a primary purpose of farming, courts have permitted unrealized

appreciation to be considered as part of an overall intent to

profit from the property, irrespective of the amount of income

from farming. See, e.g., Engdahl v. Commissioner, supra at 668 &

n.4, 669; Hoyle v. Commissioner, supra; Ellis v. Commissioner,

supra.

In the present matter, the same result is obtained

regardless of whether petitioner’s ranch land was held primarily
 - 24 -

for appreciation or for farming. If appreciation was the

dominant motive, the activities cannot be considered together

because income from ranching did not exceed deductions. For the

1992 through 1995 years at issue, the ranch generated $0 in gross

income. As deductions directly attributable to ranch operations

exceeded this figure in all 4 years, ranching did not reduce the

net cost of carrying the land.

Likewise, even if farming was the primary objective, a

claimed expectation of appreciation cannot help petitioners.

Because no appraisal or value of the ranch was offered as

evidence, it is impossible to determine the extent to which

losses may have been offset by such appreciation. Furthermore,

even if we were to accept petitioner’s uncorroborated estimate of

a 30 to 40 percent area-wide increase in value, the resulting

amount would be insufficient to establish a legitimate

expectation to profit from the property. Since the losses

through 1997 total $155,702, they exceed the original purchase

price of $145,000 for parcel 2. Petitioner would have needed to

expect more than a 100 percent appreciation to recoup his losses.

5. The success of the taxpayer in carrying on other similar or
dissimilar activities.

As stated in section 1.183-2(b)(5), Income Tax Regs.: “The

fact that the taxpayer has engaged in similar activities in the

past and converted them from unprofitable to profitable

enterprises may indicate that he is engaged in the present
 - 25 -

activity for profit”. Here, petitioner previously started a

computer service business, SRMC, and brought it to the point of

achieving over $2 million in gross income. However, given the

marked differences between petitioner’s history at SRMC and his

ranching venture, general business acumen carries little

probative weight on these facts. Prior to forming SRMC,

petitioner had gained experience with computer systems through

his previous employment at Digital Equipment Corporation. Prior

to purchasing his land, petitioner had virtually no experience

with cattle ranching. In addition, to create a profitable

enterprise through full-time efforts is one thing; to dabble

several days a month is quite another. Moreover, SRMC has now

gone from profitable to unprofitable during petitioner’s tenure.

Based on these differences, an observation by the Court in

Haladay v. Commissioner, T.C. Memo. 1990-45, would seem equally

appropriate here: “The wholesale sporting goods business is

sufficiently dissimilar from farming that even if Raymond’s

Midway business had been a consistently profitable one, a

conclusion that the farming activity should have been equally

profitable would not be warranted.” The admonition by the Court

in Dodge v. Commissioner, T.C. Memo. 1998-89, that the taxpayers

there “did not show that their acquired business expertise was
 - 26 -

used in the horse activity” is likewise warranted. Petitioner’s

experiences in the high-tech arena simply did not translate

meaningfully into his cattle-ranching operations.

6. The taxpayer’s history of income or losses with respect to the
activity.

According to section 1.183-2(b)(6), Income Tax Regs., losses

that “continue to be sustained beyond the period which

customarily is necessary to bring the operation to profitable

status” may be indicative of a lack of profit objective.

Exceptions exist for losses due to “customary business risks or

reverses” and “unforeseen or fortuitous circumstances which are

beyond the control of the taxpayer”. Id. Here, it is undisputed

that petitioner’s ranch has never generated a profit in the 8

years from their first land purchase in 1990 through 1997.

Losses were incurred in each of the years at issue. Moreover,

the profit petitioners claim for 1998 is attributable to a

$33,000 consulting fee paid to petitioner by a neighbor for help

in planning and building a ranch. The cattle operations

themselves continued to show a loss even in 1998.

Although no evidence was presented as to the customary

startup period for a cattle ranch, 7 or 8 years would seem

excessive. Petitioner, however, asserts that his losses should

nonetheless be excused as attributable to unforeseen

circumstances and casualties. He points to a hurricane damaging

other property held in Hawaii, the calling of a bank loan with
 - 27 -

respect to the SRMC business, and drought conditions in the area

of the ranch as responsible for his continued losses. We

disagree that these circumstances are sufficient to justify the

lengthy period of losses at issue.

The hurricane and the SRMC misfortunes are only tangentially

related to the ranching enterprise. In addition, the hurricane

damage was resolved within a relatively short period, impacting

only the winter of 1992-93, so cannot explain the many years of

losses. As to SRMC’s reverses, since petitioner’s level of

involvement in ranch affairs prior to the 1993 corporate problems

does not appear to differ significantly from his subsequent

activities, the SRMC hardships are a less than convincing reason

for losses at the ranch.

The alleged drought, too, falls short of offering a

legitimate excuse. Petitioner testified that he learned of the

dry conditions after he bought parcel 1 in 1990, so the lack of

rainfall was hardly unforeseen when parcel 2 was purchased in

1992. Prior to the years at issue, petitioner should have been

aware of the need to plan for such conditions if he truly

intended to make a profit from his property. As of early 1999,

an irrigation system was still not in place on the property.
 - 28 -

7. The amount of occasional profits, if any, which are earned.

As indicated above, petitioner has earned no profits from

his cattle-ranching operations, apart from the 1998 consulting

fee, so this factor does little to substantiate his intent.

8. The financial status of the taxpayer.

Section 1.183-2(b)(8), Income Tax Regs., explains this

factor as follows: “Substantial income from sources other than

the activity (particularly if the losses from the activity

generate substantial tax benefits) may indicate that the activity

is not engaged in for profit”. Here, at the time petitioner

purchased both parcel 1 and parcel 2, he had adjusted gross

income of over $400,000. His income remained above the six-

figure mark through 1994. Given this significant level of

income, it would not be unreasonable to conclude that making a

profit was not petitioner’s primary concern when he began his

cattle-ranching venture. The fact that petitioner has continued

his operations despite his decrease in income could offer support

for a contrary view, but his failure to make significant changes

to increase profitability belies this notion, at least with

respect to the years in issue.

9. Elements of personal pleasure or recreation.

Underlying this final factor is the premise that:

The presence of personal motives in carrying on of an
activity may indicate that the activity is not engaged
in for profit, especially where there are recreational
or personal elements involved. On the other hand, a
 - 29 -

profit motivation may be indicated where an activity
lacks any appeal other than profit. [Sec. 1.183-
2(b)(9), Income Tax Regs.]

In the case of a ranching endeavor such as petitioner’s, however,

this consideration does not weigh strongly either for or against

intent to profit. Aspects of potential enjoyment coexist with

aspects of demanding labor. As observed by the Court in Barter

v. Commissioner, T.C. Memo. 1991-124, affd. without published

opinion 980 F.2d 736 (9th Cir. 1992): “While we agree with

petitioner fixing fences and dragging roads is not in and of

itself pleasurable, petitioner did glean some pleasure from the

ranch * * * and petitioner received the personal gain of building

and maintaining what was to be his retirement home.” Similarly,

petitioner here engaged in toilsome work such as ripping soil for

planting, but he also testified that he embarked upon cattle

ranching in part because he desired to slow down his lifestyle.

Hence, despite the presence of difficult tasks, a personal motive

was an instigator for the venture. As a result, this factor does

little to either advance or detract from petitioner’s position.

In summary, the circumstances of these cases, when

considered within the framework of the nine factors above,

indicate that petitioner did not possess the requisite intent to

profit from his cattle-ranching operations. Petitioners

therefore are subject to the restrictions set forth in section

183 and improperly deducted losses.
 - 30 -

Application - Aircraft Rental

Turning then to whether petitioner intended to make a profit

through the rental of his personal aircraft, analysis of the

surrounding circumstances again establishes that he did not.

Although the parties presented far less evidence and

argumentation on this issue than with respect to the ranch, those

of the nine factors to which the record does speak fail to paint

the picture of a profit-driven enterprise.

First, regarding businesslike manner, petitioner did not

testify to maintaining books and records for his rental

operations that would allow either for regular and meaningful

evaluation of the enterprise’s financial health or for the making

of informed business decisions. On the contrary, the only

business decision addressed by the parties at trial or on brief

appears to have been made in a strikingly unbusinesslike manner.

Petitioner set the rate he charged for use of his aircraft by

calling other businesses, inquiring what they charged, and

establishing a comparable fee. He seems to have undertaken no

analysis whatsoever of his own expenses, his probable balance of

rental versus personal use, or his likely break-even point. It

is doubtful that most serious entrepreneurs would simply charge

what competitors charge without ever calculating whether their
 - 31 -

business could stay afloat at that price level. As was the case

with the cattle ranch, turning a profit while employing such

techniques would best be characterized as merely fortuitous.

Next, as to expertise, there again appears to have been no

basic investigation of the economic aspects of the business.

There also was no evidence that petitioner had any experience in

the rental of airplanes.

Furthermore, the time and effort expended by petitioner on

his rental business was negligible. No advertising or marketing

was undertaken. The plane was rented only to petitioner’s own

business, SRMC. Moreover, between 65 and 75 percent of the

plane’s total usage, for the years as to which losses were

disallowed, was by petitioner for traveling to and from his

ranch. With such a comparatively small amount of time available

for rental, a bona fide intention to profit seems rather far-

fetched.

In addition, no appreciation could have been expected

because vehicles, including aircraft, typically depreciate rather

than increase in value.

The only factors weighing to any significant degree in favor

of a profit motive are those addressing history of losses and

occasional profits. Losses were reported in 1990, 1992, 1993,

and 1997, but petitioner’s aircraft-rental operations earned a

profit in 1991, 1994, 1995, and 1996. Such profits could be
 - 32 -

indicative of the requisite intent. Nonetheless, because of the

complete absence of evidence to show that the profits resulted

from any conscious efforts or calculation on the part of

petitioner, the apparent fortuitous nature of the positive

returns is not overcome.

The financial status factor is likewise not supportive of

petitioner’s claims. Adjusted gross income from other sources

totaled over $300,000 in both of the years for which losses were

disallowed. Petitioner could afford and benefit taxwise from the

loss.

Finally, it is unlikely that petitioner owned, maintained,

and flew a personal aircraft without finding some pleasure in the

activity. Also, the much greater percentage of time that the

aircraft was devoted to personal rather than business use (given

that the ranch failed to qualify as a business) indicates that

personal motives predominated over profit motives. Thus, as with

the cattle-ranching enterprise, section 183 precludes petitioners

from deducting losses related to the aircraft-rental business.

Respondent’s determinations of deficiencies are therefore

sustained as to both activities.

Penalty Issue

The final issue we must decide is whether petitioners are

liable, as respondent contends, for accuracy-related penalties

based on negligence. Section 6662(a) and (b)(1) imposes an
 - 33 -

accuracy-related penalty in the amount of 20 percent of any

underpayment that is attributable to negligence or disregard of

rules or regulations. “Negligence” is defined in section 6662(c)

as “any failure to make a reasonable attempt to comply with the

provisions of this title”, and “disregard” as “any careless,

reckless, or intentional disregard.” Section 1.6662-3(b)(1),

Income Tax Regs., further explains: “Negligence is strongly

indicated where-- * * * (ii) A taxpayer fails to make a

reasonable attempt to ascertain the correctness of a deduction,

credit or exclusion on a return which would seem to a reasonable

and prudent person to be ‘too good to be true’ under the

circumstances”. Case law similarly states that negligence is

“the failure to exercise the due care of a reasonable and

ordinarily prudent person under like circumstances.” Sanders v.

Commissioner, T.C. Memo. 1999-208; see also Neely v.

Commissioner, 85 T.C. 934, 947 (1985). The taxpayer bears the

burden of establishing that he or she was not negligent, had

reasonable cause for the underpayment, and acted in good faith.

See sec. 6664(c)(1); Neely v. Commissioner, supra at 947; Sanders

v. Commissioner, supra.

Here, petitioners do not aver any specific facts to rebut

respondent’s finding of negligence other than that the amounts

reported were uncontested. This assertion fails to meet

petitioners’ burden of showing that the treatment of these
 - 34 -

amounts was reasonable and in good faith. Deducting over

$117,000 without further investigation would also appear to fall

short of the prudence standard. Accordingly, respondent’s

determination of section 6662 penalties is sustained.

To reflect the foregoing,

Decisions will be entered

under Rule 155.