Jorgenson v. Commissioner

T.C. Memo. 2000-38

UNITED STATES TAX COURT

ANTHONY W. JORGENSON AND FLORENCE A. JORGENSON, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 5041-98. Filed February 7, 2000.

Edward E. Hartline, for petitioners.

Susan K. Greene, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

VASQUEZ, Judge: Respondent determined the following

deficiencies in and penalties on petitioners’ Federal income

taxes:

Accuracy-Related
Penalty
Tax Year Deficiency Sec. 6662(a)
1992 $46,954 $9,391
1993 99,939 19,988
1994 112,241 22,448
 - 2 -

All section references are to 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. After concessions,1

the issues for decision are: (1) Whether petitioners’ ranching

and farming activities constituted activities engaged in for

profit under section 183, and if so, whether petitioners

substantiated claimed expenses from the activities;2 (2) whether

petitioners are entitled to deduct certain expenses associated

with a rental property located in St. John, U.S. Virgin Islands

(the St. John rental property); (3) whether petitioners may

deduct two noncash charitable contributions; and (4) whether

petitioners are liable for accuracy-related penalties pursuant to

section 6662(a).

1
Petitioners concede the Schedule E deductions associated
with rental properties in Nacogdoches, Texas, for the 1993 and
1994 taxable years. Petitioners also concede various Schedule E
deductions associated with a rental property in St. John, U.S.
Virgin Islands (the St. John rental property), for the 1992 and
1993 taxable years. Respondent concedes that certain taxes
reported on petitioners’ Schedule E with regard to the St. John
rental property are proper itemized deductions under sec. 63(d).
Respondent allowed only certain of petitioners’ cash charitable
contributions. For the 1992, 1993, and 1994 taxable years,
petitioners failed to argue in their petition, at trial, and in
their posttrial briefs that they were entitled to cash charitable
contributions in excess of the amount allowed by respondent. We
therefore find that petitioners concede this issue. See Petzoldt
v. Commissioner, 92 T.C. 661, 683 (1989). Furthermore,
respondent concedes that petitioners did not underreport their
interest income on their 1992, 1993, and 1994 tax returns.
2
Although it is unclear from the notice of deficiency, we
assume respondent would deny, for lack of substantiation, only
those expenses in excess of the income from the activities; i.e.,
the losses from the activities.
 - 3 -

FINDINGS OF FACT

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

The stipulation of facts, the supplemental stipulation of facts,

and the attached exhibits are incorporated herein by this

reference. At the time they filed their petition, petitioners

resided in Nacogdoches, Texas.

Petitioners both practice medicine. During the years in

issue, Mr. Jorgenson worked full time as an orthopedic surgeon,

while Mrs. Jorgenson practiced full time as a radiologist.

Together, petitioners reported the following amounts as

wages and partnership income from their medical practices during

the years in issue:

Petitioners’ Wages and
Partnership Income
Taxable Year From Medical Practices
1992 $982,004
1993 865,193
1994 839,715

Petitioners were raised in rural communities. Mr. Jorgenson

grew up on a 400-acre farm in Minnesota. On the Minnesota farm,

Mr. Jorgenson’s parents maintained dairy and beef cattle, hogs,

and chickens. In addition, Mr. Jorgenson’s father planted corn

and soybeans. Mr. Jorgenson’s father gave him part of the

family’s calves, which he raised and eventually sold. Mrs.

Jorgenson was born on a 750-acre ranch near Austin, Texas. On

the farm, her father raised various crops. Her father also gave
 - 4 -

her various calves to manage and sell. At age 16, she left her

father’s Texas ranch and used the proceeds from the sale of her

calves for her college and medical school education.

In late 1976, after serving in the U.S. Army, petitioners

settled in Nacogdoches, Texas. Subsequent to arriving in

Nacogdoches, petitioners purchased three ranches and one farm.

Melrose Ranch

In 1978, petitioners purchased 80 acres of land situated 6

miles east of Nacogdoches, Texas (Melrose ranch), for $105,000.

The Melrose ranch sits adjacent to petitioners’ current residence

near Nacogdoches, Texas. During the years in issue, petitioners

rented out their current residence. Because of the Melrose

ranch’s small size, petitioners could not effectively conduct a

ranching or farming operation on it. During the taxable years in

issue, petitioners did not maintain any cattle on the Melrose

ranch.

Chireno Ranch

In 1979, petitioners purchased 510 acres of land in Chireno,

Texas (Chireno ranch), which is 25 miles east of Nacogdoches, for

$325,000. When petitioners purchased the Chireno ranch, the

ranch contained minimal improvements. Petitioners constructed

additional cattle pens, a pole barn, and a small metal shed. In

1992, petitioners built a one-vehicle bridge over a canal on the

Chireno ranch.

Initially, petitioners, together with Mr. Jorgenson’s
 - 5 -

elderly father, raised crossbred cattle. In the early 1980's,

petitioners decided to breed purebred cattle and purchased a

registered purebred Black Brangus herd (Brangus herd) consisting

of 110 head of cattle. Between 1986 and 1989, as part of their

effort to breed purebred cattle, petitioners entered into an

artificial insemination program for their cattle.

Petitioners failed to make a profit on the purebred cattle

operation. In June 1989, petitioners sold their Brangus herd,

dismissed their ranch manager, and ceased the purebred cattle

operation on the Chireno ranch.

In 1991, petitioners decided again to raise crossbred

cattle. In September 1991, petitioners received 51 steers from

the Colorado ranch, see infra Colorado ranch, and maintained

these steers on the Chireno ranch. This number of steers was far

below the Chireno ranch’s capacity. Sometime between September

1991 and January 1992, petitioners’ Chireno ranch manager was

killed in a propane explosion. On January 11, 1992, because

petitioners had not hired a new ranch manager and they were

maintaining full-time medical practices, they sold the steers.

During the rest of 1992, 1993, and 1994, petitioners did not

raise, purchase, or maintain any cattle on the Chireno ranch.

During that time period, Elzie Smith (Mr. Smith), who had bailed

hay prior to 1992 on the Chireno ranch for petitioners, performed

general maintenance work on the Chireno ranch in addition to

bailing hay. He maintained the fences and cared for the pastures
 - 6 -

of the Chireno ranch. Mr. Smith did not maintain written records

with regard to the number of hours he cared for the Chireno

ranch. Petitioners compensated Mr. Smith for his services by

providing him with part of the bailed hay. In addition to his

work at the Chireno ranch, Mr. Smith worked for a local cable

company installing cable and operated a ranch in Nacogdoches.

Colorado Ranch

In 1983, petitioners purchased 1,200 acres of land, 10 miles

east of Guffey, Colorado (Colorado ranch), for $550,000. The

Colorado ranch includes a house and a barn.

On the Colorado ranch, the growing season lasts only 30 to

60 days during a normal year. The grazing season lasts only 90

days. Because of this short grazing season, the Colorado ranch

can only serve as a summer steer or heifer operation.

In 1984, severe rains caused a major flood on the Colorado

ranch. As a result of the flood, the hay meadows and the grasses

on the Colorado ranch were severely damaged. To maintain revenue

from the sale of hay and to provide any steers and heifers on the

Colorado ranch with fields on which to graze, petitioners had to

reestablish the hay meadows and the grasses.

From 1984 to 1993, petitioners participated in a Government-

sponsored conservation program to replant the hay meadows and the

grasses. Under the terms of the conservation program,

petitioners could not graze cattle on several sections of the

Colorado ranch during the replanting period. The replanting
 - 7 -

effort extended until 1993 partly due to the short growing season

at the Colorado ranch.

Generally, petitioners have to purchase steers or heifers

around June 1 and maintain them at the Colorado ranch until

September 1 when petitioners have to move or sell them. In the

summer of 1991, petitioners purchased and maintained 51 steers,

which were subsequently moved to the Chireno ranch, on the

Colorado ranch. In 1992, the Colorado ranch was not used as a

summer steer or heifer operation.

In 1992, petitioners increased the size of the Colorado

ranch by purchasing 640 adjoining acres of land at a cost of

$101,000. Also, in 1992, petitioners hired Calvin Hunt to make

major improvements to the Colorado ranch. The improvements

included repairing dams, removing debris, and restoring the

irrigation systems to the hay meadows. During 1992, 1993, and

1994, petitioners hired Donald and Tina Higgenbotham on a part-

time basis to maintain the Colorado ranch. The Higgenbothams’

duties included establishing and maintaining the hay meadows and

seeding and mowing the grasses of the Colorado ranch.3 After all

the replanting efforts and improvements, the Colorado ranch had

improved hay meadows and restored grasses.

In 1993, petitioners acquired an additional 200 adjoining

acres for $42,000. During 1993, petitioners maintained a small

3
In addition, Donald Higgenbotham performed services for
petitioners on petitioners’ ranches in Texas and rental
properties.
 - 8 -

number of steers on the Colorado ranch.4 In 1994, petitioners

purchased for the Colorado ranch a very limited amount of cattle

which they subsequently sold in late 1994.

Kerrville Farm

In 1993, petitioners purchased 100 acres of land in

Kerrville, Texas (Kerrville farm), for $275,000. Petitioners

purchased the Kerrville farm with the intent of retiring and

harvesting pecans on the Kerrville farm.

Petitioners constructed two houses on the Kerrville farm;

i.e., a large and beautiful residence for themselves (retirement

home) and a small home for their part-time caretaker.

Construction on their retirement home began in 1993 and concluded

in 1994. During those years, petitioners cleared the land of

cedar and rocks, leveled the land, and made various other

improvements. In 1994, petitioners purchased six longhorn

steers, which could not be bred, for $4,000 and placed them on

the Kerrville farm. In 1995, 1 year after the years in issue,

petitioners planted their first pecan trees on the Kerrville

farm. Normally, a pecan operation becomes profitable 7 to 10

years after the planting of the pecan trees.

Petitioners did not maintain any business records such as

budgets, operating statements, written business plans, or

financial projections with regard to the ranching and farming

4
The record does not establish whether petitioners sold or
retained the steers that they maintained on the Colorado ranch in
1993.
 - 9 -

activities on the four properties (collectively, the Melrose,

Chireno, and Colorado ranches and the Kerrville farm are referred

to as the four properties). Also, petitioners failed to maintain

logs or journals with regard to their participation in the

activities on the four properties. Petitioners, however, did

consult with local government conservation agencies about how

best to restore and improve the four properties.

Throughout their ownership of the four properties,

petitioners reported losses. Specifically, for the years 1986 to

1994, petitioners incurred losses (excluding depreciation

deductions) totaling $1,284,349. As for the years in issue,

petitioners claimed the following losses with regard to the

ranching and farming activities:

Ranching and Farming
Taxable Year Losses
1992 $122,893
1993 205,331
1994 261,469

Rental Properties

In February 1992, petitioners purchased the St. John rental

property for $375,000. In December 1992, petitioners transferred

a one-half interest in the St. John rental property to the

Jorgenson Family Credit Shelter Trust (the Trust). On their 1994

tax return, petitioners reported $149,230 in expenses with regard

to the St. John rental property on Schedule E. On the notice of

deficiency, respondent determined that petitioners and the Trust
 - 10 -

had substantiated expenses of $64,397 with regard to the St. John

rental property for the 1994 taxable year. Respondent determined

that of the $64,397 expenses allowed to petitioners and the

Trust, petitioners were entitled to deduct only one-half.

Respondent disallowed the rest of the deductions claimed by

petitioners for lack of substantiation. During the years in

issue, in addition to the St. John rental property, petitioners

maintained several other rental properties in Nacogdoches, Texas,

for which they claimed various tax deductions.

Charitable Contributions

In 1993 and 1994, petitioners made noncash charitable

contributions to two qualified charitable organizations as

described in section 170(c)(1). In 1993, petitioners donated a

sliding wall partition (partition) having a fair market value of

$10,000 to the Boys and Girls Club of Nacogdoches (the Club). In

1994, petitioners donated a 1989 Chevrolet Suburban (Suburban)

having a fair market value of $14,850 to the Sacred Heart

Catholic Church.

The Internal Revenue Service (IRS) provides taxpayers with

Form 8283 to report information related to noncash charitable

contributions on their tax returns. In their 1993 tax return,

petitioners attached the second page of Form 8283 and a letter

from the executive director of the Club to petitioners thanking

them for the partition. On the second page of Form 8283,

petitioners described the partition as a “Sliding Partition Wall”
 - 11 -

in “Good” condition with an appraised fair market value of

“$10,000". Further, on the second page of Form 8283, petitioners

stated that they had acquired the partition by purchase, that

they had a $10,000 adjusted basis in the partition, and that they

claimed a $10,000 deduction with regard to the partition. In

their 1994 tax return, petitioners failed to include Form 8283.

Petitioners incorrectly claimed the noncash charitable

contribution of the Suburban as a $14,850 cash charitable

contribution.

Petitioners also failed to obtain qualified appraisals, as

defined by section 1.170A-13(c)(3), Income Tax Regs., for both

charitable contributions prior to the due date of their 1993 and

1994 tax returns. On audit, petitioners provided the IRS with

letters drafted (after petitioners filed their tax returns) by

two appraisers.

OPINION

I. Ranching and Farming Activities

Section 183(a) provides generally that, if an activity is

not engaged in for profit, no deduction attributable to such

activity shall be allowed except as provided in section 183(b).5

5
In the case of an activity not engaged in for profit,
sec. 183(b)(1) allows a deduction for expenses that are otherwise
deductible without regard to whether the activity is engaged in
for profit. Sec. 183(b)(2) allows a deduction for expenses that
would be deductible only if the activity were engaged in for
profit, but only to the extent that the total gross income
derived from the activity exceeds the deductions allowed under
sec. 183(b)(1).
 - 12 -

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 212.”

For a deduction to be allowed under section 162 or section

212(1) or (2), a taxpayer must establish that he or she engaged

in an activity with an actual and honest objective of making an

economic profit independent of tax savings. See Antonides v.

Commissioner, 91 T.C. 686, 693-694 (1988), affd. 893 F.2d 656

(4th Cir. 1990); Dreicer v. Commissioner, 78 T.C. 642, 644-645

(1982), affd. without opinion 702 F.2d 1205 (D.C. Cir. 1983).

The expectation of profit need not have been reasonable; however,

the taxpayer must have entered into the activity, or continued

it, with the objective of making a profit. See Hulter v.

Commissioner, 91 T.C. 371, 393 (1988); sec. 1.183-2(a), Income

Tax Regs.

Whether the requisite profit objective exists is determined

by looking at all the surrounding facts and circumstances. See

Keanini v. Commissioner, 94 T.C. 41, 46 (1990); sec. 1.183-2(b),

Income Tax Regs. Greater weight is given to objective facts than

to a taxpayer’s mere after-the-fact statement of intent. See

Westbrook v. Commissioner, 68 F.3d 868, 875-876 (5th Cir. 1995),

affg. T.C. Memo. 1993-634; sec. 1.183-2(a), Income Tax Regs. The

taxpayer bears the burden of proving that he engaged in the

activity with the intent to make a profit. See Rule 142(a).
 - 13 -

Section 1.183-2(b), Income Tax Regs., provides a list of

factors to be considered in the evaluation of a taxpayer’s profit

objective: (1) The manner in which the taxpayer carries on the

activity; (2) the expertise of the taxpayer or his advisors; (3)

the time and effort expended by the taxpayer in carrying on the

activity; (4) the expectation that assets used in the 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, from the

activity; (8) the financial status of the taxpayer; and (9)

elements of personal pleasure or recreation. This list is

nonexclusive, the number of factors for or against the taxpayer

is not necessarily determinative, and more weight may be given to

some factors than to others. Cf. Dunn v. Commissioner, 70 T.C.

715, 720 (1978), affd. 615 F.2d 578 (2d Cir. 1980); sec. 1.183-

2(b), Income Tax Regs.

Petitioners contend that because the activities were profit

motivated they properly reported losses from the ranching and

farming activities. Conversely, respondent asserts that the

activities were not engaged in for profit. We agree with

respondent.6

6
On Schedule F of their tax returns, petitioners reported
the ranching and farming activities on the four properties as one
activity. In their briefs, petitioners seem to argue that the
ranching and farming activities on the four properties are one
activity. Respondent argues that we should treat each property
 - 14 -

A. Manner in Which the Activity Is Conducted

The fact that a taxpayer carries on the activity in a

businesslike manner and maintains complete and accurate books and

records may indicate a profit objective. See sec. 1.183-2(b)(1),

Income Tax Regs. Petitioners presented the Court with voluminous

receipts, invoices, and canceled checks allegedly evidencing

expenditures for the four properties. After reviewing the

evidence, we cannot determine whether the expenditures were

exclusively for the benefit of the four properties (instead of

the rental properties) and which expenditures, if any, related to

which specific ranch or farm.

The parties also stipulate that petitioners did not prepare

any budget or operating statements. Further, the parties

stipulate that petitioners did not create a written business plan

or any financial projections. Petitioners conducted their

activities unaware of the amount of revenue they could reasonably

generate and had no credible estimate of the costs associated

with the four properties.

We conclude that petitioners did not conduct the ranching

as a separate activity. In order to ascertain whether
petitioners have conducted separate activities, we must evaluate
all the facts and circumstances of the case. See sec. 1.183-
1(d)(1), Income Tax Regs. Although we find that the ranching and
farming activities on the four properties are one activity, we
note that the outcome of this case would have been the same had
we concluded that petitioners maintained separate activities on
each of the four properties or two activities (one for ranching
and one for farming).
 - 15 -

and farming activities in a businesslike manner.7

B. Expertise of Petitioners and their Advisors

A taxpayer’s expertise, research, and study of an activity,

as well as his consultation with experts, may be indicative of a

profit motive. See sec. 1.183-2(b)(2), Income Tax Regs. Growing

up, petitioners acquired experience in raising and maintaining a

limited number of cattle but not in running an entire ranching

and farming operation.

Petitioners, however, hired ranch managers for their ranches

and sought advice from local Government conservation agencies

with regard to maintaining the four properties. These facts

indicate that petitioners had a profit motive.

C. Time and Effort Expended by the Taxpayer

Because of their busy medical practices, petitioners devoted

a very limited time to their ranching and farming activities. A

taxpayer, however, can show a profit motive if he has employed

competent and qualified persons to carry on the activity. See

sec. 1.183-2(b)(3), Income Tax Regs. In the instant case,

petitioners employed various people to maintain and care for

their four properties. Petitioners’ actions indicate a profit

motive.

7
Sec. 1.183-2(b)(1), Income Tax Regs., provides that
abandonment of unprofitable methods may indicate a profit motive.
Petitioners argue that when they abandoned their purebred cattle
operation in 1989, they attempted to limit their losses.
Although we find some merit in petitioners’ argument, it does not
affect our overall conclusion that for the years in issue
petitioners did not conduct the ranching and farming activities
in a businesslike manner.
 - 16 -

D. The Expectation That Assets May Appreciate in Value

An expectation that assets may appreciate in value may also

be an indication of the taxpayer’s motive with respect to such

activity. See sec. 1.183-2(b)(4), Income Tax Regs. Petitioners

contend that the appreciation in the value of their four

properties more than offsets petitioners’ historical losses. Mr.

Jorgenson testified that the appreciation on the four properties

exceeded the historical losses and that the Colorado ranch could

be sold for more than the amount of the historical losses. Mr.

Jorgenson, however, failed to explain to the Court how he knows

his claims to be true. We note with regard to the Colorado

ranch, for example, petitioners purchased land in 1983 for $458

an acre ($550,000 ÷ 1,200 acres), while in 1992, they purchased

adjoining land for $158 an acre ($101,000 ÷ 640 acres). Because

no appraisals of the four properties were presented to the Court,

we do not accept petitioners’ uncorroborated claims.

Accordingly, this factor does not support petitioners’

assertions.

E. The Success of the Taxpayer in Carrying on Other
Similar or Dissimilar Activities

A profit motive may be indicated by the “fact that a

taxpayer has engaged in similar activities in the past and

converted them from unprofitable to profitable enterprises”.

Sec. 1.183-2(b)(5), Income Tax Regs. Petitioners argue that they

profitably operated cattle operations on their parents’ ranches

and that they have successfully operated their medical practices.
 - 17 -

We do not equate petitioners’ childhood experiences of caring for

a limited amount of cattle with the responsibility associated

with running an entire ranching and farming operation. Further,

petitioners’ experiences in the medical field do not meaningfully

translate into their ranching and farming operations. See

Wesinger v. Commissioner, T.C. Memo. 1999-372; Wilkinson v.

Commissioner, T.C. Memo. 1996-39. Accordingly, this factor also

does not support petitioners’ position.

F. The Activity’s History of Income or Losses and
Amount of Occasional Profits (If Any)

A record of substantial losses over several years may be

indicative of the absence of a profit motive. See Golanty v.

Commissioner, 72 T.C. 411, 426 (1979), affd. without opinion 647

F.2d 170 (9th Cir. 1981). Petitioners have incurred losses

throughout their ownership of the four properties, with

$1,284,349 being incurred between 1986 and 1994. Petitioners

have never earned any profits from the ranching and farming

activities.

Petitioners argue that they incurred losses from normal

startup costs and from unusual market and economic conditions.

Further, petitioners contend that part of their losses can also

be explained by dramatic weather conditions that affected their

Colorado ranch.

We are unpersuaded. Although the Court recognizes that

pecan operations do not immediately become profitable,

petitioners purchased the Kerrville ranch in 1993, but they did
 - 18 -

not plant the first pecan trees until 1995 when their retirement

home was completed. Further, petitioners failed to show that had

events beyond their control not occurred their ranches would have

been profitable. Accordingly, these factors weigh against

petitioners.

G. The Taxpayer’s Financial Status

Substantial income from sources other than the activity in

question, particularly if the activity’s losses generate

substantial tax benefits, may indicate that the activity is not

engaged in for profit. See sec. 1.183-2(b)(8), Income Tax Regs.

Petitioners generated significant income from their medical

practices which enabled them to afford the upkeep on the four

properties. This factor indicates a lack of profit objective.

H. Personal Pleasure

The absence of personal pleasure or recreation relating to

the activity in question may indicate the presence of a profit

objective. See sec. 1.183-2(b)(9), Income Tax Regs. In the case

of ranching activities, however, because personal enjoyment can

coexist with demanding physical labor, this factor does “little

to advance or detract from [petitioners’] position.” Wesinger v.

Commissioner, T.C. Memo. 1999-372. As to petitioners’ farming

activity, we note that petitioners constructed a large and

beautiful retirement home at the Kerrville ranch in the heart of

the Texas hill country. At a minimum, we find that this factor

does not advance petitioners’ argument that they conducted their

ranching and farming activities with a profit motive.
 - 19 -

I. Conclusion

After reviewing the entire record,8 we conclude that

petitioners did not engage in the ranching and farming activities

with an actual and honest objective of making a profit within the

meaning of section 183.9 Because we dispose of the section 183

issue against petitioners, we need not reach respondent’s

alternative argument that petitioners have failed to substantiate

the claimed expenses which resulted in losses for the ranching

and farming activities.

II. St. John Rental Property Expenses

On their 1994 tax return, petitioners deducted $149,230 of

expenses with regard to the St. John rental property. On the

notice of deficiency, respondent determined that petitioners and

the Trust had substantiated expenses in the amount of $64,937, of

which petitioners could deduct one-half.10 Petitioners bear the

burden of proof with regard to the claimed deductions. See Rule

8
Petitioners submitted an expert report by Stephen J.
Kleberg, which opined, among other things, that petitioners
conducted their ranching and farming operations in a businesslike
manner. We found Mr. Kleberg’s report and testimony to be of no
assistance in deciding this case. In light of the fact that Mr.
Kleberg visited only the Melrose and Chireno ranches and did not
evaluate petitioners’ limited books and records, his testimony
was implausible or questionable.
9
We have evaluated various facts and circumstances
subsequent to the years in issue. See Taube v. Commissioner, 88
T.C. 464, 482 (1987). These facts and circumstances do not
affect our conclusion that petitioners did not have a profit
motive during the years in issue.
10
Since the issuance of the notice of deficiency,
respondent has made several concessions affecting the $64,937 in
expenses.
 - 20 -

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).

Petitioners argue that they are entitled to a $149,230

deduction because (1) petitioners and the Trust had an oral

agreement to operate as a partnership with regard to the St. John

rental property, (2) pursuant to the oral partnership agreement,

the partner who paid for an expense of the St. John rental

property was entitled to the corresponding tax deduction, and (3)

petitioners paid for expenses (including depreciation) in the

amount of $149,230.

Because petitioners have failed to provide any credible

evidence of the existence of a partnership or a partnership

agreement and have failed to substantiate the deductions, we

sustain respondent’s determination.

III. Charitable Contributions

Section 170(a)(1) provides that a taxpayer may deduct “any

charitable contribution * * * payment of which is made within the

taxable year. A charitable contribution shall be allowable as a

deduction only if verified under regulations prescribed by the

Secretary.” The Secretary of the Treasury (Secretary) has issued

section 1.170A-13, Income Tax Regs., to implement Congress’

legislative mandate. Section 1.170A-13(c), Income Tax Regs,

provides that the taxpayer must obtain a qualified appraisal for

donated property (except money and certain publicly traded

securities) in excess of $5,000.11

11
Sec. 1.170A-13(c)(3), Income Tax Regs., describes the
necessary requirements for a qualified appraisal.
 - 21 -

In addition, the Secretary requires that the taxpayer attach

an appraisal summary to the tax return. See sec. 1.170A-

13(c)(2)(i)(B), Income Tax Regs. The Secretary has listed in

section 1.170A-13(c)(4)(i) and (ii), Income Tax Regs., the items

to be included by the taxpayer in the appraisal summary. The IRS

has prescribed Form 8283 to be used as the appraisal summary.

Although we have not demanded that the taxpayer strictly

comply with the reporting requirements of section 1.170A-13,

Income Tax Regs., we have required that the taxpayer

substantially comply with the Treasury regulations in order to

take the deduction for a charitable contribution. See Hewitt v.

Commissioner, 109 T.C. 258 (1997), affd. 166 F.3d 332 (4th Cir.

1998). Based on the record, we find that petitioners did not

timely obtain qualified appraisals and failed to include complete

appraisal summaries with their 1993 and 1994 tax returns.

Because petitioners failed to comply substantially with section

1.170A-13, Income Tax Regs., we hold that petitioners are not

entitled to deduct the noncash charitable contributions.

IV. Section 6662(a) Accuracy-Related Penalties

Pursuant to section 6662(a), for each of the years in issue,

respondent determined an accuracy-related penalty of 20 percent

on the amount of the underpayment attributable to a substantial

understatement of tax. In the alternative, respondent imposed

the accuracy-related penalties on the amount of the underpayment

due to negligence or disregard of rules or regulations.

Respondent's determinations are presumed to be correct, and
 - 22 -

petitioners bear the burden of proving that the accuracy-related

penalties do not apply. See Rule 142(a).

A substantial understatement of tax is defined as an

understatement of tax that exceeds the greater of 10 percent of

the tax required to be shown on the tax return or $5,000. See

sec. 6662(d)(1)(A). The understatement is reduced to the extent

that the taxpayer has (1) adequately disclosed his or her

position or (2) has substantial authority for the tax treatment

of the item. See sec. 6662(d)(2)(B). Section 6662(c) defines

“negligence” as any failure to make a reasonable attempt to

comply with the provisions of the Internal Revenue Code, and

“disregard” means any careless, reckless, or intentional

disregard.

Whether applied based on a substantial understatement of tax

or negligence or disregard of the rules or regulations, the

accuracy-related penalty is not imposed with respect to any

portion of the understatement as to which the taxpayer acted with

reasonable cause and in good faith. See sec. 6664(c)(1). The

decision as to whether the taxpayer acted with reasonable cause

and in good faith depends upon all the pertinent facts and

circumstances. See sec. 1.6664-4(b)(1), Income Tax Regs.

Relevant factors include the taxpayer's efforts to assess his

proper tax liability, including the taxpayer’s reasonable and

good-faith reliance on the advice of a professional such as an

accountant. See sec. 1.6664-4(b)(1), Income Tax Regs. Further,

an honest misunderstanding of fact or law that is reasonable in
 - 23 -

light of the experience, knowledge, and education of the taxpayer

may indicate reasonable cause and good faith. See Remy v.

Commissioner, T.C. Memo. 1997-72.

Petitioners assert that they acted with reasonable cause and

in good faith when they reported the ranching and farming losses,

the St. John rental property expenses, and the noncash charitable

contributions. The determination of whether petitioners engaged

in their ranching and farming activities for profit involves a

difficult factual question. See, e.g., Wesinger v. Commissioner,

T.C. Memo. 1999-372; Arrington v. Commissioner, T.C. Memo. 1983-

673. Petitioners maintained various receipts, invoices, and

canceled checks for their claimed expenses and employed an

accountant to prepare their tax returns and advise them. Their

accountant testified at trial that he represented other ranchers

and farmers in Texas and that petitioners provided him enough

information to report their ranching and farming activities. We

are not persuaded that their reliance on the accountant was less

than reasonable. Accordingly, we find that petitioners acted

with reasonable cause and in good faith, and, therefore, the

accuracy-related penalties attributable to the losses from the

ranching and farming activities do not apply.

Petitioners, however, have failed to provide a reasonable

explanation why we should not sustain the accuracy-related

penalties with regard to the deductions of the St. John rental
 - 24 -

property expenses and the noncash charitable contributions.

Petitioners provided no credible evidence for the claimed St.

John rental property deductions. Further, neither petitioners

nor their accountant provided an explanation why timely qualified

appraisals were not conducted for the noncash charitable

contributions and why the appraisal summaries on Form 8283 were

not fully completed. We, therefore, sustain respondent’s

imposition of the accuracy-related penalties with regard to the

underpayment associated with the deductions of the St. John

rental property expenses and the noncash charitable

contributions.

In reaching our holdings herein, we have considered all

arguments made by the parties, and to the extent not mentioned

above, we find them to be irrelevant or without merit.

To reflect the foregoing,

Decision will be entered

under Rule 155.