T.C. Memo. 2006-145
UNITED STATES TAX COURT
AUSTIN L. MITCHELL AND REBECCA A. MITCHELL, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 18129-04. Filed July 6, 2006.
Austin L. Mitchell and Priscilla J. Lim (specially
recognized), for petitioners.
Thomas C. Pliske, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
KROUPA, Judge: Respondent determined deficiencies in
petitioners’ Federal income taxes and that petitioners were
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liable for accuracy-related penalties under section 6662(a)1 for
1998, 1999, and 2000 (the years at issue). For 1998, respondent
determined a $1,060 deficiency and $212 accuracy-related penalty.
For 1999, respondent determined a $946 deficiency and $189
accuracy-related penalty. For 2000, respondent determined a
$1,346 deficiency and $284 accuracy-related penalty.
There are two issues for decision. The first is whether
petitioner Austin L. Mitchell (petitioner)2 conducted his farming
activity for profit during the years at issue. We hold he did
not. The second issue is whether petitioners are liable for the
accuracy-related penalty for their underpayments of tax in the
years at issue. We hold they are liable.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts and the accompanying exhibits are
incorporated by this reference. Petitioners resided in Salem,
Missouri, at the time they filed the petition.
Petitioner
Petitioner’s family owned and operated a farm (the family
farm) in the Salem area for more than 100 years. Petitioner grew
1
All section references are to the Internal Revenue Code in
effect for the years at issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure, unless otherwise
indicated.
2
References to petitioner’s wife are to Mrs. Mitchell.
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up on the family farm and worked on it during his childhood
through his college years. Petitioner assumed greater
responsibility for maintaining the family farm during his
adolescence because of his father’s declining health. Petitioner
worked with livestock and row crops. The family farm was
“running 100 bushel of corn to the acre” under petitioner’s
stewardship, a prodigious result.
Since 1977, petitioner has worked as an attorney and CPA in
the Salem area. Many of petitioner’s clients are farmers.
Petitioner is a hard-working individual and has been financially
successful as an attorney and CPA, his chosen professions, which
he enjoys. Petitioner worked approximately 2,800 to 3,100 hours
per year in those professional occupations in each of the years
at issue.
The Family Farm
Petitioner’s mother owned the family farm until her death in
April 1992. The family farm consisted of approximately 38 acres
of tillable bottom land, 35 to 40 acres of pasture, a 20-acre
timber stand, and a dwelling. The timber stand consisted
primarily of black walnut and white oak trees at different stages
of maturity. Both types of trees can produce revenue for a
landowner. Premature trees can be thinned and sold as pulpwood,
and mature trees can be harvested for board wood (lumber). From
the time a sapling is planted, it will be 50 years before the
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tree reaches maturity. Black walnut trees also produce edible
nuts that may be sold.
Glen B. Harris (Harris) has been planting, harvesting, and
baling hay on the family farm since 1971. Harris is petitioner’s
brother-in-law, resides near the family farm, and is an
experienced farmer. Harris worked on the family farm as a result
of a two-part arrangement he had with petitioner’s mother.
First, petitioner’s mother hired Harris to perform work on the
farm, including haying. Second, Harris rented the pastures from
petitioner’s mother to graze his cattle.
Petitioners moved into the house on the family farm in
November 1991 to care for petitioner’s elderly mother. Shortly
thereafter, in April 1992, petitioner’s mother passed away, and
petitioner inherited the family farm. Petitioner and Harris
adopted a two-part barter arrangement with respect to Harris’s
farming activities on the family farm after the inheritance.
Harris could continue to hay on the family farm at his own
expense and could keep all the hay harvested in exchange for
taking general care of the land. Also, Harris could graze his
cattle on the family farm pasture land in exchange for liming and
fertilizing the hayfields.
Petitioner and Harris changed these arrangements in 1999.
Petitioner and Harris changed the haying arrangement to “custom
baling on the shares.” Custom baling on the shares is a common
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arrangement where one party does all the haying work on another’s
land and each keeps 50 percent of the hay. Petitioner and Harris
also changed the pasturing arrangement in 1999. Petitioner
agreed to pay Harris to lime, fertilize, and maintain fencing and
Harris agreed to pay pasture land rental fees to petitioner. The
fees petitioner paid Harris for his services exactly offset the
pasture land rental fees Harris paid petitioner.
During October 1999, petitioner selectively harvested his
existing timber stand. This resulted in 62,000 board feet of
non-white oak lumber and 8,193 feet of white oak lumber, which
generated $7,500 of revenue. Petitioner consulted a logging
expert to advise him which trees to cut.
Petitioner also spent significant time from 1992 through the
years at issue working on the family farm. Each year, he spent
evenings and weekends from mid-April to September performing two
kinds of tasks. Petitioner worked at converting 10 acres of
uphill pasture to timber by planting numerous white oak and black
walnut seedlings. Petitioner also worked at weed control in
various ways. He cleared multiflora rose and native thistle from
the pasture land and bottom land, and mowed in the converted
timber stand to facilitate tree growth. In general, petitioner
enjoyed the hard physical labor he performed on the family farm
and believed he might derive health benefits from it as well.
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Petitioner consulted with neighboring farmers since moving to the
family farm.
Petitioner did not have a written business plan for his
farming activity. Nor did petitioner maintain a cash receipts
book, a general ledger, or a separate checking account for the
farming activity. The family farm, however, is quite important
to petitioner. Petitioner intended to build the farm and make it
productive before leaving the farm to his children. To date,
petitioner has lost approximately $80,000 to $90,000 as a result
of conducting the farming activity.
Petitioners’ Income Tax Returns and the Deficiency Notice
Petitioners filed joint income tax returns for the years at
issue on Forms 1040, U.S. Individual Income Tax Return, which
petitioner himself prepared. Petitioner reported net losses on
Schedules F, Profit or Loss From Farming, of $2,352 for 1998,
$2,140 for 1999, and $4,679 for 2000. In 1998, petitioner
reported no income from the farm and expenses of $2,352. In
1999, petitioner reported $4,155 of income from the farm and
expenses of $6,295. Also in 1999, petitioner reported $7,500 of
income from the sale of timber on Schedule D, Capital Gains and
Losses. In 2000, petitioner reported $1,690 of income from the
farm and expenses of $6,369. Petitioner deducted the net losses
from the farming activity against other income reported on the
tax returns for the years at issue.
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Respondent increased petitioner’s gross income by the amount
of petitioner’s farm expenses in each of the years at issue in a
deficiency notice dated June 25, 2004 (the deficiency notice).
Respondent determined that petitioner did not conduct the farming
activity with the intent to earn a profit under section 183(a).
Respondent also determined that petitioner’s various undertakings
on the family farm were not one activity for purposes of the
section 183 analysis. Finally, respondent determined that
petitioners were liable for the accuracy-related penalty because
petitioners’ underpayments of taxes were due to negligence or
disregard of rules or regulations. Petitioners timely filed a
petition seeking a redetermination of respondent’s determinations
in the deficiency notice.
OPINION
This is the third time that we have been asked to decide
whether petitioner conducted the farming activity for profit. We
held petitioner did not conduct the farming activity for profit
in 1992 and 1993. Mitchell v. Commissioner, T.C. Summary Opinion
1998-200. We similarly held that petitioner did not conduct the
farming activity for profit in 1995, 1996, and 1997. Mitchell v.
Commissioner, T.C. Memo. 2001-269.
A. Section 183 Generally
Section 183(a) provides generally that if an individual
engages in an activity and “if such activity is not engaged in
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for profit, no deduction attributable to such activity shall be
allowed under this chapter except as provided in this section.”
Deductions that would be allowable without regard to whether the
activity is engaged in for profit shall be allowed under section
183(b)(1), and deductions that would be allowable only if the
activity is engaged in for profit shall be allowed under section
183(b)(2), but only to the extent that the gross income from the
activity exceeds the deductions allowable under section
183(b)(1).
We begin with the burden of proof. In general, the
Commissioner’s determinations in the deficiency notice are
presumed correct, and the taxpayer bears the burden of proving
that the Commissioner’s determinations are in error. Rule
142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Petitioner
did not assert that the burden shifted to respondent under
section 7491. We therefore treat petitioner as having conceded
this issue and find that the burden remains with petitioner.
We follow the Court of Appeals opinion squarely on point
when appeal from our decision would lie to that court absent
stipulation by the parties to the contrary. Golsen v.
Commissioner, 54 T.C. 742 (1970), affd. 445 F.2d 985 (10th Cir.
1971). A taxpayer residing in the Eighth Circuit, such as
petitioner, must prove he or she conducted the activity with an
actual and honest objective of making a profit. See Evans v.
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Commissioner, 908 F.2d 369, 373 (8th Cir. 1990), revg. T.C. Memo.
1988-468; 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, 645 (1982), affd. without opinion 702 F.2d 1205 (D.C.
Cir. 1983).
The expectation of profit need not have been reasonable.
The taxpayer must have entered into the activity or continued it,
however, with the profit motive. Hulter v. Commissioner, 91 T.C.
371, 393 (1988); sec. 1.183-2(a), Income Tax Regs. Whether a
taxpayer has the requisite profit motive is determined on the
basis of all surrounding facts and circumstances. Dreicer v.
Commissioner, supra at 645; sec. 1.183-2(b), Income Tax Regs.
We give greater weight to objective facts than to a taxpayer’s
statements of intent. Dreicer v. Commissioner, supra at 645;
sec. 1.183-2(a), Income Tax Regs.
Before we address whether petitioner had the requisite
profit motive based on the facts and circumstances, we first must
address two threshold issues. First, whether petitioner’s tree
planting, mature timber harvesting, and haying undertakings may
be treated as one activity. Second, whether petitioner is
entitled to the presumption of a profit motive.
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1. Whether the Undertakings May Be Treated as One Activity
Respondent argues that we may not aggregate petitioner’s tree-
planting, mature timber harvesting, and haying undertakings as
one activity. We disagree.
Multiple undertakings of a taxpayer may be treated as one
activity if the undertakings are sufficiently interconnected.
Sec. 1.183-1(d)(1), Income Tax Regs. The most important factors
in making this determination are the degree of organizational and
economic interrelationship of the undertakings, the business
purpose served by carrying on the undertakings separately or
together, and the similarity of the undertakings. Id. The
Commissioner generally accepts the taxpayer’s characterization of
two or more undertakings as one activity unless the
characterization is artificial or unreasonable. Id.
We have considered these and other factors in determining
whether the taxpayer’s characterization is unreasonable. The
factors so considered include: (a) Whether the undertakings are
conducted at the same place; (b) whether the undertakings were
part of the taxpayer’s efforts to find sources of revenue from
his or her land; (c) whether the undertakings were formed as
separate businesses; (d) whether one undertaking benefited from
the other; (e) whether the taxpayer used one undertaking to
advertise the other; (f) the degree to which the undertakings
shared management; (g) the degree to which one caretaker oversaw
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the assets of both undertakings; (h) whether the taxpayer used
the same accountant for the undertakings; and (i) the degree to
which the undertakings shared books and records. See Keanini v.
Commissioner, 94 T.C. 41, 46 (1990); Tobin v. Commissioner, T.C.
Memo. 1999-328; Estate of Brockenbrough v. Commissioner, T.C.
Memo. 1998-454; Hoyle v. Commissioner, T.C. Memo. 1994-592; De
Mendoza v. Commissioner, T.C. Memo. 1994-314; Scheidt v.
Commissioner, T.C. Memo. 1992-9.
We find it is appropriate to treat petitioner’s various
farming undertakings as one activity. The undertakings are all
agricultural and were performed at the family farm. The
undertakings all demonstrate petitioner’s efforts to generate
revenue from the family farm. The mature timber harvesting and
the haying generated current revenue while the tree-planting may
generate future revenue. The undertakings were not formed as
separate businesses. The tree-planting undertaking benefited
from the mature timber harvesting undertaking as mature timber
harvesting made additional land available for tree-planting.
Petitioner managed all the undertakings. Petitioner himself was
the accountant for all the undertakings. Finally, petitioner
used one checking account to pay the expenses of and to deposit
the revenues from the various undertakings.
After reviewing these factors and the facts and
circumstances of this case, we find that petitioner’s tree-
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planting, mature timber harvesting, and haying undertakings may
be treated as one activity. We therefore reject respondent’s
determination in the deficiency notice. By treating the
undertakings as one activity, we note that petitioner reported
$7,500 from the sale of timber, $4,155 from the sale of hay, and
claimed farm expenses of $6,295 in 1999. Accordingly, petitioner
had a net profit from the farming activity in 1999, and we
therefore do not sustain respondent’s disallowance of the claimed
farm expenses as to 1999. Furthermore, we shall consider all
petitioner’s farming undertakings as one activity in analyzing
whether petitioner conducted the farming activity with an actual
and honest objective of making a profit during 1998 and 2000.
2. Whether the Section 183(d) Presumption Applies
We next address whether petitioner is entitled to the
section 183(d) presumption of a profit motive. Petitioner
contends that he qualifies for the profit motive presumption
under section 183(d) for 1998 and 2000 by arguing that the gross
income derived from the farming activity exceeded the deductions
attributable to the activity in 1999, 2001, 2003, and 2004. We
disagree. Section 183(d) presumes an activity is conducted for
profit if the gross income exceeds the attributable deductions
for 33 out of 5 consecutive years (the gross income test).4 The
3
We note that sec. 1.183-1(c)(1), Income Tax Regs., has not
been amended to conform to the statutory changes made in 1986.
(continued...)
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presumption applies only after the third profit year. Sec.
183(d). Because petitioner did not report gross income in excess
of attributable deductions from the farming activities in three
or more of the years 1994 to 1999, petitioner is not entitled to
the section 183(d) presumption for either 1998 or 2000.
B. Whether Petitioner Conducted the Farming Activity for
Profit During 1998 and 2000
We now address whether petitioner engaged in the farming
activity with an actual and honest objective of making a profit
considering all the pertinent facts and circumstances. We
structure our analysis around nine nonexclusive factors in
determining whether petitioner had an actual and honest objective
of making a profit from the farming activity during 1998 and
2000. See 1.183-2(b), Income Tax Regs.
The nine factors are: (1) The manner in which the taxpayer
carries on the activity; (2) the expertise of the taxpayer or his
or her advisers; (3) the time and effort expended by the taxpayer
in carrying on the activity; (4) the expectation that the assets
used in the activity may appreciate in value; (5) the success of
the taxpayer in carrying on other similar or dissimilar
3
(...continued)
See Tax Reform Act of 1986, Pub. L. 99-514, sec. 143(a)(1) and
(2), 100 Stat. 2120.
4
A different gross income test applies for an activity that
consists of the breeding, training, showing, or racing of horses.
Sec. 183(d) (second sentence).
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activities; (6) the taxpayer’s history of income or loss 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) whether elements of personal pleasure or recreation are
involved. Id.
No one factor or set of factors is controlling, nor is the
existence of a majority of factors favoring or disfavoring a
profit motive necessarily controlling. Hendricks v.
Commissioner, 32 F.3d 94, 98 (4th Cir. 1994), affg. T.C. Memo.
1993-396; Brannen v. Commissioner, 722 F.2d 695, 704 (11th Cir.
1984), affg. 78 T.C. 471 (1982); sec. 1.183-2(b), Income Tax
Regs. The individual facts and circumstances of each case are
the primary test. Keanini v. Commissioner, supra at 46; Allen v.
Commissioner, 72 T.C. 28, 34 (1979); sec. 1.183-2(b), Income Tax
Regs.
C. Application of the Factors
1. The Manner in Which the Taxpayer Conducts the
Activity
We begin by examining the manner in which petitioner carried
on the farming activity. Carrying on an activity in a
businesslike manner may indicate a profit objective. Sec. 1.183-
2(b)(1), Income Tax Regs. In determining whether a taxpayer
conducted an activity in a businesslike manner, we consider
whether the taxpayer maintained complete and accurate books and
records and also whether changes were attempted in an effort to
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earn a profit. Engdahl v. Commissioner, 72 T.C. 659, 666-667
(1979); sec. 1.183-2(b)(1), Income Tax Regs.
Petitioner did not present any documentary evidence to prove
the existence of complete and accurate books and records for the
farming activity. Petitioner did not maintain a separate bank
account for the farming activity. Instead, he used one account
for personal use, the farming activity, and for his legal
practice.
Petitioner asserts that because he did not maintain a
separate bank account for his law practice, which petitioner
operated with a profit motive, we should infer a profit motive
from petitioner’s lacking a separate bank account for the farming
activity. We disagree. The lack of a separate bank account for
petitioner’s farming activity, coupled with the lack of complete
and accurate books and records, tends to show that petitioner did
not carry on the farming activity in a businesslike manner. Cf.
Kahle v. Commissioner, T.C. Memo. 1991-203.
Petitioner also had no written business plan, nor offered
any documentary evidence showing he contemplated, before
beginning the farming activity, how to make it profitable.
Petitioner did not advertise the farming activity in an attempt
to increase its profitability. These facts lead us to conclude
that petitioner did not carry on the farming activity in a
businesslike manner. Sec. 1.183-2(b)(1), Income Tax Regs.
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Nor has petitioner attempted to make the farming activity
profitable by changing his conduct over the years. Rather, we
find it remarkable how little petitioner has changed the farming
activity despite years of operating losses. Petitioner primarily
relies on the changes in his arrangement with Harris made in 1999
as demonstrating his attempt to earn a profit. We find that the
change in the pasture land arrangement was just a change in form
but not substance because the amounts of money exchanged offset
each other. We find, however, that the change in the haying
arrangement with Harris in 1999 was substantive because
petitioner received half the hay after the change while before he
received none of the hay. This enabled petitioner to sell hay to
generate revenues, which he did.
We find that this one change does not outweigh the lack of
complete and accurate books and records and the absence of other
indicia that petitioner conducted the farming activity in a
businesslike manner. This factor favors respondent.
2. Expertise of the Taxpayer or His Advisers
We next consider petitioner’s expertise and that of his
advisers. Preparing for an activity by extensive study on one’s
own or by consulting with experts and conducting the activity in
accordance with what has been learned indicates that the taxpayer
had an actual and honest profit objective. Sec. 1.183-2(b)(2),
Income Tax Regs.
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Petitioner contends that he had the necessary expertise in
farming to operate a farm for profit. He was born and raised on
the family farm. He had previous experience producing row crops,
hay, and livestock. He had conversations with other farmers in
the area.5 Additionally, he consulted with two expert advisers,
Harris and a sawyer.
The record does not show, however, that petitioner knew how
or intended to make a profit from his current farming
undertakings. He did not seek expert advice on how to operate
his farm profitably. He discussed farming with his farmer
clients and farmer neighbors, but there is no evidence that they
gave him advice about farming for profit. This factor favors
respondent.
3. The Taxpayer’s Time and Effort
We next consider the time and effort petitioner expended in
conducting the farming activity. A taxpayer’s devotion of much
time and effort to conducting an activity, particularly if the
activity does not have substantial personal or recreational
aspects, may indicate an intention to derive a profit. Sec.
1.183-2(b)(3), Income Tax Regs.
5
Petitioner also testified that he consulted experts after
2000. Stating the obvious, petitioner could not possibly have
carried on the farming activity during 1998 and 2000 in
accordance with expertise garnered later. This testimony is
therefore irrelevant.
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During the years at issue, petitioners resided at the family
farm. They derived personal and recreational benefits from the
situs of the farming activity. Petitioner devoted regular and
substantial time and effort to the farming activity, although he
continued to work an average of more than 50 hours per week as a
lawyer and accountant. Petitioner did not explain how the work
he performed on the family farm related to making it profitable.
This factor favors respondent.
4. The Expectation That the Assets Used in the Activity
May Appreciate in Value
We next examine the expectation that the assets used in
conducting the activity may appreciate in value. A taxpayer may
intend, despite the lack of profits from current operations, that
an overall profit will result when appreciation in the value of
assets used in the activity is realized. Bessenyey v.
Commissioner, 45 T.C. 261, 274 (1965), affd. 379 F.2d 252 (2d
Cir. 1967); sec. 1.183-2(b)(4), Income Tax Regs. Petitioner
intends to give the family farm to his sons, not sell it. Thus,
petitioner is not relying on the appreciation of the family
farm’s assets to offset the losses sustained from his farming
activity. This factor favors respondent.
5. Success in Similar or Dissimilar Activities
We next examine the success of petitioner in carrying on
other similar or dissimilar activities. If a taxpayer has
previously engaged in similar activities and made them
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profitable, this success may show that the taxpayer has a profit
motive for the activity at issue, even though the activity is
presently unprofitable. Sec. 1.183-2(b)(5), Income Tax Regs. A
taxpayer’s success in dissimilar activities may also indicate a
profit motive. See Daugherty v. Commissioner, T.C. Memo. 1983-
188.
Petitioner argued that his previous work on the family farm
as a teenager indicates that he was previously successful in a
similar activity. Petitioner did describe in detail how much
corn was cropped due to his efforts, but he did not prove that
the family farm was financially successful during those years.
Accordingly, petitioner’s prior work on the family farm does not
support a finding for petitioner.
Petitioner is a licensed CPA and has a legal practice. We
find that petitioner is hard-working and dedicated to his
professional pursuits. Petitioner’s success in a CPA and legal
practice, however, does not equate with petitioner conducting the
farming activity with an honest and actual objective of making a
profit. This factor favors respondent.
6. Taxpayer’s History of Income or Losses
We next examine petitioner’s history of income or loss with
respect to the farming activity. A history of substantial losses
may indicate that the taxpayer did not conduct the activity for
profit. Golanty v. Commissioner, 72 T.C. 411, 427 (1979), affd.
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without published opinion 647 F.2d 170 (9th Cir. 1981); sec.
1.183-2(b)(6), Income Tax Regs.
Petitioner generated revenue from the farming activity in
1999 and 2000, resulting in a net profit in 1999, but he incurred
a net loss in 1998 and 2000. Despite the 1999 net profit,
petitioner has claimed losses between $80,000 and $90,000 from
conducting the farming activity since 1991. This factor favors
respondent.
7. Amount of Occasional Profits, If Any
We next consider the amount of occasional profits, if any,
that petitioner earned through 2000. Occasional profits the
taxpayer earned from the activity, in relation to the amount of
losses incurred, the amount of the taxpayer’s investment, and the
value of the assets used in the activity may provide useful
criteria in determining the taxpayer’s intent. Sec. 1.183-
2(b)(7), Income Tax Regs. We consider the increasing size,
width, volume, and value of the taxpayer’s harvestable timber
when we apply this factor to a tree-farming activity. Kurzet v.
Commissioner, T.C. Memo. 1997-54, affd. in part, revd. and
remanded on other grounds 222 F.3d 830 (10th Cir. 2000).
Petitioner earned a profit from the farming activity in
1999. Respondent contends that we should give little weight to
the 1999 profit because it was partially due to selling mature
timber that petitioner could have sold in other years. We
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disagree. Petitioner received $7,500 in exchange for mature
timber harvested from the family farm in 1999. If petitioner had
sold the timber in some other year, he possibly would have had a
net profit then from which we would have drawn the same favorable
inference. Petitioner’s net profit in 1999 is not diminished
because he could have realized it in another year.
Petitioner also contends that this factor should favor him
because he showed a net profit in 2001, 2003, and 2004. We place
no weight on events that arose after 2000. This factor is
neutral.
8. The Taxpayer’s Financial Status
We next examine petitioner’s financial status. If a
taxpayer does not have substantial income or capital from sources
other than the activity in question, it may indicate that the
taxpayer engages in the activity for profit. Sec. 1.183-2(b)(8),
Income Tax Regs. Conversely, substantial income from sources
other than the activity, especially if the losses from the
activity generate large tax benefits, may indicate that the
taxpayer is not conducting the activity for profit. Id.
Substantial income is, in this analysis, income well in excess of
that which is needed by the average taxpayer to meet ordinary
living expenses. See Bessenyey v. Commissioner, 45 T.C. at 274.
Taxpayers with substantial income from other sources have a
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greater tax incentive to incur large expenditures in a hobby type
of activity. Jackson v. Commissioner, 59 T.C. 312, 317 (1972).
Although petitioner was successful as an attorney and CPA,
petitioner did not earn income from these pursuits substantial
enough to motivate him to incur losses from the farming activity.
Cf. Jackson v. Commissioner, supra; Bessenyey v. Commissioner,
supra. The size of the farming activity losses claimed during
1998 and 2000 was small in whole dollar amounts given
petitioners’ marginal income tax bracket. This factor favors
petitioner.
9. Elements of Personal Pleasure or Recreation
We finally consider whether elements of personal pleasure or
recreation were involved in petitioner’s farming activity. The
presence of personal motives for, or recreational elements
associated with, conducting the activity may indicate that the
taxpayer does not have a profit motive. Jackson v. Commissioner,
supra; sec. 1.183-2(b)(9), Income Tax Regs.
Petitioner grew up on the family farm and inherited it in
1992. While farming does involve hard manual labor, petitioner
enjoyed doing the work. Petitioners have resided on the family
farm since 1991, an additional personal motive for engaging in
the farming activity. This factor is neutral.
10. Conclusion
The nine nonexclusive factors and the facts and
circumstances of this case lead us to conclude that petitioner
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did not conduct the farming activity with an actual and honest
objective of making a profit in 1998 or 2000. The net losses
petitioner sustained conducting the farming activity are
therefore not deductible from gross income. Accordingly, we
sustain respondent’s determinations in the deficiency notice for
1998 and 2000.
D. Whether Petitioners Are Liable for the Accuracy-Related
Penalty
We next consider whether petitioners are liable for the
accuracy-related penalty under section 6662(a). Respondent
asserts that all or part of the underpayment of tax for the years
at issue is due to negligence or disregard of rules or
regulations. We have found that there is no underpayment of tax
for 1999. Accordingly, petitioners are not liable for the
accuracy-related penalty for 1999.
A penalty applies to the portion of an underpayment of
income tax attributable to negligence or disregard of rules or
regulations. Sec. 6662(a) and (b)(1). Negligence is defined as
“any failure to make a reasonable attempt to comply with the
provisions of * * * [the Code].” Sec. 6662(c). Negligence is
the lack of due care or the failure to do what a reasonable and
prudent person would do under the circumstances. Neely v.
Commissioner, 85 T.C. 934, 937 (1985). Disregard encompasses any
“careless, reckless or intentional disregard.” Sec. 6662(c).
Respondent has the burden of production regarding penalties
and must come forward with sufficient evidence that it is
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appropriate to impose the penalty. See sec. 7491(c); Higbee v.
Commissioner, 116 T.C. 438, 446-447 (2001). Respondent relies on
the two prior decisions this Court issued holding that petitioner
did not conduct the farming activity for a profit. Mitchell v.
Commissioner, T.C. Memo. 2001-269;6 Mitchell v. Commissioner,
T.C. Summary Opinion 1998-200.7 Respondent argues, and we agree,
that, absent substantial changes in its operation, the farming
activity was not conducted for profit pursuant to section 183.
We find that respondent has met his burden of production
regarding 1998 and 2000.
The accuracy-related penalty does not apply to any portion
of an underpayment, however, if the taxpayer shows that there was
reasonable cause for, and that the taxpayer acted in good faith
with respect to, that portion. Sec. 6664(c)(1); sec. 1.6664-
4(b), Income Tax Regs. Petitioners have the burden of proving
that the accuracy-related penalty does not apply because of this
exception. See Higbee v. Commissioner, supra at 446.
The determination of whether the taxpayer acted with
reasonable cause and in good faith depends upon the pertinent
facts and circumstances. We emphasize the taxpayer’s efforts to
6
We note that Mitchell v. Commissioner, T.C. Memo. 2001-269,
was not issued until Oct. 4, 2001, which is after the due date
for filing a return for 2000.
7
Summary opinions should not be cited as authority. Sec.
7463. We consider it here for the limited purpose of deciding
whether respondent met his burden of production as to the
accuracy-related penalty for 1998 and 2000.
- 25 -
assess the proper tax liability, considering the experience,
knowledge, and education of the taxpayer. Sec. 1.6664-4(b)(1),
Income Tax Regs.
Petitioner is an accountant and lawyer. He represents
clients before the IRS and is a member of this Court’s bar. He
is conversant with section 183 and the regulations. Despite all
this, petitioners deducted farm losses even though petitioner
still had not manifested an actual and honest objective of making
a profit from the farm during 1998 and 2000. We find that
petitioners did not act in good faith in claiming Schedule F
farming losses and their underpayments were not due to reasonable
cause. Petitioners disregarded rules or regulations by deducting
the net losses from the farm. We conclude that petitioners are
liable for the accuracy-related penalty under section 6662(a) for
the underpayments of tax in 1998 and 2000.
To reflect the foregoing,
Decision will be entered
for respondent for 1998 and
2000, and for petitioners for
1999.