Westbrook v. Commissioner

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

_____________________

No. 94-40652
_____________________

BILLIE R. WESTBROOK and
MADELINE M. WESTBROOK,

Petitioners-Appellants,

versus

COMMISSIONER OF INTERNAL
REVENUE,

Respondent Appellee.

_________________________________________________________________

Appeal from the United States Tax Court
_________________________________________________________________
October 30, 1995

Before KING and JONES, Circuit Judges, and KAZEN*, District
Judge.

PER CURIAM:

Billie R. Westbrook and Madeline M. Westbrook appeal the

United States Tax Court's affirmance of the Commissioner's

determination of deficiencies and additions to tax for negligence

and for substantial understatement of tax liability for the tax

years 1984-1987. Finding no error, we affirm.

I. FACTUAL AND PROCEDURAL BACKGROUND

Billie R. Westbrook ("Dr. Westbrook") has been a

veterinarian since 1955. He and Madeline M. Westbrook ("Mrs.

*
District Judge of the Southern District of Texas,
sitting by designation.
Westbrook") were married in 1952. In 1962, Dr. Westbrook founded

the Spring Branch Veterinary Clinic (the "Clinic"), at which he

worked on a full time basis during the years at issue, 1984-1987.

Dr. Westbrook worked at the Clinic from 8 a.m. to 6 p.m. on

weekdays, and on Saturday and Sunday mornings, and he was on call

for emergencies twenty-four hours a day, seven days a week.

During the years in issue, the Clinic's average gross revenues

approximated $725,000, and the Westbrooks reported annual income

from the Clinic ranging from $114,828 to $224,343.

Mrs. Westbrook has performed services for the Clinic without

compensation since its inception. Her primary role has been in

marketing the Clinic, although she has also served as the

receptionist and "kennel person." Mrs. Westbrook also handled

public relations for the Texas Veterinary Medical Association,

through which she was able to obtain free advertising for the

Clinic by using animals owned by the Westbrooks. Mrs.

Westbrook's public relations activities included bringing animals

to schools and nursing homes.

A. Burton Farm

In October 1976, the Westbrooks purchased Burton Farm, a

299.2 acre farm, with its mineral rights, located in Lee County,

Texas. In 1976 and 1977, after investigating the cattle

business, the Westbrooks commenced a cattle-raising operation by

purchasing twenty Angus cows and one Angus bull. The Westbrooks

did not have a business plan for their cattle-raising operation,

2
and they did not keep detailed records of the venture. In April

1983, the Westbrooks sold their herd and ceased the cattle

operation. During the years at issue, 1984-1987, the Westbrooks

neither kept animals nor performed farming activities at Burton

Farm. Nevertheless, they reported net losses for farming

operations at Burton Farm from 1976 through 1987.

In the late 1970s, oil was discovered on Burton Farm, and

the Westbrooks commenced oil and gas production in commercial

quantities. On August 16, 1983, the Westbrooks entered a lease

agreement giving WCS Petroleum Co. ("WCS") the exclusive right to

explore, drill, and produce oil and gas at Burton Farm. In

return, the Westbrooks received a royalty interest--a fractional

share of oil production, free of development and operational

expenses. During 1984-1987, the Westbrooks reported net income

from oil and gas production on Burton Farm, although they

reported net losses from farming operations on Burton Farm for

those years.

The Westbrooks arranged for Danny Nowell, a production

manager with WCS, to reside at Burton Farm and look after the

Burton Farm property and the oil wells. Nowell lived at Burton

Farm from 1983 or 1984 until sometime between 1985 and 1987.

Nowell repaired the perimeter fence in order to keep cattle

inside, but he did not upgrade the fence in a manner designed to

deter oil theft. No oil was stolen from Burton Farm during the

time that WCS was lessee. The Westbrooks made no written claims

3
to WCS for reimbursement for physical damage to the property, as

the lease required, because they incurred no covered damages.

B. Billenbrook Farm

The Westbrooks purchased a 211-acre farm in Austin County,

Texas known as Billenbrook Farm in 1980. The Westbrooks did not

calculate the number of years that it would take to recoup their

investment in the farm or in the livestock they planned to keep

at the farm, but their son did prepare a "preliminary business

outline" stating: "The purpose of this venture is to build

capital assets with the limited physical involvement of the

principals [the Westbrooks and their son]."

The Westbrooks' activities on Billenbrook Farm generally

consisted of raising cattle and miniature horses. First, they

investigated and then engaged in "embryo transplant" cattle-

raising from 1982 to 1984. Although the Westbrooks investigated

the process of embryo transplants and examined existing

operations, they failed to obtain appraisals or make income

projections. The Westbrooks never calculated how much it would

cost to achieve their professed goal of building a purebred herd,

nor did they calculate the cost of production for each embryo-

transplant calf. In 1982, they purchased two Angus heifers to

use in the embryo transplant process, and, during 1984, they

maintained 14-16 head of cattle on Billenbrook Farm. The

Westbrooks kept cattle on Billenbrook Farm until 1987, but they

discontinued the embryo transplants in 1986 because they were

losing money from that operation.

4
 In 1983, the Westbrooks investigated the miniature horse

business and purchased twenty-seven miniature horses. They did

not make any written financial projections regarding the

miniature horses, or calculate how long it would take to recoup

their investment in the horses. The Westbrooks did not insure

the horses except when they moved them. They failed to keep

fertility records or to perform pregnancy tests on the horses.

They never mated any of their mares with another owner's stud,

nor offered their stallion's stud services to horses owned by

others. The Westbrooks never sold any miniature horses. In

August 1985, the Westbrooks donated their entire herd of

miniature horses to a tax-exempt, charitable organization.

The Westbrooks reported net losses from operations at

Billenbrook Farm in each year from 1980 to 1987. Starting in

1984, they reduced their time spent at Billenbrook Farm out of

concern for the profitability of the Clinic. The Westbrooks

finally ceased operations at Billenbrook Farm when oil and gas

production began at Burton Farm, causing a "drastic change" in

their lives.

C. Billenbrook Farms, Inc.

On January 18, 1982, the Westbrooks formed Billenbrook

Farms, Inc., a subchapter S corporation with its principal place

of business on Billenbrook Farm. Dr. Westbrook owned 100 % of

the stock of Billenbrook Farms, Inc. during 1984-1987 and all

expenses incurred by the corporation were funded by cash provided

5
by the Westbrooks, either as a contribution or a loan.

Billenbrook Farms, Inc. engaged in the activities of breeding and

raising purebred dogs and maintaining pygmy goats. In February

1985, the Westbrooks sold its entire stock of dogs and ceased the

dog operation, after determining that success would require a

larger stock of dogs and a greater percentage of Dr. Westbrook's

time than they were willing to commit. Billenbrook Farms, Inc.

also raised pygmy goats, although it failed to maintain breeding

records for the goats or sell any of them. The goats were

treated as an ancillary operation to Billenbrook Farm's miniature

horses, and they were taken by Mrs. Westbrook to nursing homes,

schools, and petting zoos as part of her public relations efforts

for the Clinic. In September 1985, the Westbrooks donated their

entire stock of pygmy goats to a tax-exempt, charitable

organization. Billenbrook Farms, Inc. reported net losses on its

income tax returns in each year from 1983 through 1986.

D. The Westbrooks' Business Records

Except for Billenbrook Farm, for which the Westbrooks' son

created a brief preliminary business outline, the Westbrooks did

not make formalized business plans for any of their activities.

The Westbrooks maintained one checking account, from which they

paid the expenses for the Clinic, Burton Farm, and Billenbrook

Farm. Billenbrook Farms, Inc. maintained a separate account.

Dr. Westbrook annotated each check with a description of the

relevant activity, such as "Burton" or "Billenbrook," and he then

6
sent copies of the checks to his accountant, John Braden.

Relying upon Dr. Westbrook's annotations, Mr. Braden entered the

check information into a computer program under the designated

activity, and the program created an income statement and a

balance sheet for each of the Clinic, Burton Farm, and

Billenbrook Farm. Braden also used this program to create

financial statements for Billenbrook Farms, Inc.

Dr. Westbrook and his staff made some errors in annotating

the checks and in disbursing funds from the wrong checking

account; therefore, the financial statements created by Braden

contained errors that the Westbrooks subsequently failed to

correct. As a result, some expenses related to the Westbrooks'

individual federal income tax returns were reported and deducted

on the Billenbrook Farms, Inc. federal income tax return, while

some expenses incurred by Billenbrook Farms, Inc. were deducted

on the Schedules F of Burton Farm or Billenbrook Farm, which were

part of the Westbrooks' individual return.

E. Procedural History

On June 27, 1991, the Commissioner mailed the Westbrooks a

Notice of Deficiency informing them of the Commissioner's

determination of additional tax liabilities for the years 1984

through 1987. Following a trial, on December 29, 1993, the tax

court sustained the Commissioner's determination of additional

tax liability based upon its findings that Dr. and Mrs. Westbrook

had no business or profit motive with respect to Burton Farm,

7
Billenbrook Farm, or Billenbrook Farms, Inc.1 The tax court also

sustained the Commissioner's application of negligence and

substantial understatement penalties. On February 28, 1994, the

Westbrooks filed a motion for reconsideration claiming that

approximately 55% of the deductions disallowed by the tax court

had been placed on the wrong schedules of their return, and

asking to be allowed to reclassify the expenses reported for

Burton Farm, Billenbrook Farm, and Billenbrook Farms, Inc., so

that these expenses would be properly deductible. The tax court

denied the motion for reconsideration, and the Westbrooks

appealed.

II. STANDARD OF REVIEW

We review the decision of the tax court under the same

standards that we apply to district court decisions. Thus, we

review the tax court's factual findings for clear error, and

examine issues of law de novo. Park v. Commissioner, 25 F.3d

1289, 1291 (5th Cir.), cert. denied, 115 S. Ct. 673 (1994);

McKnight v. Commissioner, 7 F.3d 447, 450 (5th Cir. 1993). A

finding of fact is clearly erroneous when, although there is

enough evidence to support it, the reviewing court is left with a

firm and definite conviction that a mistake has been committed.

United States v. United States Gypsum Co., 333 U.S. 364, 395

1
The Commissioner had conceded the deductibility of
Billenbrook Farms, Inc.'s losses for 1984 through February 1985.
The tax court's finding that the Westbrooks lacked a profit
motive with respect to Billenbrook Farms, Inc. is thus limited to
the corporation's activities after February 1985.

8
(1948); Henderson v. Belknap (In re Henderson), 18 F.3d 1305,

1307 (5th Cir.), cert. denied, 115 S. Ct. 573.

We review the tax court's denial of the Westbrooks' motion

for reconsideration under an abuse of discretion standard.

George v. Commissioner, 844 F.2d 225, 229 (5th Cir. 1988).

III. DISCUSSION

The tax court sustained the Commissioner's determination of

deficiencies totaling $236,157.502 for the years 1984-1987, and

additions to tax for the same years for negligence (totaling

$135,050.19) and for substantial understatement (totaling

$59,039.33). In sustaining the Commissioner's deficiencies, the

tax court held that: (1) the Westbrooks were not engaged in a

trade or business on Burton Farm during the years at issue; (2)

the Westbrooks were not entitled to deductions related to their

royalty interest in oil and gas produced on Burton; (3) the

Westbrooks did not operate Billenbrook Farm for profit during the

years at issue; (4) the activities of Billenbrook Farms, Inc.

after February 1985 were not for profit; (5) deductions taken by

Billenbrook Farms, Inc. after February 1985 were not for ordinary

and necessary business expenses; (6) Billenbrook Farms, Inc. was

not entitled to deductions erroneously reported on its return

2
The deficiencies assessed for each year were:

1984 $ 38,624.25
1985 $112,712.20
1986 $ 72,272.50
1987 $ 12,548.55.

9
that relate to activities of Burton Farm or Billenbrook Farm;

(7) the Westbrooks are liable for additions to tax for negligence

for each of the years at issue; and (8) the Westbrooks are liable

for additions to tax for substantial understatement of tax for

the years at issue.3 The Westbrooks filed a motion for

reconsideration, requesting that the court allow them to

recharacterize expenses listed on their tax returns for 1984-1987

and the tax returns of Billenbrook Farms, Inc. for those years,

which was denied by the tax court.

On appeal, the Westbrooks contend that the tax court

committed clear error in finding that they had no good faith

intention of making a profit from their activities at Burton

Farm, Billenbrook Farm, or the activities of Billenbrook Farms,

Inc. They further contend that the tax court abused its

discretion in refusing to permit them to supplement the record

after the trial to demonstrate that expenses, which were

mistakenly listed on the wrong return, would be properly

deductible if correctly recorded. The Westbrooks also contend

that the tax court's finding that they negligently prepared their

returns was clearly erroneous, and that the tax court erred in

determining that the Westbrooks lacked substantial authority for

their deductions and thus were liable for substantial

understatement penalties. The Commissioner maintains that the

3
The tax court also held that deductions taken by
Billenbrook Farms, Inc. for the educational expenses of the
Westbrooks' son, William Westbrook, while he attended business
school at SMU, were improper; however, the Westbrooks do not
challenge this holding on appeal.

10
tax court's determinations were correct. We will address each

argument in turn.

A. Profit Motive

As a general rule, Internal Revenue Code ("IRC") §§ 162(a)

and 212 allow for the deduction of ordinary and necessary

expenses incurred in the carrying on of a trade or business (§

162(a)) or for the production or collection of income (§ 212(1))

or for the maintenance of property held for the production of

income (§ 212(2)). 26 U.S.C. §§ 162, 212. To be engaged in a

trade or business under § 162, a taxpayer "must be involved in

the activity with continuity and regularity and . . . the

taxpayer's primary purpose for engaging in the activity must be

for income or profit." Commissioner v. Groetzinger, 480 U.S. 23,

35 (1987). Similarly, the standard for deductibility under § 212

is whether the expenditures were made "primarily in furtherance

of a bona fide profit objective independent of tax consequences."

Agro Science Co. v. Commissioner, 934 F.2d 573, 576 (5th Cir.),

cert. denied, 502 U.S. 907 (1991). "If an individual incurs a

loss in a trade or business, or in any transaction entered into

for profit unconnected with a trade or business, IRC § 165(c)

permits the individual to deduct the loss." 26 U.S.C. § 165(c);

Faulconer v. Commissioner, 748 F.2d 890, 892-93 (4th Cir. 1984).

IRC § 183 governs allowable deductions for expenses incurred

in an activity "not engaged in for profit." 26 U.S.C. § 183.

Section 183(a) provides that no deductions shall be allowed for

11
an activity not engaged in for profit except as provided in this

section. Id. Section 183(b) provides that, in relation to an

activity not engaged in for profit, a taxpayer can take those

deductions which would be allowable without regard to profit

motive, and can take deductions which would be allowed if the

activity were engaged in for profit, but only to the extent "that

gross income derived from such activity for the taxable year

exceeds the deductions allowable." Id. In sum, section 183

allows deductions for expenses incurred in an activity not

engaged in for profit, but only to the extent of gross income

from that activity; therefore, taxpayers may not deduct losses

incurred in an activity not engaged in for profit.

Section 183(c) defines an activity not engaged in for profit

as an activity other than one for which deductions are allowable

under §§ 162 or 212. Id. The Treasury Regulations promulgated

pursuant to § 183 establish an objective test for determining

whether a taxpayer is engaging in an activity for profit:

The determination whether an activity is engaged in for
profit is to be made by reference to objective
standards, taking into account all of the facts and
circumstances of each case. Although a reasonable
expectation of profit is not required, the facts and
circumstances must indicate that the taxpayer entered
into the activity, or continued the activity, with the
objective of making a profit. . . . In determining
whether an activity is engaged in for profit, greater
weight is given to objective facts rather than to the
taxpayer's mere statement of his intent.

Treas. Reg. § 1.183-2(a); Estate of Power v. Commissioner, 736

F.2d 826, 830 (1st Cir. 1984). The regulations under § 183 also

list nine factors to be considered in determining whether a

12
taxpayer has a profit motive with regard to a certain activity:

(1) the extent to which the taxpayer carries out the activity in

a businesslike manner; (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 other similar or dissimilar activities; (6) the

taxpayer's history of income or losses attributable to the

activity; (7) the amount of occasional profits, if any, which are

earned; (8) the taxpayer's financial status; and (9) any elements

of personal pleasure or recreation in the activity. Treas. Reg.

§ 1.183-2(b)(1)-(9). Courts have consistently relied on these

nine factors, originally derived from court opinions, to

determine whether a profit motive exists for purposes of

deduction of losses under §§ 162 and 212. Independent Elec.

Supply, Inc. v. Commissioner, 781 F.2d 724, 727 (9th Cir. 1986);

Faulconer, 748 F.2d at 896-902; Nickerson v. Commissioner, 700

F.2d 402, 404 (7th Cir. 1983). These factors are not exclusive,

and no one factor or mathematical preponderance of factors is

determinative. Faulconer, 748 F.2d at 894; Nickerson, 700 F.2d

at 404-05.

The profit motive inquiry is a question of fact, our review

of which is limited to a determination of whether the tax court

committed clear error. Agro Science Co., 934 F.2d at 576-77;

Thomas v. Commissioner, 792 F.2d 1256, 1259 (4th Cir. 1986). The

Commissioner's assessment of a deficiency is presumptively

13
correct and the taxpayer bears the burden of proving it wrong.

United States v. Janis, 428 U.S. 433, 440-41 (1976); Welch v.

Helvering, 290 U.S. 111, 115 (1933). Thus, the Westbrooks bear

the burden of proving that their activities at Burton Farm,

Billenbrook Farm, and Billenbrook Farms, Inc. were engaged in

with the primary purpose of earning a profit. See Faulconer, 748

F.2d at 893; Nickerson, 700 F.2d at 404.

1. Burton Farm

The Tax Court determined that the Westbrooks' losses from

Burton Farm were not deductible because they were not engaged in

any animal activity during the years at issue which constituted a

trade or business under § 162. The Tax Court also rejected the

Westbrooks' argument that their disallowed Burton Farm expenses

were incurred to protect their oil and gas royalties, finding

that the Westbrooks presented no evidence that they incurred

expenses related to oil and gas production at Burton Farm.

During 1984 through 1987, the Westbrooks claimed

depreciation deductions for items such as a windmill, fences,

barns, troughs, and a tractor, as well as operational expenses

including repairs, maintenance, supplies, fuel oil, insurance,

legal fees, and travel and entertainment on their Schedule F for

Burton Farm. However, in the tax court, the Westbrooks

stipulated that they neither kept animals nor conducted farming

operations at Burton Farm during the years at issue. The Tax

Court's finding that the Westbrooks were not engaged in a trade

14
or business of farming or raising animals at Burton Farm from

1984-1987 thus cannot be considered clearly erroneous. The

Westbrooks argue that their operational and depreciation expenses

are nevertheless deductible as expenses of oil and gas production

on Burton Farm, or, alternatively, because the deductions should

be offset against the appreciation in value of the land at Burton

Farm.

The tax court found that the Westbrooks failed to present

evidence that the expenses listed on their 1984-1987 Schedules F

for Burton Farm related to oil and gas production. The tax court

noted that the oil and gas lease entered by the Westbrooks and

WCS imposed no operational obligations on the Westbrooks. No oil

was stolen from Burton Farm during the years at issue, nor was

any physical damage to the property sustained from oil

development or drilling. Although the Westbrooks argue that the

perimeter fence was repaired to protect against oil theft, Dr.

Westbrook testified that any repairs to the fence were made by

Mr. Nowell to keep Mr. Nowell's cattle on the property, not to

keep oil thieves off of the property. We conclude that the tax

court did not clearly err in holding that the Westbrooks

presented no evidence that deductions taken on the Burton Farm

Schedule were incurred in relation to oil and gas production.

Because the taxpayer bears the burden of proving its entitlement

to a deduction, see Hendricks v. Commissioner, 32 F.3d 94, 98

(4th Cir. 1994), we affirm the tax court's holding that the

15
deductions listed on Burton Farm's Schedule F for 1984-1987 were

not allowable as costs incurred in oil and gas production.

The Westbrooks additionally argue that their farm-related

depreciation and operational expenses should be offset against

the appreciation in the value of the land. This argument lacks

merit. First, we note that the Westbrooks did not demonstrate

appreciation in the value of Burton Farm during 1984-1987 with

specific evidence, although, given the production of oil on the

land, such appreciation is plausible. However, Treasury

Regulation § 1.183-1(d)(1) provides that farming and the holding

of land for speculation constitute a single activity only if the

income derived from farming exceeds deductions not directly

attributable to the holding of the land, thus reducing the net

cost of retaining the land. Treas. Reg. § 1.183-1(d)(1); see

Estate of Power v. Commissioner, 736 F.2d 826, 829 (1st Cir.

1984). The Westbrooks, however, seek to deduct farming losses

based on the appreciation in value of the land, which actually

increased the cost of retaining the land.

The Westbrooks also argue that many of the items listed on

the Burton Farm Schedule F--such as depreciation of a one-eighth

interest in embryo transplant cattle--were related to Billenbrook

Farm activities and would be properly deductible if reclassified.

Because this argument was the subject of the motion for

reconsideration, it will be addressed in relation to the denial

of that motion.

16
 In sum, we conclude that the tax court did not clearly err

in disallowing farming expense deductions with relation to Burton

Farm because the Westbrooks neither raised animals nor conducted

farming operations on Burton Farm from 1984 to 1987.

2. Billenbrook Farm

The tax court held that the Westbrooks' Billenbrook Farm

activities--embryo-transplant cattle and other cattle raising and

miniature horse breeding--were not engaged in for profit under §

183; therefore, losses incurred in carrying out those activities

were not deductible. The tax court determined whether the

Westbrooks were motivated by profit by applying the nine factors

of Treasury Regulation § 1.183-2(b)(1)-(9).

On appeal, the Westbrooks present a novel "process of

elimination" argument. As they explain, a taxpayer's expenses

can only be classified into three categories: personal expenses,

business expenses, or expenses incurred in other profit-seeking

activities. They argue that if no elements of recreation,

pleasure, sport or hobby exist with respect to an activity, that

activity, by default, must be a business or an activity conducted

for the production of income. The Westbrooks reason that because

the tax court made no fact findings that their activities at

Billenbrook Farm were motivated by personal pleasure, recreation,

hobby or sport, the only proper legal conclusion is that they

were motivated by profit. We reject the Westbrooks' unique

profit motive analysis as contrary to existing precedent. First,

17
personal pleasure or recreational motivation is only one of the

nine factors included in the treasury regulations, and the case

law clearly holds that no one factor can be determinative.

Treas. Reg. § 1.183-2(b)(9); see, e.g., Hendricks, 32 F.3d at 98;

Faulconer, 748 F.2d at 895. Furthermore, the Westbrooks have the

burden of proof to affirmatively establish a profit motive.

Faulconer, 748 F.2d at 893. Holding that a profit motive exists

because the tax court did not find a personal pleasure or

recreation motive would turn this burden on its head. Whether

the requisite profit motive is present must be determined by

examining all the facts and circumstances, Nickerson, 700 F.2d at

404; therefore, a balancing of the nine factors and any other

relevant consideration is the proper method for determining

whether a profit motive exists. See, e.g., Hendricks, 32 F.3d at

98; Burger v. Commissioner, 809 F.2d 355, 358 n.4 (7th Cir.

1987); Estate of Power, 736 F.2d at 829; Brannen v. Commissioner,

722 F.2d 695, 704 (11th Cir. 1984); Golanty v. Commissioner, 72

T.C. 411, 426 (1979), aff'd, 647 F.2d 170 (9th Cir. 1981); Givens

v. Commissioner, 58 T.C.M. (CCH) 255, 258 (1989).

Considering the facts and circumstances, we conclude that

the tax court's finding of no profit motive with respect to

Billenbrook Farm is not clearly erroneous. The tax court

determined that the Westbrooks did not carry on the activity in a

business-like manner. Treas. Reg. § 1.183-2(b)(1). The

Westbrooks failed to make complete and accurate records.

Although the Westbrooks professed a desire to build a purebred

18
herd of cattle through the embryo transplant process, they made

no cost estimates related to that goal and took no steps to

achieve it. The Westbrooks kept no records of births, fertility

or mating of their miniature horses, nor did they keep track of

how many horses died. Although these were ostensibly breeding

operations, the Westbrooks also did not keep records of

fertility, pregnancy, or calving performance of either their

commercial or embryo-transplant cattle.

Another relevant factor is the expertise of the taxpayers

and consultation with expert advisors. Treas. Reg. § 1.183-

2(b)(2). The Westbrooks have some personal expertise in animal

husbandry, evidenced by Dr. Westbrook's profession of veterinary

medicine. Although the Westbrooks studied and consulted experts

regarding the technical and scientific aspects of horse and

cattle raising, they did not seek expert advice regarding the

economic or business aspects of these activities. The Westbrooks

made no financial projections with regard to either miniature

horse-breeding or cattle-raising, nor did they estimate the

return of capital invested in these activities.

In determining the existence of profit motive, we also

consider the time and effort expended by the taxpayer in carrying

on the activity. Treas. Reg. § 1.183-2(b)(3). Dr. Westbrook

worked full time, including Saturday and Sunday mornings, at the

Clinic. Additionally, he was on call for emergencies with his

Clinic patients twenty-four hours a day, seven days a week. Mrs.

Westbrook was involved in an ongoing public relations campaign

19
for the Clinic and the Texas Veterinary Medical Association, in

addition to participating in other animal husbandry, community,

and church organizations. Neither Dr. nor Mrs. Westbrook had

much time left to devote to the Billenbrook Farm activities.

The Westbrooks endured a long series of losses from their

activities at Billenbrook Farm. Although a series of losses

during the start-up stage of a business does not necessarily

indicate a lack of profit motive, the Westbrooks' losses extended

beyond any initial period. Treas. Reg. § 1.183-2(b)(6);

Hendricks, 32 F.2d at 99. From 1980-1987, the Westbrooks

reported losses totalling approximately $510,000 from raising

miniature horses, embryo-transplant cattle, and commercial

cattle. These losses were not demonstrated to be attributable to

unforeseen or fortuitous circumstances. The Westbrooks ignored

their losses from cattle-raising on Burton Farm when they

established operations at Billenbrook Farm. Treas. Reg. § 1.183-

2(b)(5) (the success of the taxpayer in other similar or

dissimilar activities). They made no sales of miniature horses

or embryo-transplant cattle, and they realized no occasional

profits. Treas. Reg. § 1.183-2(b)(7).

Substantial income from other sources may indicate that the

activity is not engaged in for profit. Treas. Reg. § 1.183-

2(b)(8); Hendricks, 32 F.3d at 99. During the years in issue,

the Westbrooks' net income from the Clinic approximated $685,000

and their income from oil and gas production exceeded $700,000.

20
 The Westbrooks argue that a profit motive exists because

they received no personal pleasure or recreation from the

Billenbrook Farm activities. While this fact is relevant to the

profit motive analysis, see Treas. Reg. § 1.183-2(b)(9), we

believe the tax court did not clearly err in finding it

outweighed by other facts establishing the lack of a profit

motive. Similarly, the Westbrooks contend that the tax court

erred in failing to consider the appreciation in the value of the

Billenbrook Farm land during 1984-1987. Because the Westbrooks

failed to present evidence that the land did appreciate, we

reject this argument. See Hendricks, 32 F.2d at 100 ("[T]he mere

expectation that land values may appreciate is not sufficient, in

itself, to demonstrate that an activity was engaged in for

profit.") In sum, we conclude that the tax court's finding that

the Westbrooks lacked a profit motive with respect to their

Billenbrook Farm activities was not clearly erroneous.

3. Billenbrook Farms, Inc.

The tax court concluded that Billenbrook Farms, Inc.'s

activities after February 1985 were not engaged in for profit

under § 183. After February 1985, Billenbrook Farms, Inc.'s sole

activity was raising pygmy goats, which it donated to a tax-

exempt organization in September 1985. The Westbrooks again

argue that because they obtained no personal pleasure or

recreation from raising pygmy goats, that activity necessarily

was profit-motivated. As we stated above, the proper analysis

21
for determining whether a profit motive exists is a balancing of

the nine factors and other relevant objective considerations.

The Westbrooks did not present evidence of records pertaining to

the goats, any sales of goats, any business analysis regarding

the profitability of maintaining goats or any plans or attempt to

market them. The goats were primarily used by Mrs. Westbrook in

her public relations campaign for the Clinic, as she took them to

schools and petting zoos. Upon these facts, we conclude that the

tax court's finding that Billenbrook Farms, Inc. lacked a profit

motive after February 1985 was not clearly erroneous.

B. Motion for Reconsideration

In its memorandum opinion, the tax court rejected the

Westbrooks' argument that certain expenses of Burton Farm or

Billenbrook Farm that were erroneously reported on Billenbrook

Farms, Inc.'s income tax return were nevertheless deductible

because Dr. Westbrook owned all of the stock of Billenbrook

Farms, Inc. In so holding, the tax court noted:

if petitioners had properly substantiated these
expenses, they could have deducted many, if not all of
them on their individual tax returns, not as flow-
through deductions from Billenbrook Farms, Inc., but as
deductions related to income-seeking activity of their
own. However, petitioners did not make this argument
and we decline to reach this issue on our own
initiative; petitioners did not substantiate these
expenses.

Relying on this language, the Westbrooks filed a motion for

reconsideration, asking the tax court to allow them to supplement

the record in order to substantiate and reclassify these

22
expenditures. The Westbrooks sought to reclassify some

deductions listed on the forms for Burton Farm, Billenbrook Farm,

and on the tax return of Billenbrook Farms, Inc. as expenses

incurred for the Clinic. The Westbrooks conceded in their motion

that their request to reclassify expenses should have been made

before trial. The tax court denied the motion for

reconsideration. On appeal, the Westbrooks contend that the tax

court abused its discretion in denying the motion because the

Commissioner did not raise substantiation of the expenses as an

issue for trial.

Reconsideration of proceedings is generally denied in the

absence of "substantial error" or "unusual circumstances." See

CWT Farms, Inc. v. Commissioner, 79 T.C. 1054 (1982), aff'd, 755

F.2d 790 (11th Cir. 1985), cert. denied, 477 U.S. 903 (1986). A

motion for reconsideration is not granted "to resolve issues

which could have been raised during the prior proceedings." Id.

We review the denial of a motion for reconsideration under an

abuse of discretion standard. See Tweeddale v. Commissioner, 841

F.2d 643, 646 (5th Cir. 1988); CWT Farms, 79 T.C. at 1057.

We find that through the exercise of reasonable diligence,

the Westbrooks could have presented reclassification evidence at

trial. See Tweeddale, 841 F.2d at 646. The Westbrooks argue

that the Commissioner waived substantiation of expenses because

substantiation was not listed as an issue for trial in the pre-

trial memorandum. However, the Westbrooks forget that taxpayers

bear the burden of proving their entitlement to a deduction.

23
United States v. General Dynamics Corp., 481 U.S. 239, 245

(1987). Even if the Commissioner had stipulated that the amounts

were spent, the Westbrooks would still be required to demonstrate

that the expenditures were related to a particular trade or

business under § 162, such as the Clinic, or an income-producing

activity under § 212. Furthermore, the record reveals that

although the parties stipulated to several exhibits documenting

or identifying expenses of the farms, the stipulations indicate

that "the truth of assertions within stipulated exhibits is not

necessarily agreed to and may be rebutted or corroborated with

additional evidence." Additionally, the Commissioner did not

stipulate to any reclassification of expenses in relation to

different entities. The Westbrooks failed to present evidence at

trial justifying reclassification of expenses, although the

record provides no indication that the reclassification evidence

was unavailable at the time of trial. No extraordinary

circumstances exist to justify or excuse the failure of the

Westbrooks to present such evidence. Therefore, the tax court

did not abuse its discretion by denying the motion for

reconsideration.

C. Negligence Penalty

The Commissioner assessed additions to tax against the

Westbrooks for negligence under IRC § 6653(a)(1) and (2) for the

24
1984-1987 taxable years.4 The tax court sustained these

determinations because the Westbrooks presented insufficient

evidence that they were not negligent in preparing their return.

On appeal, the Westbrooks argue that the § 6653 negligence

penalty cannot apply to them because all of their actions--"from

the choice of their one checking account bookkeeping system, to

the determination of what was deductible or not"--were taken on

the advice of their accountant, John Braden.

Section 6653(a)(1) imposes an addition to tax equal to 5% of

the underpayment of tax if any part of the underpayment is

attributable to negligence or intentional disregard of the rules

or regulations. 26 U.S.C. § 6653(a)(1). Section 6653(a)(2)

provides for a further addition to tax equal to 50% of the

interest due on the portion of the underpayment attributable to

negligence or intentional disregard of the rules and regulations.

26 U.S.C. § 6653(a)(2). " `Negligence' includes any failure to

reasonably attempt to comply with the tax code, including the

lack of due care or the failure to do what a reasonable or

ordinarily prudent person would do under the circumstances."

4
The negligence penalty found at § 6653(a)(1) and (2) in
the 1984, 1985, and 1986 Internal Revenue Code is enacted as §
6653(a)(1)(A) and (B) in the 1987 Internal Revenue Code. For
simplicity, we will use the citations from the 1984-1986 codes
for all four years. The amounts of the penalties for each year
are as follows:

1984 1985 1986 1987

§ 6653(a)(1) $ 1,931.21 $ 5,635,61 $ 3,613.63 $ 627.28
§ 6653(a)(2) $25,840.40 $59,949.78 $32,711.19 $4,741.09.

25
Heasley v. Commissioner, 902 F.2d 380, 383 (5th Cir. 1990);

Sandvall v. Commissioner, 898 F.2d 455, 458 (5th Cir. 1990).

The tax court's determination of negligence is a factual

finding which we review for clear error. Portillo v.

Commissioner, 932 F.2d 1128, 1135 (5th Cir. 1991); Sandvall, 898

F.2d at 459. In addition, because the Commissioner's

determinations are presumed correct, the taxpayer bears the

burden of establishing the absence of negligence. Portillo, 932

F.2d at 1135; Sandvall, 898 F.2d at 459; see also Goldman v.

Commissioner, 39 F.2d 402, 407 (2d Cir. 1994); Accardo v.

Commissioner, 942 F.2d 444, 452 (7th Cir.), cert. denied, 503

U.S. 907 (1991).

The record demonstrates that the Westbrooks took business

expense deductions that were not supported by the facts,

primarily because the deductions were taken in relation to the

wrong farming activity. For example, a goat house, goats, a barn

and a tractor, located at and used by Billenbrook Farm, were

listed on the Burton Farm depreciation schedule, although no

animals were raised and no farming was performed at Burton Farm

during 1984-1987. Furthermore, expenses of Billenbrook Farm's

cattle and miniature horse-raising ventures were deducted on

Billenbrook Farms, Inc.'s corporate income tax returns. This

circuit has previously concluded that a negligence penalty is

correctly assessed in cases where deductions claimed on returns

are not supported by the facts. Portillo, 932 F.2d at 1135;

Sandvall, 898 F.2d at 459.

26
 The Westbrooks argue that the tax court's determination of

negligence is clearly erroneous because they relied on the advice

of their accountant, John Braden, with respect to "everything

they did." It is true that a taxpayer may avoid a negligence

penalty if he reasonably relies on an accountant's or a lawyer's

advice on a matter of tax law. See United States v. Boyle, 469

U.S. 241, 251 (1985); Chamberlain v. Commissioner, 1995 WL 568705

at *2; Heasley v. Commissioner, 902 F.2d at 383. However, the

underpayment of tax in this case did not result from Mr. Braden's

misinterpretation of a matter of tax law. Rather, the

Westbrooks' negligence was an example of garden-variety careless

record-keeping--they failed to record expenses with the activity

in which the expenses were incurred. The Westbrooks maintain

that any errors resulted from their one-checking account

bookkeeping system, which was created by Mr. Braden. While this

may be true, no legal support exists for the proposition,

apparently urged by the Westbrooks, that because an accountant

recommends a particular bookkeeping system, the taxpayers are

insulated from penalties if they negligently use that system,

causing an underpayment of tax.

The Westbrooks also argue that a negligence penalty is

inappropriate because they reasonably relied on Mr. Braden to

prepare their returns. A taxpayer may rely on an accountant to

prepare his income tax return, and thus avoid a negligence

penalty, if the taxpayer demonstrates that (1) the return

preparer was supplied with all necessary information, and (2) the

27
incorrect return was a result of the preparer's mistakes. Cramer

v. Commissioner, 101 T.C. 225, 251 (1993), aff'd, 64 F.3d 1406

(9th Cir. 1995); Weis v. Commissioner, 94 T.C. 473, 487 (1990);

Pessin v. Commissioner, 59 T.C. 473, 489 (1972). The Westbrooks

have not satisfied this burden. Two groups of errors in the

classification of deductions are demonstrated by the evidence.

First, expenses related to Billenbrook Farm were deducted on the

Burton Farm Schedules F. The record reveals that these errors

may have been caused by Dr. and Mrs. Westbrook's making incorrect

notations on the checks. Mr. Braden relied on those notations in

determining how to classify the expenses among the Westbrooks'

various activities. Mr. Braden testified, however, that some of

the Billenbrook/Burton errors may have resulted from his staff

person miscoding a check with a correct notation when entering it

into the computer program. The Westbrooks fail, however, to

direct this court to a portion of the record indicating which

mistakes, if any, were made by Mr. Braden, and which were made by

the Westbrooks themselves. Second, expenses of Billenbrook Farm

were deducted by Billenbrook Farms, Inc. on its corporate income

tax return. Mr. Braden testified that, after the audit, he

discovered that these expenses were miscoded because Dr. and Mrs.

Westbrook and their son, William Westbrook, wrote checks from the

Billenbrook Farms, Inc. account to pay expenses of the

Billenbrook Farm sole proprietorship activities. Therefore, the

Billenbrook Farm/Billenbrook Farms, Inc. classification errors

were caused by the Westbrooks' failure to give Mr. Braden correct

28
information. Because the Westbrooks have not demonstrated that

they provided Mr. Braden with correct information, or that the

errors on their returns were a result of his mistakes, we

conclude that the tax court's finding of negligence was not

clearly erroneous. Therefore, the Commissioner's assessment of

negligence penalties under § 6653(a)(1) and (2) for 1984-1987 is

affirmed.

D. Substantial Understatement Penalty

The Commissioner also assessed additions to tax for

substantial understatement of tax liability for 1984-1987 under

IRC § 6661.5 The tax court affirmed these determinations because

the Westbrooks presented no evidence contesting the additions.

Section 6661(a) of the IRC provides for an addition to tax

of 25% of the amount of any underpayment attributable to a

substantial understatement of income tax for the taxable year.

26 U.S.C. § 6661(a). A substantial understatement of income tax

exists if the amount of the understatement exceeds the greater of

10% of the tax required to be shown on the return, or $5,000. 26

U.S.C. § 6661(b)(1). The Westbrooks had substantial

understatements of tax liability in each year from 1984-1987.

5
The amounts of the penalties for each year were:

1984 $ 9,656.06
1985 $28,178.00
1986 $18,068.13
1987 $ 3,137.14.

29
 The amount of an understatement may be reduced by the

portion of the understatement which the taxpayer shows is

attributable to either (1) the tax treatment of any item for

which there was substantial authority; or (2) the tax treatment

of any item with respect to which the relevant facts were

adequately disclosed on the return. 26 U.S.C. § 6661(b)(2)(B).

Substantial authority exists when "the weight of the authorities

supporting the treatment is substantial in relation to the weight

of the authorities supporting contrary positions." Treas. Reg. §

1.6661-3(b)(1); Accardo, 942 F.2d at 453. The taxpayers bear the

burden of proving that the Commissioner's determination of

substantial underpayment is incorrect. Weis, 94 T.C. at 490.

The Westbrooks argue that substantial authority exists that

their Burton Farm, Billenbrook Farm, and Billenbrook Farms, Inc.

deductions were proper business expenses of profit-motivated

activities. The Westbrooks took the position that their

deductions were proper because they were for expenses incurred in

a trade or business under § 162 or a profit-motivated activity

under § 212. The Westbrooks argued that they were necessarily

motivated by profit because they derived no pleasure from their

Burton Farm, Billenbrook Farm or Billenbrook Farms, Inc.

activities. As is shown in Part III.A.2 of this opinion, there

is not only no substantial authority for this position, but in

fact no authority at all. The great weight of legal authority

holds that profit motive is determined by weighing all the facts

and circumstances, using the nine factors of Treas. Reg. § 1.183-

30
2(b), only one of which is whether elements of personal pleasure

or hobby exist. Treas. Reg. § 1.183-2(b)(9); see, e.g.,

Hendricks, 32 F.3d at 98; Burger, 809 F.2d at 358 n.4; Estate of

Power, 736 F.2d at 829; Brannen v. Commissioner, 722 F.2d at 704;

Golanty v. Commissioner, 72 T.C. at 426; Givens, 58 T.C.M. (CCH)

at 258. Because substantial authority does not exist for the

Westbrooks' position, the Commissioner correctly assessed the

substantial underpayment penalty.

IV. CONCLUSION

For the foregoing reasons, we AFFIRM the judgment of the tax

court.

31