UNITED STATES TAX COURT
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T.C. Memo. 2003-285
UNITED STATES TAX COURT
GEORGE R. AND BARBARA H. BURRUS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14709-99.
Filed October 3, 2003.
John A. Beam III and Eric E. Rogers, for petitioners.
John E. Glover, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
GALE, Judge:
Respondent determined the following
deficiencies, addition to tax, and accuracy-related penalties
with respect to petitioners’ Federal income taxes:
- 2 Year
Deficiency
1990
1991
1992
1993
1994
1995
$48,003.74
61,322.84
72,370.56
104,589.15
42,916.12
25,817.51
Addition to Tax and Penalties
Sec. 6651(a)(1)
Sec. 6662
$2,399.77
------
$9,600.75
12,264.57
14,474.11
20,917.83
8,583.22
5,163.50
After concessions, the issues for decision are:
(1) Whether
petitioners’ activity relating to cattle breeding was an activity
not engaged in for profit within the meaning of section 183 for
the years in issue, (2) whether petitioners are liable for an
addition to tax under section 6651(a)(1) in 1990, and (3) whether
petitioners are liable for accuracy-related penalties under
section 6662(a) for the years in issue.
Unless otherwise noted, 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.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
incorporate by this reference the stipulation of facts,
We
supplemental, second, and third supplemental stipulations of
facts, and the attached exhibits.
At the time of filing the petition, petitioners resided in
Nashville, Tennessee.
Petitioners filed joint returns for the
- 3 years in issue.
Petitioners’ 1990 return was due, including
extensions, on October 15, 1991, and was received on October 28,
1991.
Petitioners’ returns for the remaining years in issue were
timely filed.
Petitioner George R. Burrus (Dr. Burrus) is a licensed
physician.
Petitioner Barbara H. Burrus (Mrs. Burrus) reported
an occupation of “real estate manager” on the returns for the
years in issue.
Dr. Burrus has been involved with farming, cattle, and other
agricultural activities since his childhood.
He had check-
writing authority for his father’s farm, starting as a teenager,
and his active involvement continued on weekends and during the
summer while attending college.
Dr. Burrus has no formal
education or training in animal husbandry, farming, or similar
agricultural activity.
During the years in issue, Dr. Burrus maintained a
successful medical practice and was chief of his department at a
local hospital where he also served as the chief perfusionist.
He often worked as many as 7 days a week, for as many as 10 to 12
hours per day.
During the years in issue Dr. Burrus reported
income from his medical practice in amounts ranging from $233,749
to $691,281.
From 1969 to 1971, Dr. Burrus served as a missionary doctor
- 4 in Africa, during which time he established a small missionary
hospital that remains in operation today.
Petitioners return to
Africa to work at the hospital twice a year, for a month each in
the spring and fall.
In 1978, Dr. Burrus entered into a partnership, the ForemanBurrus Hereford Ranch (FBHR), with a fellow physician, Howard
Foreman (Dr. Foreman), to breed purebred horned Hereford cattle.
Initially, Drs. Burrus and Foreman shared FBHR’s profits and
losses equally.
In 1980, FBHR acquired 505 acres of property in Cheatham
County, Tennessee (Cheatham Property), comprising three separate
tracts of land.
The Cheatham Property was purchased at $1,200
per acre for a total purchase price of $606,000.
Drs. Burrus and
Foreman chose this property for FBHR because of its proximity to
Nashville and their medical practices.
At most times, FBHR was operated by five ranch hands and
maintained up to approximately 250 animals.
Cattle were bred by
FBHR by means of an “embryo transfer” method, which at the time
was a technique of surgically implanting embryos in cows.1
After
FBHR incurred losses for the first 5 or 6 years of its existence,
Dr. Burrus became concerned that the operation could not be run
1
Embryo transfer was subsequently perfected as a less
expensive, nonsurgical technique.
- 5 profitably using the embryo transfer technique, so he convinced
Dr. Foreman that they should adjust their profit and loss sharing
ratios.
As a consequence, Dr. Burrus reduced his share of the
profits and losses of FBHR to 20 percent while Dr. Foreman took
an 80-percent share therein.
Dr. Burrus retained his 50-percent
interest in the Cheatham Property, however.
After losses continued for several more years, Dr. Burrus
became convinced that a cattle breeding venture that utilized the
embryo transfer technique could not be run profitably, and as a
consequence sought to terminate FBHR.
On December 26, 1989, Drs.
Burrus and Foreman executed an agreement dissolving FBHR, under
which the animals and equipment were distributed to the partners
in the same ratio that profits and losses were shared: 80 percent
to Dr. Foreman and 20 percent to Dr. Burrus.
With respect to the
Cheatham Property, Dr. Burrus obtained sole ownership by paying
$818,053 to Dr. Foreman for his 50-percent interest.
The
partners had agreed that ownership of the Cheatham Property would
be resolved by Dr. Foreman’s proposing a price for a 50-percent
interest based on an appraisal, and Dr. Burrus’s having the
option either to purchase Dr. Foreman’s interest, or sell his own
interest to Dr. Foreman, at that price.
Dr. Burrus chose to
purchase Dr. Foreman’s interest.
Dr. Burrus then commenced (in 1990) a purebred horned
- 6 Hereford cattle breeding undertaking principally at the Cheatham
Property and at certain other real property owned or controlled
by petitioners, referred to as the Maple Row Hereford Ranch
(Maple Row).
case.
It is this undertaking that is at issue in this
During the years in issue, the undertaking consisted
primarily of breeding and selling registered horned Hereford
cattle.2
Dr. Burrus employed “natural selection” in the cattle
breeding operations at Maple Row rather than the embryo transfer
technique employed by FBHR, because he believed the former was
more cost effective.
As noted, the Cheatham Property was the principal location
for the Maple Row cattle undertaking.
Petitioners also used two
additional properties in Maple Row’s operations, in that cattle
were transported to those properties to graze during the years in
issue.
One such property was located in or near the town of
White House, in Robertson County, Tennessee (Robertson Property),
and the other was located in or near the town of Hendersonville,
in Sumner County, Tennessee (Sumner Property).3
The Robertson
2
Petitioners also purchased steer for fattening during
certain years, sold bull semen, and received income from leasing
the tobacco allotments for the Maple Row land.
3
From 1979 through 1989, petitioners undertook farming
operations on the Robertson and the Sumner Properties that
included running steer to eat the grass, selling crops, and
leasing tobacco allotments. Petitioners also generated income by
(continued...)
- 7 Property contained approximately 274 acres, comprising three
tracts acquired by petitioners between 1966 and 1977.
Two houses
were located on the Robertson Property for which petitioners
received rental income during the years in issue.
The Cheatham
Property also had a house from which petitioners received rental
income.
The Sumner Property consisted of two tracts, acquired
from Dr. Burrus’s mother between 1975 and 1983: an approximately
51-acre tract held by the Cardiovascular Surgery Associates, P.C.
Money Purchase Pension Trust4 and an approximately 10-acre tract
held by petitioners personally.
Petitioners’ residence during
the years in issue was located in Nashville, although there was a
one-bedroom apartment affixed to a barn on the Cheatham Property
where petitioners or family members occasionally stayed
overnight.
The Cheatham Property was purchased by FBHR in 1980 for
$606,000, and sold to Dr. Burrus in late 1989 for an effective
price of $1,636,106.
Appraisals obtained by petitioners for
purposes of trial estimated the Robertson Property’s value at
3
(...continued)
leasing houses on the Robertson Property. On their returns,
petitioners reported the results of these activities separately
from the results of FBHR. Petitioners reported net losses from
the farming and rental activities undertaken on these properties
in those years.
4
At some point in time, petitioners apparently transferred
this tract to Dr. Burrus’s sec. 401(k) plan.
- 8 $200,000 in 1990 and $400,000 in 1995, and the Sumner Property’s
value at $316,000 in 1990 and $700,000 in 1995.
Petitioners employed Charles Gruen, who had worked for FBHR
before its dissolution, as the sole ranch hand at Maple Row from
1990 until he retired in 2000.
Mr. Gruen, who had experience
working with cattle for about 20 years before joining FBHR, was
placed in charge of Maple Row’s day-to-day operations.
Dr.
Burrus and Mr. Gruen communicated frequently, often daily,
regarding operations at Maple Row.
Mr. Gruen resided with his
wife at the Cheatham Property.
Rather than selling cattle on location at the Cheatham
Property, as was done by FBHR, Maple Row’s livestock sales,
principally purebred Hereford bulls, were made at “absolute”
auctions in Montgomery, Alabama, and Orlando, Florida.
Dr.
Burrus did not advertise regarding Maple Row’s livestock during
the years in issue.
Petitioners’ herd inventory records were maintained by Mr.
Gruen and consisted of two parts.
The first was the “Office
Copy of Breeding and Calving Record”, which contained information
regarding the cattle in the Maple Row herd including their
parentage, birth date, birth weight, and identification number
that was submitted to the American Hereford Association (AHA).
The second record was the “Herd Performance Enrollment”, which
- 9 listed the Maple Row cattle that were registered with the AHA and
their registration numbers.
Based on the herd inventory records,
Maple Row’s cows produced the following offspring in the years
indicated:
Year
Heifers
Bulls
Total
1990
1991
1992
1993
1994
1995
13
10
15
17
27
30
6
7
15
20
24
23
19
17
30
37
51
53
In 1998, two of the cows in the Maple Row herd received “Dam of
Distinction” awards from the AHA for exceeding certain calf
production standards as measured against other cows in the herd.
One cow had produced nine calves and the other six.
Although petitioners did not have a written business plan
for Maple Row, Dr. Burrus anticipated that the cattle operation
would begin to show a profit once his herd reached 100
“productive”–-i.e., calf-bearing-–cows.
Dr. Burrus anticipated
selling the male offspring at the age of 2 for approximately
$2,000 each, as well as a small number of culled females while
retaining the remaining females to build the herd.
The primary financial record maintained in connection with
Maple Row was a ledger used to record the activity occurring in
the three bank accounts petitioners maintained for the purpose of
- 10 conducting Maple Row’s operations.
Mrs. Burrus, who was
responsible for writing checks and preparing the ledger, would
generally obtain information necessary for this purpose from Dr.
Burrus and Mr. Gruen.
The ledger recorded the expenditures of
the Maple Row operations, as well as its income, such as from
sales of cattle,5 from the rental of the houses on the Maple Row
properties, and from tobacco allotments.
The ledgers also
recorded as “income” certain cash transfers from other bank
accounts controlled by petitioners, including accounts used for
Dr. Burrus’s medical practice and a shopping center owned by
petitioners.
At the end of each year, Mrs. Burrus gave the
ledger and checks to petitioners’ accountant.
Petitioners’
accountant prepared petitioners’ returns for each of the years in
issue.
The accountant would check the ledger against the checks,
and make inquiries of Mrs. Burrus to prepare the returns.
During
the years in issue, petitioners did not have financial statements
prepared for Maple Row, nor did they seek advice from any outside
management or agricultural consultant regarding Maple Row.
Petitioners’ accountant did not advise petitioners regarding
5
The entries for cattle sales sometimes specified the
number and gender of the animals sold and sometimes did not.
Where specified, the ledgers in evidence recorded bull sales
ranging from $1,847 to $2,100 per bull, and heifer sales at $850
per heifer.
- 11 Maple Row’s operations.
In addition to their cattle undertaking, petitioners used
the Cheatham Property for recreation.
noted allowed for overnight visits.
The apartment previously
There were four or five
horses on the property that were ridden occasionally by
petitioners and members of their family, but they were not used
in Maple Row’s operations.
Petitioners conducted an annual dove
hunt and barbecue for about 50 to 75 guests.
Petitioners’
children and grandchildren visited the Cheatham Property during
the years in issue at intervals ranging from once per month to
once per year depending on their proximity.
Petitioners’
grandchildren would often canoe and fish on a pond located at the
Cheatham Property.
Since 1997, petitioners have conducted “Camp
Papa” for a week each year during which petitioners’
grandchildren engage in work and recreational activities around
the Cheatham Property.
During the years in issue, Dr. Burrus attended two
conventions of the American Hereford Association and showed bulls
there.
He attended annual meetings of the Western Stock Breeders
Convention in Denver, Colorado.
He also was a member of the
Tennessee Hereford Association during the years in issue and,
prior to the years in issue but not during, had shown Hereford
cattle at fairs.
- 12 For the years in issue, amounts reported6 by petitioners on
Schedules F, Profit or Loss From Farming, of their returns are
summarized below:
Year
Income1
Expenses2
Profit (Loss)
1990
1991
1992
1993
1994
1995
$10,647
35,459
27,301
44,607
50,792
32,158
$140,111
180,563
258,088
304,966
272,622
188,205
($129,464)
(145,104)
(230,787)
(260,359)
(221,830)
(156,047)
1
In addition to livestock sales, includes tobacco allotment income and income
from the rental of houses located on the Maple Row properties. The latter income
was reported on the “Other income” line of the Schedules F for the years in issue
as follows:
Year
“Other income” - Schedule F
1990
1991
1992
1993
1994
1995
$6,910
10,165
9,596
9,720
9,878
9,448
2
Includes amounts reported by petitioners on Schedules F for the years in issue
(except as modified by examination adjustments for 1990 and 1991) as mortgage
interest, taxes, depreciation, and conservation expenses as follows:
Year
Mortgage
Interest
Taxes
Depreciation
Conservation
Expenses
1990
1991
1992
1993
1994
1995
$45,712
66,148
121,254
147,636
143,809
58,370
$6,908
16,392
11,317
9,621
8,431
11,011
$29,228
24,970
29,803
24,579
25,489
27,339
$6,198
9,852
-9,011
-–-
For 1996 to 1999, petitioners reported the following amounts on
Schedules F of their returns or amended returns:
6
The expense amounts described as “reported” for 1990 and
1991 reflect examination adjustments (agreed to or not contested
by petitioners) that reduced reported expenses (and resulting
losses) in 1990 and 1991 by $300,066 and $161,049, respectively.
- 13 Year
Income1
Expenses2
Profit (Loss)
1996
1997
1998
1999
$29,967
46,890
61,698
44,621
$190,053
193,053
220,154
210,005
($160,086)
(146,163)
(158,456)
(165,384)
1
In addition to livestock sales, includes tobacco allotment income and income
from the rental of houses located on the Maple Row properties. The latter income
was reported on the “Other income” line of the Schedules F for 1996 to 1999 as
follows:
Year
Other Income - Schedule F
1996
1997
1998
1999
$8,506
6,903
9,906
9,720
2
Includes amounts reported by petitioners on Schedules F for 1996 to 1999 as
mortgage interest, taxes, depreciation, and conservation expenses as follows:
Year
Mortgage
Interest
Taxes
Depreciation
Conservation
Expenses
1996
1997
1998
1999
$56,627
61,413
57,454
54,861
$15,982
11,537
12,309
12,172
$25,233
22,939
25,860
27,318
––-$8,061
Petitioners also owned and operated a shopping center in
Sumner County, Tennessee, called “Maple Row Center” (MRC) during
the years in issue.
MRC’s several retail spaces were leased to
tenants, and day-to-day operations were managed by a property
manager.
MRC was nearly breaking even when petitioners purchased
it in 1987, and it was operating at a slight profit by the time
of trial.
In the notice of deficiency, respondent determined that the
farming activities reflected on petitioners’ Schedules F for the
years in issue were not activities engaged in for profit and that
the reported farm losses therefrom should be disallowed under
- 14 section 183.
Respondent further determined that petitioners were
liable for an addition to tax for untimely filing their 1990
return, and that they were liable for negligence penalties for
all the years in issue.
OPINION
I.
Section 183
We must decide whether petitioners’ undertakings reported on
Schedules F during the years in issue constituted an activity not
engaged in for profit within the meaning of section 183, as
determined by respondent.
As a general rule, individuals are
allowed to deduct expenses attributable to an “activity not
engaged in for profit" only to the extent permitted by section
183(b).
Sec. 183(a) and (b).
Petitioners contend that the
farming activity they reported on Schedules F, consisting
primarily of the cattle breeding and sales conducted as Maple
Row, was conducted with a profit motive and is not subject to
section 183.
A.
Single Activity Issue
Determining whether an activity falls within the
restrictions of section 183 requires an initial determination of
the activity’s scope.
Respondent has issued regulations on this
point, the validity of which petitioners have not challenged.
See sec. 1.183-1(d), Income Tax Regs.
A taxpayer may be engaged
- 15 in several undertakings, each of which constitutes a separate
activity for purposes of section 183, or several undertakings may
constitute a single activity for this purpose.
Id.
The
regulations further state:
(d) Activity defined. (1) Ascertainment of
activity. * * * In ascertaining the activity or
activities of the taxpayer, all the facts and
circumstances of the case must be taken into account.
Generally, the most significant facts and circumstances
in making this determination are the degree of
organizational and economic interrelationship of
various undertakings, the business purpose which is (or
might be) served by carrying on the various
undertakings separately or together in a trade or
business or in an investment setting, and the
similarity of various undertakings. Generally, the
Commissioner will accept the characterization by the
taxpayer of several undertakings either as a single
activity or as separate activities. * * * Where land
is purchased or held primarily with the intent to
profit from increase in its value, and the taxpayer
also engages in farming on such land, the farming and
the holding of the land will ordinarily be considered a
single activity only if the farming activity reduces
the net cost of carrying the land for its appreciation
in value. * * * [Sec. 1.183-1(d)(1), Income Tax
Regs.; emphasis added.]
The regulations thus provide for delineating activities under
section 183 with a general rule drawing on all facts and
circumstances, and a special rule in the case of land acquired or
held primarily for its appreciation on which farming is also
conducted.
In the latter circumstance, the regulations provide
that the holding of the land and the farming will be considered a
single activity only if the farming activity reduces the net cost
- 16 of carrying the land.
Determining whether the special rule in
the regulations is applicable requires a finding of the primary
purpose for acquiring or holding the land.
Engdahl v.
Commissioner, 72 T.C. 659, 668 n.4 (1979); Perry v. Commissioner,
T.C. Memo. 1997-417; Hoyle v. Commissioner, T.C. Memo. 1994-592.
Based largely on Dr. Burrus’ own testimony and also on the
objective evidence, we are persuaded that petitioners held the
Maple Row land (i.e., the Cheatham, Robertson, and Sumner
Properties) during the years in issue primarily with the intent
to profit from the increase in the land’s value.
Dr. Burrus
testified that “if I was going to make a profit related to this
[i.e., Maple Row], it was because of the land rather than the
herd, the cattle.”
Further, Dr. Burrus testified specifically to
his interest in land as an investment:
I’m not really into asset-buying, other than buying
land. * * * I’m sort of like stocks like I am land.
If I buy them, I just let them sit, so I - I don’t sell
them unless there’s some reason.
With respect to the Maple Row land, Dr. Burrus testified that he
“was pretty sure it was going up in price” during the years in
issue, and appraisals obtained by petitioners support the view
that the properties were appreciating substantially.
Moreover,
Mrs. Burrus reported her occupation for the years in issue as
“real estate manager”.
- 17 That Dr. Burrus’s primary profit motive during the years in
issue was based on land appreciation rather than the cattle
operation is also reflected in his actions with respect to FBHR.
Although Dr. Burrus’s disenchantment with FBHR’s cattle breeding
operations caused him to seek to reduce his share of the
partnership’s profits and losses from 50 percent to 20 percent,
he nonetheless was careful to retain his 50-percent interest in
the partnership’s land.
At the dissolution of FBHR, the partners
agreed that Dr. Burrus would receive only 20 percent of the
cattle and other assets except the land.
With respect to the
land, Dr. Burrus had the option of either selling his half
interest or buying Dr. Foreman’s, based on Dr. Foreman’s
appraisal.
Dr. Burrus opted to buy, even though a half interest
in the Cheatham Property had nearly tripled in value during the
partnership’s ownership, from approximately $300,000 to over
$800,000.
Dr. Burrus’s own statement of his profit expectations
regarding the Maple Row land and the significance of the cattle
herd thereto, his expressed interest in land as an investment,
his wife’s description of her occupation as “real estate
manager”, and his actions with respect to the FBHR partnership
all point convincingly to the conclusion that he held the land
utilized in Maple Row’s operations primarily with the intent to
- 18 profit from its appreciation rather than for purposes of
conducting the cattle activity.
It follows that the land was
“held primarily with the intent to profit from increase in its
value” during the years in issue, within the meaning of the
regulations.
Sec. 1.183-1(d)(1), Income Tax Regs.7
Since petitioners held the Maple Row land primarily with the
intent to profit from its appreciation, the holding of the land
and the farming activities are considered a single activity under
the regulations only if the farming activity reduces the cost of
holding the land.
Id.
The regulations further provide:
the farming and holding of the land will be considered
a single activity only if the income derived from
farming exceeds the deductions attributable to the
farming activity which are not directly attributable to
7
While there is evidence in the record that the Cheatham
Property was originally acquired by FBHR primarily for a cattle
activity (because of its proximity to Drs. Foreman’s and Burrus’s
medical practices), the regulations provide for separate activity
treatment of landholding and farming whenever the land “is
purchased or held” primarily for its appreciation. Sec. 1.1831(d)(1), Income Tax Regs. (Emphasis added.) We are persuaded by
his testimony and actions that by 1990 and the remaining years in
issue, Dr. Burrus was holding the Cheatham Property primarily for
its appreciation. With respect to the Robertson and Sumner
Properties, the record contains no evidence of Dr. Burrus’s
intentions at the time of the acquisition of those properties,
although farming activities on the properties were reported on
certain of petitioners’ returns before the years in issue.
However, Dr. Burrus’s testimony concerning his intentions during
the years in issue was directed at all three properties utilized
in the Maple Row operations, and persuades us that the Robertson
and Sumner Properties were likewise held primarily for their
appreciation potential during the years in issue.
- 19 the holding of the land (that is, deductions other than
those directly attributable to the holding of the land
such as interest on a mortgage secured by the land,
annual property taxes attributable to the land and
improvements, and depreciation of the improvements to
the land). [Id.]
Applying the foregoing regulation in this case, we conclude
that the “income derived from farming” includes all income
reported by petitioners on their Schedules F except the amount
listed on the “Other income” line, which the testimony of both
Dr. and Mrs. Burrus confirms is income petitioners received from
renting three houses located on the Maple Row land.
Such income
is more appropriately allocable to the holding of land.
As for
deductions “directly attributable to the holding of the land”
that should be excluded from farming deductions, we conclude,
based in part on the parties’ agreement,8 that the amounts
reported on the Schedules F for mortgage interest, taxes, and
8
Petitioners offered into evidence a table indicating, and
further argued on brief, that the Schedule F, Profit or Loss From
Farming, entries reported for mortgage interest, taxes,
depreciation, and conservation expenses are properly allocable to
the holding of land, while respondent concedes on brief that all
of the foregoing items except conservation expenses are so
allocable. Given respondent’s concession regarding depreciation,
we do not consider whether the record supports any allocation of
some portion of the depreciation (e.g., for equipment) to the
farming activity.
Respondent further concedes on brief that the expenses
treated as directly attributable to the holding of the land for
purposes of sec. 1.183-1(d)(1), Income Tax Regs., are deductible
by petitioners, subject, in the case of the mortgage interest, to
the restrictions of sec. 163(d).
- 20 depreciation are directly attributable to the holding of the land
and therefore should be excluded when determining whether the
income from farming exceeds the deductions therefrom.
The
parties disagree regarding the treatment of the conservation
expenses reported on the Schedules F, petitioner and respondent
contending that they are attributable to landholding and farming,
respectively.
Since a precondition for the current deduction of
a conservation expenditure is that the taxpayer be engaged in the
business of farming, see sec. 175(a), we agree with respondent
and conclude that the conservation expenses are not directly
allocable to the land for purposes of section 1.183-1(d)(1),
Income Tax Regs.
Excluding the Schedule F “Other income” from income and the
Schedule F deductions that are “directly attributable to the
holding of the land”, petitioners’ “income derived from farming”
and “deductions attributable to * * * farming” within the meaning
of section 1.183-1(d)(1), Income Tax Regs., during the years in
issue are as follows:
- 21 -
Year
Income Derived
From Farming
1990
1991
1992
1993
1994
1995
$3,737
25,294
17,705
34,887
40,914
22,710
Deductions
Attributable
To Farming
Net Gain (Loss)
$58,263
73,053
95,714
123,130
94,893
91,485
($54,526)
(47,759)
(78,009)
(88,243)
(53,979)
(68,775)
Since petitioners’ income derived from farming did not exceed the
deductions attributable thereto in any of the years in issue,
their farming activity--i.e., the Maple Row cattle activity--must
be treated as a separate activity from the holding of land, in
accordance with section 1.183-1(d)(1), Income Tax Regs.
Respondent concedes that petitioners’ separate activity of
holding land was an investment activity for which the allocable
expenses are deductible.
(See supra note 8.)
It therefore
remains for us to decide whether petitioners’ separate activity
of farming (i.e., as disaggregated under section 1.183-1(d)(1),
Income Tax Regs., from the activity of holding land) was an
activity not engaged in for profit within the meaning of section
183.
B.
Application of Section 183 to Cattle Activity
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
- 22 paragraph (1) or (2) of section 212."
In general, deductions are
allowable under sections 162 or 212 for activities in which the
taxpayer engaged with the primary purpose and dominant hope and
intent of realizing a profit.
Commissioner v. Groetzinger, 480
U.S. 23, 35 (1987); Hayden v. Commissioner, 889 F.2d 1548, 1552
(6th Cir. 1989), affg. T.C. Memo. 1988-310; Novak v.
Commissioner, T.C. Memo. 2000-234.
"An activity is engaged in
for profit if the taxpayer entertained an actual and honest, even
though unreasonable or unrealistic, profit objective in engaging
in the activity."
Campbell v. Commissioner, 868 F.2d 833, 836
(6th Cir. 1989), affg. in part, revg. in part and remanding T.C.
Memo. 1986-569; Keanini v. Commissioner, 94 T.C. 41, 46 (1990);
Dreicer v. Commissioner, 78 T.C. 642, 644-645 (1982), affd.
without published opinion 702 F.2d 1205 (D.C. Cir. 1983); sec.
1.183-2(a), Income Tax Regs.
Whether the taxpayer engaged in an activity with the
requisite profit objective is a question of fact to be determined
by examining all the facts and circumstances, giving greater
weight to objective facts than to the taxpayer's mere statement
of intent.
Engdahl v. Commissioner, 72 T.C. at 666; sec. 1.183-
2(a), Income Tax Regs.
The taxpayer bears the burden of proving
the requisite profit objective.
See Rule 142(a); Hayden v.
Commissioner, supra at 1552; Golanty v. Commissioner, 72 T.C.
- 23 411, 426 (1979), affd. without published opinion 647 F.2d 170
(9th Cir. 1981).9
Section 1.183-2(b), Income Tax Regs., sets forth a
nonexclusive list of factors to be considered in determining
whether an activity is engaged in for profit.
Commissioner, supra at 836.
These factors are:
Campbell v.
(1) The manner
in which the taxpayer carried on the activity; (2) the expertise
of the taxpayer or his advisers; (3) the time and effort expended
by the taxpayer in carrying on the activity; (4) 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
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.
As no single factor is controlling, the
facts and circumstances of the case taken as whole are
determinative.
Abramson v. Commissioner, 86 T.C. 360, 371
(1986); sec. 1.183-2(b), Income Tax Regs.
As a threshold matter, we must consider Dr. Burrus’s
9
Sec. 7491 is inapplicable in these proceedings; the
parties conceded at trial that the examinations in this case
commenced before July 22, 1998, the statute’s effective date.
- 24 previously quoted testimony to the effect that any profit he
expected to make from Maple Row “was because of the land rather
than the herd”.
Taken in context, we do not interpret Dr.
Burrus’s statement as a concession that he had no profit intent
with respect to the cattle activity.
Dr. Burrus’s observations
were directed at Maple Row as a whole-–that is, both the
landholding and the cattle activity as an integrated undertaking.
In this context, Dr. Burrus’s statement reflected his judgment
that any profits from the cattle operation would never be
sufficient to cover the cost of holding the land.
As he stated
in the same context:
I wasn’t worrying about making a profit from selling
the cows in the magnitude of [$]230,000 [the 1992 loss,
including land costs] * * * [Neither] Dr. Foreman nor I
ever made any profit [from cattle] that would
counteract the cost of the land.
Thus, we understand Dr. Burrus as expressing the view that,
because his land costs would dwarf what he considered to be the
realistic profit potential of the cattle operation, any overall
gain from the integrated undertaking would come from land
appreciation.
However, where, as here, the landholding and
cattle breeding activities must be analyzed separately under
section 183, we do not consider Dr. Burrus’s comments directed at
the combined results of landholding and cattle breeding
activities as a concession that petitioners lacked a profit
- 25 motive with respect to the cattle breeding activity considered
separately.
We accordingly proceed to consider whether petitioners had
an actual and honest intent to profit from the cattle activity,
based on the factors enumerated in the regulations.
1.
Manner in Which Activity Conducted
The fact that a taxpayer carries on an activity in a
businesslike manner and maintains complete and accurate books and
records may indicate that the activity was engaged in for profit.
See sec. 1.183-2(b)(1), Income Tax Regs.
Also, a profit motive
may be indicated by the conduct of the activity in a manner
substantially similar to other activities of the same nature
which are profitable.
Id.
Both parties proffered expert
witnesses on cattle breeding to evaluate the conduct of Maple
Row’s cattle operations.10
10
With regard to the parties’ cattle breeding experts:
We have broad discretion to evaluate “‘the overall
cogency of each expert’s analysis.’” We are not bound
by the formulae and opinions proffered by an expert,
especially when they are contrary to our own judgment.
Instead, we may reach a decision based on our own
analysis of all the evidence in the record. The
persuasiveness of an expert’s opinion depends largely
upon the disclosed facts on which it is based. While
we may accept the opinion of an expert in its entirety,
we may be selective in the use of any portion of such
an opinion. We also may reject the opinion of an
(continued...)
- 26 Petitioners did not have a written business plan, nor did they
prepare income or budget projections with respect to the
activity.
However, petitioners contend that Dr. Burrus believed
the cattle activity would begin to show a profit once the herd
reached approximately 100 purebred productive cows and that he
was endeavoring towards that goal.
Respondent disputes
petitioners’ contention that they were endeavoring to achieve a
herd of 100 cows, citing among other things the absence of
records documenting the size of petitioners’ herd for the years
in issue.
We agree with respondent that it is not possible to
determine the size of petitioners’ herd during the years in issue
from the herd inventory records in evidence.11
This is so
10
(...continued)
expert witness in its entirety. [Alumax, Inc. v.
Commissioner, 109 T.C. 133, 171-172 (1997), affd. 165
F.3d 822 (11th Cir. 1999); citations omitted.]
As best we can ascertain from their reports, the parties’
cattle breeding experts were provided data on petitioners’ cattle
operation that was more limited than what has been introduced as
evidence in these proceedings. In a few instances, the experts
appear to have been provided information that is not in the
record. In any event, their failure to analyze certain of the
years in issue detracts significantly from the usefulness of
their testimony. As a result, to the extent we have not
specifically mentioned their testimony, we have found it
unhelpful, unpersuasive, or both.
11
The parties’ cattle experts provided herd figures for
certain years in their reports, apparently based in part on
(continued...)
- 27 because these records document births, but not sales,12 deaths or
other dispositions.
Nonetheless, petitioners’ herd inventory
records do show, and the parties agree, that petitioners’ cattle
produced the following purebred Hereford offspring during the
years in issue:
Year
Heifers
Bulls
Total
1990
1991
1992
1993
1994
1995
13
10
15
17
27
30
6
7
15
20
24
23
19
17
30
37
51
53
Thus, the number of offspring produced by petitioners’ herd
nearly doubled in the first 4 years of operation and nearly
11
(...continued)
information that was not offered into evidence. Our review of
those figures indicates that they are either incomplete or
unreliable.
Petitioners’ expert provided figures only for 1990 through
1992. Respondent’s expert covered 1990 through 1992, and 1994,
but not 1993 or 1995. Respondent’s expert’s figure for
productive cows in 1994 is highly suspect, however; he puts it at
49, based on records made available to him, whereas the parties
have agreed that births registered in 1994 totaled 51. The
registration of 51 newborn calves in 1994 indicates that there
were almost certainly more than 49 productive cows in that year,
as it is undisputed that the “drop” rate (i.e., calving rate) for
such cows was between 80 and 90 percent. We therefore conclude
that respondent’s expert’s herd figures are unreliable.
12
The financial ledgers maintained by Mrs. Burrus for Maple
Row record the proceeds from cattle sales but generally do not
record the number or type of cattle sold.
- 28 tripled by the end of the sixth year.
It is also undisputed that
the “drop” rate-–i.e., calving rate-–for petitioners’ cows was
generally between 80 and 90 percent.13
Consequently, the number
of productive cows was clearly growing, suggesting the retention
of female offspring for this purpose.
Accordingly, petitioners’
claim that they were building a herd during the years in issue
finds substantial corroboration in the herd inventory records
they maintained.
In addition, Dr. Burrus’s claim that he
anticipated being able to sell purebred horned Hereford bulls for
approximately $2,000 is substantiated in the financial ledgers,
which record sales of bulls at prices in this range.
In short, the business plan claimed by petitioners is
corroborated in the records they maintained.
The herd
inventories were also adequate to document the herd’s
productivity, to an extent sufficient to earn recognition from
the AHA.
Two of petitioners’ cows earned AHA awards based on
productivity in 1998; since the awards were based on the cows’
production of nine and six calves respectively, it is clear that
petitioners’ records extending back into the years in issue were
considered reliable and accurate by the AHA.
Cf. Stonecipher v.
Commissioner, T.C. Memo. 2000-378 (section 183 applicable to
13
Both Dr. Burrus and respondent’s expert testified that
calving rates in this range were the norm.
- 29 cattle breeding activity where no cattle inventory records kept).
Similarly, with respect to the financial ledgers for Maple
Row maintained by Mrs. Burrus, we find that these records, though
not flawless, represented a reasonably accurate attempt to record
the activity’s financial results.
Moreover, petitioners
maintained separate bank accounts for the purpose of conducting
Maple Row’s affairs.
When cash was transferred from personal or
other accounts to Maple Row’s accounts, the transfer was recorded
in the ledgers.
Cf. id. (no separate bank account for cattle
activity).
Respondent’s expert postulated several criteria to which he
believed a profit-oriented purebred cattle breeding operation
would adhere, and found Maple Row’s practices at variance with
those criteria.
To the extent the expert’s testimony was
intended to show that petitioners conducted their cattle breeding
activity in a manner not substantially similar to like activities
conducted for profit, we are unpersuaded.
Respondent’s expert
cited the need for genetically superior stock, but then opined
merely that he was unable to determine from the records provided
him whether petitioners had such stock.
In this regard, it is
worth noting that the expert cited in his report petitioners’
documentation to the effect that Maple Row had received the
designation “1998 Top Recorders in Tennessee” for having
- 30 registered 62 Hereford cattle.
However, respondent’s expert does
not further discuss this reference, suggesting to us that his
report lacked either thoroughness or objectivity.
Respondent’s
expert further testified that embryo transfer would have been
used in a profitable operation, whereas petitioner’s expert
testified that a switch from embryo transfer to natural selection
in 1990 would have been a valid business decision at the time,
given the then high cost of embryo transfer.
Finally,
respondent’s expert postulated that for-profit purebred cattle
breeding operations would be conducted at a well maintained,
aesthetically pleasing farm site that would conform to the
expectations of customers visiting the site for on-site
purchases.
The expert found Maple Row’s facilities deficient in
this respect and also believed that a for-profit operation would
engage in advertising to attract such on-site customers.
In
fact, Maple Row sold its cattle by means of off-site auctions,
obviating the need for advertising, and the prices petitioners
obtained at auction were in line with what respondent’s expert
indicated were market prices.
In sum, we are not persuaded that
Maple Row’s variances from the model cattle operation postulated
by respondent’s expert suggest a lack of profit motive.
Overall, we are persuaded that petitioners conducted their
cattle breeding activity in a businesslike manner and maintained
- 31 adequate records, which in accordance with section 1.183-2(b)(1),
Income Tax Regs., tends to indicate the existence of an intent to
make a profit.
2.
Expertise of Taxpayer and Advisers
Preparation for an activity by extensive study or
consultation with experts may indicate a profit objective where
the taxpayer conducts the activity in accordance with such study
or advice.
See sec. 1.183-2(b)(2), Income Tax Regs.
A taxpayer
need not make a formal market study before engaging in an
activity but should undertake a basic investigation of the
factors that would affect profit.
Westbrook v. Commissioner,
T.C. Memo. 1993-634, affd. 68 F.3d 868 (5th Cir. 1995).
Expertise with respect to the mechanics of an activity can be
distinguished from expertise in the economics of such activity,
and the taxpayer's failure to obtain expertise in the economics
of the activity in question may indicate a lack of profit
objective.
Burger v. Commissioner, 809 F.2d 355, 359 (7th Cir.
1987), affg. T.C. Memo. 1985-523.
Between the two of them, Dr. Burrus and Mr. Gruen possessed
substantial experience with respect to breeding and caring for
cattle.
While neither Dr. Burrus nor Mr. Gruen had formal
training regarding the economics of operating a profitable cattle
breeding business, both of them had been around cattle breeding
- 32 operations for the better part of their lives.
We are persuaded
that Dr. Burrus’s near lifelong experience with farming,
including livestock, gave him knowledge of both the mechanics and
economics of livestock.
In accordance with section 1.183-
2(b)(2), Income Tax Regs., the expertise possessed by Dr. Burrus
and his hired help tends to indicate the existence of a profit
intent.
3.
Time and Effort Expended
The fact that the taxpayer devotes much of his or her
personal time and effort to carrying on an activity, particularly
if the activity does not have substantial personal or
recreational aspects, may indicate a profit objective.
1.183-2(b)(3), Income Tax Regs.
Sec.
The fact that the taxpayer
devotes a limited amount of time to an activity does not
necessarily indicate a lack of profit motive where the taxpayer
employs competent and qualified persons to carry on such
activity.
Id.
Dr. Burrus often worked 7 days a week for 10 to 12 hours per
day during the years in issue, and petitioners traveled to Africa
to work at the mission hospital for approximately 2 months of
each year, thereby limiting the amount of time they were able to
personally devote to the cattle activity.
Nonetheless, they
hired Mr. Gruen, whose experience and competence have been
- 33 previously noted, full time to oversee the operations of the
cattle activity.
The record establishes that Dr. Burrus devoted
significant time to consulting with Mr. Gruen in connection with
decisionmaking for Maple Row, notwithstanding the demands of his
medical practice.
When one adds to the foregoing the fact that
raising cattle generally lacks significant recreational
aspects,14 the application of section 1.183-2(b)(3), Income Tax
Regs., tends to suggest the existence of a profit objective.
4.
Expectation That Assets May Appreciate
An expectation that assets used in the activity will
appreciate in value may indicate a profit objective.
Golanty v.
Commissioner, 72 T.C. at 427-428; Bessenyey v. Commissioner, 45
T.C. 261, 274 (1965), affd. 379 F.2d 252 (2d Cir. 1967); Hillman
v. Commissioner, T.C. Memo. 1999-255; Dodge v. Commissioner, T.C.
Memo. 1998-89, affd. 188 F.3d 507 (6th Cir. 1999); sec. 1.1832(b)(4), Income Tax Regs.
We have held at respondent’s behest
that petitioners’ landholding and cattle activities must be
treated as separate activities under section 1.183-1(d)(1),
Income Tax Regs., for purposes of section 183.
14
As more fully discussed in connection with the
“recreation” factor, the recreational aspects of the Cheatham
Property that find support in the record are more closely
associated with petitioners’ landholding activity than with their
cattle activity.
- 34 As a consequence, any anticipated appreciation in the Maple
Row land is not considered in ascertaining the existence of an
intent to profit from the cattle activity.
See Roberts v.
Commissioner, T.C. Memo. 1987-404; Hambleton v. Commissioner,
T.C. Memo. 1982-234.
With respect to the livestock, we have
previously found that petitioners’ purebred herd was growing
during the years in issue, and that they were breeding bulls that
sold for approximately $2,000 each.
These factors indicate that
petitioners had an expectation that the herd would appreciate;
under section 1.183-2(b)(4), Income Tax Regs., this expectation
tends to indicate the existence of an intent to profit.
5.
Past Success in Similar or Dissimilar Activities
A taxpayer's past success in similar or dissimilar
activities may indicate that his engagement in a presently
unprofitable activity is for profit.
Tax Regs.
Sec. 1.183-2(b)(5), Income
Petitioners have enjoyed at least moderate success
with MRC, Dr. Burrus has been successful in his medical practice,
and the missionary hospital he established in Africa is still
operating.
Petitioners’ prior experience with cattle breeding at
FBHR was unsuccessful, at least if the appreciation in the value
of the Cheatham Property during that period is disregarded.
If
the more than doubling in value of the Cheatham Property during
the period it was held by the FBHR partnership is taken into
- 35 account, Dr. Burrus’s actions involving the partnership--reducing
his exposure to the operational losses while holding onto his
full interest in the land--appear financially astute.
On
balance, given the generally positive track record of Dr.
Burrus’s various entrepreneurial undertakings, we believe that
the application of section 1.183-2(b)(5), Income Tax Regs.,
provides support for the existence of an intent to profit.
6.
Activity’s History of Income or Losses
An activity's history of income or loss may reflect whether
the taxpayer has a profit objective.
Tax Regs.
Sec. 1.183-2(b)(6), Income
Unless explained by unforeseen or fortuitous
circumstances beyond the taxpayer's control, a record of
continuous losses beyond the period customarily required to
obtain profitability may indicate that the activity is not
engaged in for profit.
Golanty v. Commissioner, supra at 426;
Bessenyey v. Commissioner, supra at 274; Hillman v. Commissioner,
supra; sec. 1.183-2(b)(6), Income Tax Regs.
As earlier calculated for purposes of determining whether
petitioners’ farming activity should be treated as a separate
activity from the holding of land, the results from petitioners’
Maple Row cattle activity for the years in issue are as follows:
- 36 -
Year
Income Derived
From Farming
1990
1991
1992
1993
1994
1995
$3,737
25,294
17,705
34,887
40,914
22,710
Deductions
Attributable
To Farming
Net Gain (Loss)
$58,264
73,053
95,715
123,130
94,893
91,484
($54,527)
(47,759)
(78,010)
(88,243)
(53,979)
(68,774)
For the 4 years immediately following the years in issue, if the
same adjustments are made to show the results of the Maple Row
cattle activity as a separate activity, those results are as
follows:
Year
Income Derived
From Farming
Deductions
Attributable
To Farming
Net Gain (Loss)
1996
1997
1998
1999
$21,461
39,987
51,792
34,901
$92,211
97,164
124,531
115,654
($70,750)
(57,177)
(72,739)
(80,753)
Thus, petitioners have shown losses for the first 6 years of
Maple Row’s operations (the years in issue), as well as the next
4 years.
Petitioners point out that courts have recognized a startup
period with respect to breeding activities that is longer than
the period associated with other activities, and argue that their
losses have been incurred during a startup period.
See, e.g.,
Engdahl v. Commissioner, 72 T.C. at 669 (startup phase between 5
to 10 years for horse-breeding activity); Fields v. Commissioner,
- 37 T.C. Memo. 1981-550 (losses in third, fourth, and fifth years of
cattle breeding operation found to occur during startup phase).
Petitioners’ losses throughout the first 6 years of Maple
Row’s operations are consistent with Dr. Burrus’s stated business
plan of expanding his herd of productive cows to 100, and not
expecting to cover his losses until that time.
As previously
discussed, petitioners’ records and other evidence corroborate
that they were building a herd during the years at issue.
Indeed, the herd’s annual production of registered purebred
offspring nearly tripled during the period.
Although petitioners
incurred losses during all 6 years in issue, we are persuaded
that these years constituted a reasonable startup period.
As a
result, the continuous losses do not indicate the absence of an
intent to profit, under section 1.183-2(b)(6), Income Tax Regs.
While petitioners also incurred losses for the next 4 years
(1996-99), the issue we must decide is whether they had an actual
and honest intent to profit during the years in issue, given
their herd growth and other factors extant at the time;
petitioners’ intentions and expectations for the years in issue
were not informed by the experience of subsequent years.15
15
We express no opinion herein whether petitioners were
engaged in their cattle activity for profit during 1996 through
1999, given the facts and circumstances known to them in those
(continued...)
- 38 7.
Occasional Profits
The amount of any occasional profits, if large in relation
to losses incurred or the taxpayer's investment, may indicate a
profit objective.
Sec. 1.183-2(b)(7), Income Tax Regs.
The
possibility of a substantial profit in a highly speculative
venture may indicate a profit objective even where profits are
occasional and small or nonexistent.
Id.
As petitioners have shown no profit during any year of the
Maple Row cattle activity, this factor is neutral.
8.
Taxpayer’s Financial Status
Substantial income from sources other than the activity
(particularly if the losses from the activity generate
substantial tax benefits) may indicate that the activity is not
engaged in for profit, especially if there are personal or
recreational elements involved.
Sec. 1.183-2(b)(8), Income Tax
Regs.
During each of the years in issue, Dr. Burrus earned
substantial income from his medical practice, which obviously
made it possible for petitioners to bear the losses incurred in
connection with the cattle activity.
However, recreational
elements, which “especially” suggest the absence of a profit
15
years.
(...continued)
- 39 motive where substantial other income is available, were
insignificant with respect to petitioners’ cattle activity.16
On
balance, we do not believe this factor carries much weight in the
instant case.
9.
Personal Pleasure or Recreation
The existence of recreational or personal elements in an
activity may indicate that the activity is not engaged in for
profit.
Sec. 1.183-2(b)(9), Income Tax Regs.
On the other hand,
where an activity lacks any appeal other than profit, a profit
objective may be indicated.
Id.
Respondent cites several
examples of recreational activities petitioners undertook on the
Cheatham Property including, inter alia, fishing in the ponds,
horseback riding, the annual dove hunt, and Camp Papa, to argue
that Maple Row’s recreational elements were significant and
should evidence a lack of profit motive.
The recreational
elements respondent cites are more appropriately allocable to the
landholding activity than the cattle activity, in our view.
Moreover, petitioners did not maintain a residence at any of the
Maple Row properties, and any personal or recreational aspect of
the apartment available for their use at the Cheatham Property is
likewise allocable to the landholding.
16
While Dr. Burrus had an
See discussion of the “recreation” factor, infra.
- 40 avocational interest in Hereford breeding, as evidenced by his
attendance, and occasional showing of animals, at livestock
conventions and fairs, we believe any recreational component of
these activities was minor.
Cf. Sullivan v. Commissioner, T.C.
Memo. 1998-367 (taxpayer’s regular participation as
nonprofessional rider in cutting horse competitions constitutes
recreation indicative of lack of profit motive), affd. without
published opinion 202 F.3d 264 (5th Cir. 1999).
Because
petitioners’ cattle activity lacked significant recreational
appeal, a profit intent is indicated under section 1.183-2(b)(9),
Income Tax Regs.
C.
Conclusion
Petitioners’ purebred Hereford herd grew significantly
during the first 6 years of Maple Row’s operation, the years at
issue herein.
Their herd inventory records document this herd
building process.
While losses were incurred in all 6 years,
such losses are consistent with a startup period inherent in herd
building and therefore do not necessarily indicate a lack of
profit motive.
Given the growth in petitioners’ herd as of 1995,
the demonstrated market value of purebred Hereford bulls, their
record keeping practices, and the absence of significant
recreational elements in cattle raising, we are persuaded that
petitioners had an actual and honest intent to profit from their
- 41 cattle activity during the years in issue.
Accordingly,
respondent’s determination to disallow the losses attributable to
petitioners’ cattle activity under section 183 is not sustained.
II.
Addition to Tax for Failure To File Timely Under Section
6651 and Accuracy-Related Penalties Under Section 6662
Respondent determined that petitioners are liable for the
section 6651(a) addition to tax for failing to file a timely
return for 1990.
This addition to tax does not apply if the
taxpayer proves that the failure to file timely was:
(1) Due to
reasonable cause, and (2) not due to willful neglect.
Sec.
6651(a)(1); Rule 142(a)(1); United States v. Boyle, 469 U.S. 241
245 (1985); Peacock v. Commissioner, T.C. Memo. 2002-122.
There is no dispute that the due date for petitioners’ 1990
return was October 15, 1991, and that it was received on October
28, 1991.
Petitioners argue that they had reasonable cause for
untimely filing because they relied on their accountant to file
their return.
Reliance on an agent, however, does not constitute
reasonable cause for a late filing under section 6651(a)(1).
United States v. Boyle, supra at 252; Stolz v. Commissioner, T.C.
Memo. 1999-404.
In the absence of any other argument or evidence
establishing reasonable cause, we sustain respondent’s
determination under section 6651(a)(1) for 1990; petitioners
conceded various adjustments for that year which would result in
a deficiency, in addition to any deficiency resulting from our
- 42 holdings herein.
See sec. 6665(b)(1).
Respondent also determined that, for each of the years in
issue, petitioners are liable for the section 6662(a) accuracyrelated penalty due to their negligence or intentional disregard
of rules or regulations.
For this purpose, negligence includes
any failure to make a reasonable attempt to comply with the
provisions of the Internal Revenue Code, and disregard includes
any careless, reckless, or intentional disregard of rules or
regulations.
Sec. 6662(c); sec. 1.6662-3(b), Income Tax Regs.
The accuracy-related penalty does not apply to any portion of an
underpayment to the extent the taxpayer shows there was
reasonable cause for such portion and that the taxpayer acted in
good faith.
Sec. 6664(c)(1); secs. 1.6662-3(a), 1.6664-4(a),
Income Tax Regs.
The decision as to whether a taxpayer acted
with reasonable cause and in good faith depends on all the facts
and circumstances relevant to the case with the most important
factor being the taxpayer’s efforts to assess the proper tax
liability.
Jorgenson v. Commissioner, T.C. Memo. 2000-38; sec.
1.6664-4(b)(1), Income Tax Regs.
Petitioners treated the entire Maple Row cattle undertaking
as one activity.
Portions of the underpayments that may remain
for the years in issue may be attributable to petitioners’
failure to treat as a separate activity the holding of the land
- 43 on which they conducted their cattle activity.17
With respect to
those portions, we find that petitioners had reasonable cause for
the underpayment.
We have found that petitioners conducted their
cattle activity with the requisite profit motive to avoid the
restrictions of section 183.
In these circumstances, their
failure to adhere to the precise requirements of the regulations
requiring the treatment of farming and landholding as separate
activities does not, in our view, reflect a lack of effort to
assess their proper tax liability.
As for any remaining portions of the underpayments for the
years in issue, such as those attributable to petitioners’
failure to substantiate claimed deductions, petitioners have not
addressed the issue, and we accordingly sustain respondent’s
determinations.
In light of the parties’ concessions and the foregoing,
Decision will be entered
under Rule 155.
17
For example, underpayments may exist as a result of the
limitations imposed by sec. 163(d) on the mortgage interest
deductions claimed by petitioners on Schedules F.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.