United States Tax Court

United States Tax Court

T.C. Memo. 2025-95

WESLEY E. YOUNG AND JANET S. YOUNG,

Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

__________

Docket No. 2800-18.

Filed September 22, 2025.

__________

Jeffery D. Trevillion, Jr., for petitioners.

William F. Castor, Vassiliki Economides Farrior, and Tyler A. Gilmore,

for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

MARVEL, Judge: Petitioners, Wesley E. Young and Janet S.

Young (Youngs), contest respondent’s determination of deficiencies and

section 6662 1 accuracy-related penalties for their 2013 and 2014 taxable

years (years at issue). In a Notice of Deficiency dated November 13,

2017, respondent determined that the farming activity at Pecandarosa

Ranch was not an activity engaged in for profit within the meaning of

section 183 and disallowed deductions attributable to it that the Youngs

claimed for the years at issue. The Youngs argue that they operated

Pecandarosa Ranch for profit and that accuracy-related penalties are

not warranted because they acted with reasonable cause and in good

faith. We agree with respondent that the Pecandarosa Ranch activity

1 Unless otherwise indicated, statutory references are to the Internal Revenue

Code, Title 26 U.S.C. (Code), in effect at all relevant times, regulation references are

to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times,

and Rule references are to the Tax Court Rules of Practice and Procedure. Some

monetary amounts have been rounded to the nearest dollar.

Served 09/22/25

2

[*2] was not an activity engaged in for profit during the years at issue

and that accuracy-related penalties are warranted.

FINDINGS OF FACT

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

Stipulation of Facts, First Supplemental First Stipulation of Facts, and

their accompanying Exhibits are incorporated herein by this reference.

The Youngs resided in Oklahoma when they timely filed their Petition. 2

We will provide separate overviews of Mr. Young’s and Ms. Young’s

backgrounds because, as discussed infra, they met and married each

other just before the years at issue.

I.

Mr. Young

Mr. Young was born in 1962 and grew up in Okmulgee,

Oklahoma. He did not grow up on a farm, but he was a member of the

Future Farmers of America in high school.

Mr. Young has a varied work history encompassing oil drilling,

pecan harvesting, hay baling, and ranch management, including

working with cattle and horses. Beginning at age 17, he worked at Bill

Wadley & Son Drilling Co. for about 15 years, 3 initially drilling oil wells

but later harvesting pecans and baling hay. As part of his pecan

harvesting duties, he picked up fallen tree limbs, used a limb rake,

operated a harvester, worked at a pecan cleaning table, and shook pecan

trees. 4 Mr. Young then worked for Hughes Cattle Co. at Dillingham

Ranch in Okmulgee for about two years, which entailed working with

cattle and baling hay. After the owners of another ranch, Buford Ranch,

bought Dillingham Ranch, Mr. Young left Hughes Cattle Co. to work for

Buford Ranch for a few years, working with cattle and horses and baling

hay. Mr. Young then returned to Hughes Cattle Co. working for about

13 years at Robson Ranch in Catoosa, Oklahoma. At Robson Ranch he

worked with cattle and managed over 2,000 wild horses under a

2 Unless otherwise agreed by the parties in writing, venue for an appeal is the

U.S. Court of Appeals for the Tenth Circuit. See § 7482(b)(1)(A).

3 Mr. Young’s employment with Bill Wadley & Son Drilling Co. was not entirely

continuous, however. He credibly explained that “there [were] periods in there where

there [were] no wells to drill, and we would have to draw unemployment.”

4 In Mr. Young’s experience, pecan harvesting typically occurred in October or

November but could occur as late as January, and both the timing and volume of a

pecan harvest depended on the weather.

3

[*3] contract that Hughes Cattle Co. had with the Bureau of Land

Management.

Mr. Young had engaged in team roping, a type of rodeo event, for

over 20 years as of the years at issue. The object of team roping is for

two horsemen (one header and one heeler) to work together to rope a

steer’s head and heel in the fastest time possible. 5 Team roping

competitions offer prize money or various other prizes, such as belt

buckles and horse saddles, and Mr. Young wore one such belt buckle at

trial. Most of the team roping competitions in which Mr. Young

participated lasted multiple days.

II.

Ms. Young

Ms. Young was born in 1963. She began working at the

Oklahoma Employment Security Commission (OESC) in 1987 as a clerk.

In 1988 she married Dale Todd, whom she had met in 1983. At the time

of Ms. Young’s marriage to Mr. Todd, Mr. Todd and his father worked

together running ETI, Inc. (ETI), an Oklahoma corporation formed by

Mr. Todd’s father in 1980. ETI manufactured and refurbished airplane

parts, and at all relevant times it was based in Tulsa, Oklahoma, and

was an S corporation 6 for federal income tax purposes.

Ms. Young became a claims adjuster at some point while working

for the OESC. She left that position in 1993 and went back to school at

Langston University in Oklahoma. While at Langston University, Ms.

Young took Accounting I and Accounting II, which together totaled six

credit hours. She also took Business Law and other classes pertaining

to business management. She received a bachelor’s degree in business

management in 1995.

After college Ms. Young obtained a workers’ compensation

adjuster license and worked for a third-party workers’ compensation

insurance administrator for about three years. She then left the thirdparty administrator to lead the workers’ compensation division at Saint

5 We have previously described the sport of team roping in detail. See Gallegos

v. Commissioner, T.C. Memo. 2021-25, at *3–5.

6 An S corporation is governed under the rules in subchapter S of chapter 1 of

subtitle A of the Code. S corporations are not generally themselves subject to federal

income tax but, like partnerships, are conduits through which income flows to their

shareholders. See § 1366; Gitlitz v. Commissioner, 531 U.S. 206, 209 (2001)

(“Subchapter S allows shareholders of qualified corporations to elect a ‘pass-through’

taxation system under which income is subjected to only one level of taxation.”).

4

[*4] Francis Hospital in Tulsa, Oklahoma, where she worked for about

six months. She subsequently worked for a staffing company for a short

time.

In 1998 Ms. Young passed series 7, 63, 65, and 66 exams and

became a licensed stockbroker. 7 She worked as a stockbroker from 1998

until either 2004 or 2005, when she sold her stockbrokerage business

with the intent of assisting Mr. Todd with ETI. She did not begin

working at ETI right away, however, and was unemployed for a couple

of years. In July 2007 Mr. Todd purchased ETI from his father. 8 At the

time he purchased it, Mr. Todd had been overseeing ETI’s day-to-day

operations for at least ten years. Upon purchasing ETI, Mr. Todd

became its sole shareholder and chief executive officer. Shortly after

that, Ms. Young began working full time at ETI. At all relevant times

Ms. Young oversaw ETI’s accounting and human resources operations,

and ETI used QuickBooks as its accounting system, including for

maintaining a general ledger.

In 2008 Mr. Todd and Ms. Young bought Pecandarosa Ranch for

$2 million. At that time, Pecandarosa Ranch comprised 82.7 acres of

real property in Rogers County, Oklahoma, and included a residence, a

guest house, and a native pecan grove consisting of about 490 mature

pecan trees. Before buying Pecandarosa Ranch, Mr. Todd and Ms.

Young spoke with its then owners and their pecan harvester, Billy

Crose, 9 about the harvesting of the pecan grove. An ice storm had

7 The series 7 license, a general securities representative license, allows the

licensee to sell almost any type of individual security. See Fleischer v. Commissioner,

T.C. Memo. 2016-238, at *3 n.2. The series 63 license, the Uniform Securities Agent

License, allows the licensee to transact business within a State and is required by

every State. See id. The series 65 license is required to provide financial advice or

services on a noncommission basis. See id. The series 66 license allows the licensee to

advise clients on investments. See, e.g., Cisneros v. FirstMerit Corp., No. 14-cv-14893,

2016 U.S. Dist. LEXIS 14655, at *3 (E.D. Mich. Feb. 8, 2016).

8 Ms. Young repeatedly testified that both she and Mr. Todd bought ETI in

2007, but she also testified that Mr. Todd or “his trust” was the “sole shareholder” at

the time of the purchase and that “from the time we bought it, he was the owner. He

was [the] sole shareholder.” The parties have stipulated that “[f]rom at least 2008

until his death, Mr. Todd was ETI’s sole shareholder.” ETI also reported on its Forms

1120S, U.S. Income Tax Return for an S Corporation, for 2008–10 that it had one

shareholder and that Mr. Todd had a 100% ownership interest in ETI. The purchase

agreement, if any exists, is not in the record. To the extent that Ms. Young testified

that she purchased ETI or some portion of it in 2007, we do not credit that testimony

because it is uncorroborated and contradicts other portions of her testimony.

9 Mr. Crose did not testify at trial.

5

[*5] damaged the pecan grove in December 2007, and Ms. Young and

Mr. Todd spent their first year of ownership clearing trees and limbs.

Ultimately, there was no pecan harvest in 2008.

Mr. Todd and Ms. Young joined the Oklahoma Pecan Growers

Association in 2009 and subscribed to various periodicals, including the

Georgia Pecan, Pecan South, and The Pecan Grower. From 2009–13 Mr.

Crose continued harvesting pecans on Pecandarosa Ranch. 10 Mr.

Crose’s compensation for his services was 50% of the pecans he

harvested on the ranch. His compensation was lower than the typical

rate of 70% of the harvest because the pecan grove was kept in good

shape.

Oklahoma began experiencing drought conditions in 2010, which

ultimately continued through 2015. Separately, Mr. Todd received a

cancer diagnosis on July 1, 2010. On September 14, 2010, Mr. Todd and

Ms. Young conveyed Pecandarosa Ranch to the Janet Sue Todd 2004

Living Trust. Sometime after Mr. Todd was diagnosed with cancer, Ms.

Young and Mr. Todd hired additional outside labor (i.e., laborers other

than Mr. Crose) to assist with operating Pecandarosa Ranch. They

incurred labor expenses of $15,255 during 2010 and $10,459 during

2011.

Mr. Todd died in December 2011. Ms. Young became the sole

shareholder of ETI and began managing ETI 11 after Mr. Todd’s death.

At all relevant times, Ms. Young handled the business and

administrative aspects of Pecandarosa Ranch. She did not make or keep

a formal written business plan for Pecandarosa Ranch during 2008–12.

10 Although respondent has asked us to find that Pecandarosa Ranch employed

Mr. Crose to harvest pecans from 2008 to 2014, the record is clear that there was no

pecan harvest in either 2008 or 2014.

11 ETI’s accountable manager for aviation regulatory purposes, however, is an

individual other than Ms. Young. Cf. 14 C.F.R. § 145.3(a) (2025) (defining an

accountable manager as “the person designated by the certificated repair station who

is responsible for and has the authority over all repair station operations that are

conducted under part 145, including ensuring that repair station personnel follow the

regulations and serving as the primary contact with the” Federal Aviation

Administration). Ms. Young credibly testified that “I can’t change the way we repair

an airplane part” and that with respect to “the actual work and how it’s done, I would

never change that.”

6

[*6] III.

2012

In early 2012 Ms. Young began construction of a

22,590-square-foot arena on Pecandarosa Ranch. The Youngs married

in August 2012 although the record does not establish exactly when they

met.

Sometime in 2012 while still working for Hughes Cattle Co., Mr.

Young started serving as an unpaid intern for his church, which

included performing community service projects. In December 2012 Mr.

Young provided Hughes Cattle Co. with notice of his intent to resign.

Pecandarosa Ranch incurred labor expenses of $30,333 during

2012. One of the individuals hired was a hay baler.

IV.

2013 and 2014

A January 18, 2013, appraisal by Southwest Valuation Service,

Inc., valued Pecandarosa Ranch, including the arena, the Youngs’

residence, and other improvements, at $2.75 million under the sales

comparison approach or $2.718 million under the cost approach. The

appraisal valued the land under the cost approach at $395,000 and the

improvements at $2.323 million, $1.176 million of which related to the

Youngs’ residence and $399,500 of which related to the arena.

Construction on the arena was completed in July 2013. Around

the same time, Mr. Young’s internship with his church ended, and he

began working full time at Pecandarosa Ranch performing various

tasks, including brush hogging, fixing fences, and servicing tractors. In

other words, his role at Pecandarosa Ranch was that of a physical

laborer. After starting to work at Pecandarosa Ranch, Mr. Young

attended seminars conducted by the Oklahoma Pecan Growers

Association. By his own account, Mr. Young enjoyed working at

Pecandarosa Ranch.

There was no pecan harvest in 2014 because Mr. Crose notified

the Youngs late in the season that he would not harvest pecans for them

that year, and the Youngs were unable to find a replacement harvester

on short notice. Pecandarosa Ranch began marketing team roping

practice as an offering in 2014.

The Youngs resided on Pecandarosa Ranch during the years at

issue. Ms. Young worked about 15 hours per week at ETI during that

time, and Mr. Young (in addition to his ranching duties) took team

7

[*7] roping lessons from Speed Williams, a world champion team

roper. 12 By his own account, Mr. Young enjoyed team roping. During

the years at issue Mr. Young was a member of the following

organizations: the United States Team Roping Championships, the

World Series of Team Roping, and Allstar Team Roping. The Youngs

were also members of the American Quarter Horse Association, the

American Paint Horse Association, and the Pinto Association. During

the years at issue the Youngs used a personal bank account for

Pecandarosa Ranch, which was unincorporated and which the parties

have stipulated was a sole proprietorship. The Youngs were physically

active on Pecandarosa Ranch and, depending on the season, sometimes

worked after dark.

The Youngs did not track expenses with the goal of evaluating

whether they could make a meaningful profit from Pecandarosa Ranch.

Although Ms. Young provided invoices, receipts, and statements related

to Pecandarosa Ranch to accountant Kathy Burch, 13 who prepared the

Youngs’ income tax returns, the Youngs did not maintain a general

ledger for Pecandarosa Ranch during the years at issue. At times not

established by the record, Ms. Young or Ms. Burch prepared

rudimentary spreadsheets of Pecandarosa Ranch’s income and

expenses, which the parties have stipulated to be profit and loss

statements for the years at issue, based on those invoices, receipts, and

statements. Ms. Burch used the spreadsheets in tax return preparation;

there is no indication that the Youngs used them to inform their decision

making or foster profitability. The 2013 spreadsheet attributed income

of $3,036 to pecan harvesting and $300 to Mr. Young’s team roping. 14

The 2014 spreadsheet attributed income of $7,000 to the sales of three

horses, $7,855 to cattle sales, and $4,035 to Mr. Young’s team roping.

The 2014 spreadsheet listed “Pecans,” “Hay,” and “Events” in the

“Income” section but indicated there was zero income from them. The

spreadsheets did not reflect income from any other source. The

12 Mr. Young also credibly testified that at some point he consulted with world

champion team roper Buddy Hawkins, who advised him to be selective about his roping

partners and to buy certain team roping videos. He further credibly testified that

world champion horseman Tyler Magnus “came to the ranch” and that “hang[ing]

around with better people . . . make[s] me a better roper.”

13 Ms. Burch did not testify at trial.

14 The 2013 profit and loss statement recorded $8,341 of co-op patronage

income. Nonetheless, we credit Ms. Young’s testimony that it represented a partial

rebate of interest payments the Youngs made on a loan from the Oklahoma Farm

Bureau rather than income. We thus do not regard it as a source of revenue for

Pecandarosa Ranch.

8

[*8] spreadsheets also showed total expenses of $344,545 for 2013 and

$270,407 for 2014.

V.

Events After the Years at Issue

In 2015, the year respondent’s audit began, see infra FINDINGS

OF FACT Part VII, Ms. Young began using QuickBooks to track

Pecandarosa Ranch’s income and expenses on Ms. Burch’s advice. On

September 21, 2016, a member of Ms. Burch’s firm organized

Pecandarosa Ranch, LLC, with the Youngs as its managers and the

Janet Sue Todd 2004 Living Trust as its sole member. In 2017

Pecandarosa Ranch, LLC, opened a business bank account with Bank of

America and maintained the account through at least 2019.

In 2019 a land title survey of Pecandarosa Ranch divided the

property into two tracts: the residence tract, comprising about 31.94

acres, and the chapel tract, comprising about 50.76 acres. The division

followed advice from the Youngs’ accountants and attorneys that it

would be better to divide Pecandarosa Ranch into separate tracts for

liability purposes. The residence and the guest house were on the

residence tract, and the native pecan grove was on the chapel tract. In

November 2019 the chapel tract was conveyed to Pecandarosa Ranch,

LLC.

A November 1, 2019, appraisal of the residence tract valued it at

$1.958 million under the cost approach or nearly $1.901 million under

the sales comparison approach. The appraisal valued the land under

the cost approach at $432,000 and the improvements at nearly $1.526

million. 15

In 2020 the Youngs completed construction of a

14,892-square-foot event center on the chapel tract that included a

banquet and reception hall and a wedding chapel. Before its completion,

the Youngs secured an appraisal of the chapel tract dated April 17,

2020, 16 valuing it as is at $2.45 million or with a prospective

15 Over $1.105 million of the improvements related to the Youngs’ residence.

Other improvements included a four-year-old shop valued at $91,000, a four-year-old

horse barn valued at $25,056, a two-year-old outdoor living area valued at $82,944,

and a new shop valued at $62,500.

16 Although the parties stipulated that the appraisal of the chapel tract is

“dated June 17, 2020,” the record is clear that the appraisal is dated April 17, 2020,

and that a letter referring to the appraisal and determining “that the construction is

complete” is dated June 17, 2020. We disregard the stipulation to the extent it is

9

[*9] 16,213-square-foot event center at $3.73 million. 17 Pecandarosa

Ranch, LLC, obtained a $2.9 million loan from Regent Bank for the

purpose of constructing the event center, as well as undertaking related

projects, such as constructing new fencing and new roads to the event

center. Pecandarosa Ranch, LLC promised to repay Regent Bank on a

monthly payment schedule with equal monthly payments of $14,299

starting July 2, 2020. The Youngs and ETI guaranteed repayment of

the loan, and Pecandarosa Ranch, LLC, conveyed a mortgage to Regent

Bank on the chapel tract. Pecandarosa Ranch, LLC, maintained a bank

account at Regent Bank from at least June 2020 through August 2021.

In August 2023 the Youngs listed the residence tract for sale. The

asking price was $2.75 million. The listing expired on February 9, 2024.

At times not established by the record, cf. infra note 40, the

Youngs advertised Pecandarosa Ranch’s goods and services on its

website and third-party websites.

QuickBooks profit and loss

statements for Pecandarosa Ranch are in the record for 2015–23 and for

a small portion of 2024. According to those statements, the first time

Pecandarosa Ranch received income 18 from each of the following sources

was in the following years:

Year

Source of Income

2015

Arena & Outside

Grounds

2015

Hay–Large

2015

Hay–Small

erroneous. Cf. Cal-Maine Foods, Inc. v. Commissioner, 93 T.C. 181, 195 (1989) (holding

that we are not obliged to accept a stipulation between the parties when it is clearly

contrary to facts disclosed by the record or there is substantial evidence contrary to it).

17 Of the $3.73 million appraised value upon the construction’s completion,

$380,000 related to the land and about $3.35 million related to improvements.

18 Although the 2014 spreadsheet lists “Hay” and “Events” in the “Income”

section, it also indicates that Pecandarosa Ranch had zero income from those sources

that year. As a reminder, the sources of income reflected on the spreadsheets for the

years at issue related only to pecan harvesting, team roping, sales of horses, and sales

of cattle. The table thus does not list the following sources of income that appear on

the QuickBooks profit and loss statements: “Pecan Harvesting,” “Pecans,” “Team

Roping,” “Horse Sales,” and “Livestock Sales.” Nor does the table list a category in

2020 called “(Discount),” which carried a negative value.

10

[*10]

2015

Rental Items

2016

Boarding–Option 1

2016

Boarding–Option 3

2016

Pecan Wood

2016

Pecandarosa Cottage

2016

Sales–Miscellaneous

2017

Boarding–Option 2 19

2017

Hay Harvesting

2018

Event Planning 20

2019

Pecandarosa Venue

2020

Miscellaneous–

Boarding

2020

Miscellaneous–Venue

2022

Pecandarosa Petals

2022

Pecandarosa Planning

2022

Sales–Other

The record does not disclose when the Youngs began planning each of

those sources of income or undertakings; 21 in some cases, it also

19 The 2016 QuickBooks profit and loss statement listed “Boarding–Option 2”

in the “Income” section but indicated there was zero income from it.

20 The 2017 QuickBooks profit and loss statement listed “Event Planning” in

the “Income” section but indicated there was zero income from it.

21 Portions of the Youngs’ testimony could be understood to suggest that

Pecandarosa Ranch was performing some of the undertakings listed in the table during

the years at issue although that testimony was neither sufficiently precise nor

adequately corroborated by documentary evidence for us to make a finding to that

effect.

11

[*11] discloses little about the nature of the source of income or

undertaking. The record is remarkably imprecise concerning the

relationship, if any, of the above-listed sources of income or

undertakings to the years at issue from an operational or planning

perspective.

VI.

ETI Income and Pecandarosa Ranch Losses

Ms. Young and (as applicable) Mr. Todd’s or Mr. Young’s Forms

1040, U.S. Individual Income Tax Return, for 2008–22 reported wage

income totaling $2,942,958. Those returns also reported nonpassive

passthrough income from ETI totaling $15,985,429 for the same years.

None of the returns reported a loss from ETI.

Ms. Young and (as applicable) Mr. Todd’s or Mr. Young’s Forms

1040 for 2008–22 also reported losses from Pecandarosa Ranch for all

taxable years from 2008–22. The reported losses from those years

totaled $2,953,041. For each year during 2008–22 the reported loss from

Pecandarosa Ranch partially offset the reported ETI passthrough

income, wages, or other income.

For 2008–19 Ms. Young and (as applicable) Mr. Todd or Mr.

Young reported the following information for Pecandarosa Ranch on

Schedules F, Profit or Loss From Farming, of their Forms 1040:

Year

Gross Income

Total Expenses

Net Loss

2008

—

$85,551

$85,551

2009

$2,313

32,065

29,752

2010

20,972

58,326

37,354

2011

40,308

103,155

62,847

2012

15,447

78,333

62,886

2013

11,677

269,333

257,656

2014

22,381

328,274

305,893

2015

37,345

172,535

135,190

12

[*12]

2016

38,248

122,557

84,309

2017

57,741

126,025

68,284

2018

62,463

108,092

45,629

2019

38,261

200,918

162,657

Total

$347,156

$1,685,164

$1,338,008

For 2020 and 2021 the Youngs reported the following information

for Pecandarosa Ranch on Schedules C, Profit or Loss From Business, of

their Forms 1040:

Year

Gross

Receipts

Returns

and

Allowances

Cost of

Goods

Sold

Total

Expenses

Net Loss

2020

$256,369

$7,250

$45,285

$1,075,414

$871,580

2021

346,932

5,455

41,871

571,254

271,648

Total

$603,301

$12,705

$87,156

$1,646,668

$1,143,228

For 2022 the Youngs reported a nonpassive loss of $471,805 from

Pecandarosa Ranch, LLC. Pecandarosa Ranch, LLC, filed Form 1065,

U.S. Return of Partnership Income, reporting (in addition to a $22,191

real estate rental loss) the following information:

Year

Gross

Receipts

Other

Income

Cost of

Goods Sold

Total

Expenses

Ordinary

Net Loss

2022

$224,341

$20,950

$77,003

$617,902

$449,614

13

[*13] VII.

Tax Reporting and Examination for the Years at Issue

The Youngs timely filed their joint federal income tax returns for

the years at issue. The Youngs reported that Pecandarosa Ranch’s

principal crop or activity was pecans. 22

The 2013 Schedule F reported gross income of $11,677, total

expenses of $269,333, and a net loss of $257,656 from Pecandarosa

Ranch. The Youngs further reported the following breakdown of

expenses for 2013:

Expense

Amount

Depreciation

$138,812 23

Gasoline, fuel,

and oil

242

Insurance (other

than health)

6,822

Labor hired (less

employment

credits)

3,885

Repairs and

maintenance

56,094

Seeds and plants

28,804

Supplies

1,500

22 The parties, however, have stipulated only that “[d]uring 2008 through 2010,

the principal farming activity on [Pecandarosa Ranch] was the raising and harvesting

of pecans.” The parties have not provided a stipulation about the principal activity

occurring on Pecandarosa Ranch during the years at issue. Notably, Pecandarosa

Ranch’s reported principal crop, activity, business, or profession has shifted somewhat

over the years. The 2017–19 Schedules F state that its principal crop or activity was

“Hay/Pecans.” The 2020–21 Schedules C state that its principal business or profession

was “event venue.”

23 The Youngs’ claimed 2013 depreciation expense includes $87,018 of section

179 expenses for the full costs of acquiring the following machinery, equipment, and

horses in 2013: (1) “7’ Ground Hog Equipment” ($3,650); (2) “Heel-O-Matic Trainer”

($3,545); (3) “Horse Walker” ($26,608); (4) “Gates/Wiring” ($17,715); (5) Drifter Horse

($25,000); (6) Chili Horse ($4,500); (7) Big Daddy Horse ($5,500); and (8) Lucky Horse

($500).

14

[*14]

Taxes

2,459

Utilities

5,214

Veterinary,

breeding, and

medicine

3,683

Other expenses:

Accounting

expense

1,246

Other expenses:

Dues &

subscriptions

455

Other expenses:

Farrier

4,745

Other expenses:

Professional fees

2,500

Other expenses:

Security

401

Other expenses:

Travel

12,471

Total

$269,333

The 2014 Schedule F reported gross income of $22,381, total

expenses of $328,274, and a net loss of $305,893 from Pecandarosa

Ranch. The Youngs also reported the following breakdown of expenses

for 2014:

Expense

Amount

Depreciation

$192,064 24

24 The Youngs’ claimed 2014 depreciation expense includes $157,640 of section

179 expenses for the full costs of acquiring the following machinery and equipment in

2014: (1) “2011 Platinum Trailer” ($108,000); (2) “Wylie 300 Gallon Sprayer” ($3,933);

15

[*15]

Feed

24,427

Gasoline, fuel,

and oil

1,065

Insurance (other

than health)

7,614

Mortgage (paid

to banks, etc.)

22,522

Repairs and

maintenance

1,663

Supplies

9,916

Taxes

969

Utilities

4,968

Veterinary,

breeding, and

medicine

6,498

Other expenses:

Accounting

expense

329

Other expenses:

Dues &

subscriptions

1,235

Other expenses:

Mileage

2,957

Other expenses:

Outside services

30,893

Other expenses:

Registration fees

16,460

(3) “Dakota Safe” ($3,118); (4) “Harrow Chain” ($775); (5) “DR Wood Splitter” ($2,074);

(6) “Case 1070 Tractor” ($5,000); (7) “John Deere Square Bailer” ($7,000); (8) “Savage

7218 Limb Rake” ($4,715); (9) “Savage Harvester” ($10,000); (10) “2548 Shaker”

($3,025); and (11) “4224 Cleaner” ($10,000).

16

[*16]

Other expenses:

Security

360

Other expenses:

Travel

4,334

Total

328,274

In June 2015 Revenue Agent Terry Hagelberg (RA Hagelberg)

was assigned to examine the Youngs’ income tax returns for the years

at issue. 25 On August 5, 2015, RA Hagelberg interviewed Ms. Burch.

During the interview Ms. Burch stated that the Pecandarosa Ranch

activity included pecan farming, horse training, team roping, rental of

the arena for events, and a bed and breakfast. On May 25, 2016, during

a three-way telephone call among RA Hagelberg, Ms. Young, and Ms.

Burch, Ms. Young stated that Pecandarosa Ranch began using

QuickBooks in 2015.

During the examination Ms. Young provided RA Hagelberg with

an undated written business plan. The document she provided to RA

Hagelberg did not exist during the years at issue. 26 The business plan

stated that Pecandarosa Ranch “will provide . . . a source for pecans,

firewood, hay, horse boarding, various equine activities, weddings,

family reunions and parties, and an overnight horse hotel, equine trailer

hook-up, and Bed & Breakfast rental.” It also stated that Pecandarosa

Ranch’s financial objectives included breaking even within seven years

and included an income and expense table showing a cumulative profit

of $34,500 by 2020. The income and expense table forecasted total costs

each year of $100,000 from 2012 to 2015 and $10,000 from 2016 to 2022.

In relation to the forecast, the plan stated that

[b]ecause of the large cost of equipment for Ranching and

Harvesting, cash purchases of the equipment to minimize

debt and interest expense[,] and the phased start-up

25 RA Hagelberg did not testify at trial.

26 When asked when she prepared the business plan in Exhibit 51-J, Ms. Young

testified that she prepared it in that form “[w]henever I was asked for my notes” and

that “I took my notes and put it into a Word document whenever I was asked during

the audit.” We do not find as fact that Ms. Young’s alleged notes—which are not in the

record—existed, but we accept her testimony that she prepared the business plan in

Exhibit 51-J in that form during the examination.

17

[*17] approach, the forecast for realized profits is 5-7 years and

[for] fully break[ing] even [is] at 8-10 years. Initial start-up

equipment costs outside of permanent structures is

estimated at $300,000 from 2012 through 2015.

The plan included a table that broke down the forecasted income by

undertaking (“Pecan,” “Hay/Wood,” “Arena Cottage Trailer,” “Equine

Cattle,” and “Roping”) but did not break down the forecasted expenses

by undertaking. It did not include a discussion of Pecandarosa Ranch

making a profit from land appreciation. The plan, however, did refer to

Mr. Young, stating that “[i]n 2012, a Professional Ranch Manager

brought new opportunity to the Ranch.”

RA Hagelberg prepared schedules allocating income and

expenses among Pecandarosa Ranch’s undertakings (as he understood

them) for the years at issue. Specifically, he allocated income and

expenses among “Pecans/Wood,” “Team Roping,” “Horse Boarding,”

“Arena/Venue Rental,” and “Hay/Cattle.” His allocations showed losses

for each of those undertakings, as well as for all of the undertakings in

the aggregate.

In October 2016 the Youngs’ and respondent’s authorized

representatives signed a Form 872, Consent to Extend the Time to

Assess Tax, agreeing to extend the time to assess tax for the 2013

taxable year to April 30, 2018. A Civil Penalty Approval Form dated

December 2, 2016, reflects RA Hagelberg’s decision to assert

accuracy-related penalties for the years at issue, as well as his

immediate supervisor’s approval of the assertion of accuracy-related

penalties on December 30, 2016.

Respondent determined adjustments to the Youngs’ Schedules F

for the years at issue based on his determination that the Pecandarosa

Ranch activity was not engaged in for profit under section 183.

Respondent did not determine that the amounts of the Youngs’ expenses

were unsubstantiated. Respondent reclassified the Schedule F income

as other income and disallowed the Schedule F expense deductions in

their entirety for each year at issue, except that (1) he allowed the

Youngs $1,061 of the $2,459 reported 2013 tax expense 27 and all of the

$969 reported 2014 tax expense as itemized deductions on Schedules A,

Itemized Deductions, of their Forms 1040, (2) he did not adjust the

27 Respondent disallowed $1,398 of the reported Schedule F tax expense for

2013 after determining that it was a duplicate of a real property tax that the Youngs

had already deducted elsewhere on their income tax return.

18

[*18] $2,957 reported mileage expense for 2014, 28 and (3) he allowed the

Youngs miscellaneous itemized deductions in amounts equal to the

reclassified Schedule F income, subject to the limitation of section 67(a).

Cf. § 183(b); Gregory v. Commissioner, T.C. Memo. 2021-115, at *14

(“[S]ection 183(b)(2) constitutes a miscellaneous itemized deduction

subject to section 67(a)’s 2-percent floor.”), aff’d, 69 F.4th 762 (11th Cir.

2023). Respondent also determined that the Youngs were entitled to an

additional $240 Schedule A itemized deduction for charitable

contributions in 2014. On November 13, 2017, respondent issued the

Youngs a Notice of Deficiency determining income tax deficiencies and

accuracy-related penalties for the years at issue as follows:

Year

Deficiency

§ 6662 Penalty

2013

$109,432

$21,886

2014

$107,294

$21,459

On February 7, 2018, the Youngs timely petitioned this Court for review

of respondent’s determinations.

OPINION

I.

Jurisdiction and Burden of Proof

We have jurisdiction to resolve this case under section 6213(a).

The Commissioner’s determinations in a Notice of Deficiency are

generally presumed correct, and the taxpayer bears the burden of

proving that the determinations are incorrect. See Rule 142(a)(1); Welch

v. Helvering, 290 U.S. 111, 115 (1933); Esgar Corp. v. Commissioner, 744

F.3d 648, 653 (10th Cir. 2014), aff’g T.C. Memo. 2012-35, and Temple v.

Commissioner, 136 T.C. 341 (2011). Deductions are a matter of

legislative grace, and taxpayers bear the burden of proving that they are

entitled to any deduction claimed. See INDOPCO, Inc. v. Commissioner,

503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435,

440 (1934). A taxpayer claiming a deduction on a federal income tax

return must demonstrate that the deduction is provided for by statute

and must maintain records sufficient to enable the Commissioner to

28 The parties have also stipulated that there is a $1 discrepancy between the

$1,663 reported repairs and maintenance expense for 2014 and the $1,662 adjustment

that respondent made in the notice of deficiency.

19

[*19] determine the correct tax liability. See § 6001; Hradesky v.

Commissioner, 65 T.C. 87, 89–90 (1975), aff’d per curiam, 540 F.2d 821

(5th Cir. 1976); Treas. Reg. § 1.6001-1(a).

Under section 7491(a), if the taxpayer provides credible evidence

concerning any factual issue relevant to ascertaining the taxpayer’s

liability and complies with certain other requirements, the burden of

proof shifts to the Commissioner as to the factual issue. The Youngs

asserted in their Pretrial Memorandum and again at trial that section

7491(a) shifts the burden of proof to respondent in this case. We need

not decide the Youngs’ contention in this regard because our findings

and analysis do not depend on which party bears the burden of proof.

See Esgar Corp. v. Commissioner, 744 F.3d at 653–54; Addis v.

Commissioner, 118 T.C. 528, 529 n.1 (2002), aff’d, 374 F.3d 881 (9th Cir.

2004). We discuss the burden of proof applicable to the accuracy-related

penalties respondent determined against the Youngs separately in

connection with our discussion of those penalties.

II.

Section 183

Regarding the deficiency determinations, the sole issue

remaining for our decision is whether the Youngs’ reported Schedule F

expenses for the years at issue should be allowed as deductions in

amounts greater than those respondent already allowed. See supra

FINDINGS OF FACT Part VII. We note that neither substantiation of

the amounts of the expenses nor whether it is proper to attribute those

expenses to Pecandarosa Ranch is at issue. The parties’ disagreement

instead concerns only whether the Youngs engaged in the Pecandarosa

Ranch activity for profit during the years at issue. We conclude by a

preponderance of the evidence that they did not.

Our discussion proceeds in three parts. First, we briefly provide

some legal background. Second, we ascertain the activity at issue.

Finally, we consider whether the Youngs engaged in the Pecandarosa

Ranch activity for profit within the meaning of section 183.

A.

Background

Taxpayers are generally allowed deductions for business-related

expenses and for expenses paid or incurred for the production or

collection of income. See §§ 162, 212. Section 183(a) provides, however,

that “[i]n the case of an activity engaged in by an individual or an

S corporation, if such activity is not engaged in for profit, no deduction

attributable to such activity shall be allowed under” chapter 1 of

20

[*20] subtitle A of the Code except to the extent provided by section

183(b). Section 183(b) allows (1) deductions that would be allowable

without regard to whether the activity was engaged in for profit and (2) a

deduction equal to the amount of deductions that would be allowable

only if such activity were engaged in for profit, but only to the extent

that the gross income from such activity exceeds the deductions

allowable without regard to profit motive. See Kraske v. Commissioner,

T.C. Memo. 2023-128, at *7.

B.

Ascertaining the Activity at Issue

To determine whether a taxpayer had an intent to make a profit,

the activity at issue must first be ascertained. See Treas. Reg.

§ 1.183-1(d)(1). Where a taxpayer is engaged in several undertakings,

each may be a separate activity. See id. Nonetheless, a taxpayer’s

multiple undertakings may be treated as one activity if the

undertakings are sufficiently interconnected.

See Welch v.

Commissioner, T.C. Memo. 2017-229, at *22 (citing Treas. Reg.

§ 1.183-1(d)).

The Commissioner will generally accept the taxpayer’s

characterization of multiple undertakings as either a single activity or

separate activities. See Treas. Reg. § 1.183-1(d)(1). The taxpayer’s

characterization will not be accepted, however, when it appears that it

is artificial and cannot be reasonably supported by the facts and

circumstances of the case. See id. “In ascertaining the activity or

activities of the taxpayer, all the facts and circumstances of the case

must be taken into account.” Id.

Generally, the most significant facts and circumstances to

consider when ascertaining the activity at issue are the degree of

organizational and economic interrelationship of the undertakings, the

business purpose that is (or might be) served by carrying on the

undertakings separately or together, and the similarity of the

undertakings. Id. We also consider (1) whether the undertakings were

conducted at the same place, (2) whether the undertakings were part of

the taxpayer’s efforts to find sources of revenue from their land,

(3) whether the undertakings were formed separately, (4) whether one

undertaking benefited from the other, (5) whether the taxpayer used one

undertaking to advertise the other, (6) the degree to which the

undertakings shared management, (7) the degree to which one

caretaker oversaw the assets of both undertakings, (8) whether the same

accountant was used for the undertakings, and (9) the degree to which

21

[*21] the undertakings shared books and records. See Topping v.

Commissioner, T.C. Memo. 2007-92, 2007 Tax Ct. Memo LEXIS 88,

at *17–18 (citing Mitchell v. Commissioner, T.C. Memo. 2006-145).

We will first briefly discuss an issue that is not in dispute. While

the parties dispute whether the Pecandarosa Ranch activity should be

grouped together with the holding of the land on which Pecandarosa

Ranch is located as a single activity, it is undisputed that the varied

undertakings making up Pecandarosa Ranch’s operations should be

treated together as a single activity. Although some of the undertakings

are not entirely similar to others (e.g., pecan farming and team roping),

the parties’ decision to treat Pecandarosa Ranch as a single activity in

their posttrial briefs effectively ends our inquiry. The Commissioner

ordinarily accepts the taxpayer’s characterization in this regard unless

it is artificial or cannot be reasonably supported, and he has accepted it

here. Separately, we may deem issues not raised in posttrial briefs to

be conceded. See Mendes v. Commissioner, 121 T.C. 308, 312–13 (2003).

Finally, although we need not decide whether it is the best

characterization, the parties’ characterization finds reasonable support

in the record. For example, the undertakings were mostly conducted at

the same place, Pecandarosa Ranch, 29 and were reported by the same

accountant, Ms. Burch, as a single activity. See Hoyle v. Commissioner,

T.C. Memo. 1994-592, 1994 WL 675565, at *5 (holding that “each of [the

taxpayer’s] operational activities were organizationally and

economically interrelated” because “[f]arming, hunting, crabbing, riding

lessons, horse boarding, game-bird breeding, and thoroughbred horse

racing occurred at one location and were all part of [the taxpayer’s]

various efforts to find sources of revenue on his farm” and the “same

accountant maintained tax records for all of the . . . activities”). Mr.

Young also credibly testified that the same equipment was sometimes

used in more than one of the undertakings. We will thus treat the

Youngs’ varied undertakings as a single Pecandarosa Ranch activity.

The parties, however, dispute whether the Pecandarosa Ranch

activity should be grouped together with the holding of the land on

which it occurs for purposes of section 183. The first question we must

confront is whether the general rule concerning the grouping of

undertakings that we just discussed, or the special rule in the last two

sentences of Treasury Regulation § 1.183-1(d)(1) pertaining to

29 Team roping competitions, however, occurred offsite.

22

[*22] farming, 30 applies. See Burrus v. Commissioner, T.C. Memo. 2003285, 2003 WL 22272897, at *6 (“The regulations . . . 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.”). The last two sentences of Treasury Regulation § 1.1831(d)(1) provide that

[w]here 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. Thus, the

farming and holding of the land will be considered a single

activity only if the income derived from farming exceeds

the deductions attributable to the farming activity which

are not directly attributable to the holding of the land (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 improvements to

the land).

In other words, if the special rule applies, “the activity conducted on the

property must be independently profitable, excluding deductions

relating to holding the property (such as rent and depreciation of

improvements to real property), such that the farming activity helps

support the taxpayer’s holding of the land for appreciation.” Estate of

Stuller v. United States, No. 11-3080, 2013 WL 1287402, at *7 (C.D. Ill.

Mar. 27, 2013) (citing Burrus v. Commissioner, 2003 WL 22272897,

at *8). “Determining whether the special rule in the regulations is

applicable requires a finding of the primary purpose for acquiring or

holding the land.” Burrus v. Commissioner, 2003 WL 22272897, at *6;

see Hoyle v. Commissioner, 1994 WL 675565, at *6 (“If the taxpayer’s

primary intent is not to profit from appreciation of the land, then the

general rule of the regulation applies in determining whether there is a

single activity.”).

30 The term “farming” in Treasury Regulation § 1.183-1(d)(1) includes

ranching. See Hoelscher v. Commissioner, T.C. Memo. 2013-236, at *5–6.

23

[*23] The special rule does not apply because the Youngs and

respondent argue that profiting from appreciation in the value of the

land was not the primary purpose for acquiring or holding the land. The

Youngs argue that the special rule is inapplicable because they 31

“purchased Pecandarosa Ranch to harvest pecans.” Respondent argues

that the Youngs 32 “never treated their holding of the . . . land as an

activity from which they expected to profit from appreciation” and that

“the record reflects no evidence that [the Youngs] even treated the

holding of the land as an undertaking.” We conclude that the primary

purpose of acquiring or holding the land was not to profit from

appreciation in its value.

Proceeding under the general rule in Treasury Regulation

§ 1.183-1(d)(1), we agree with respondent that—even assuming

arguendo that landholding was an undertaking—it was a separate

activity from the ranching activity. 33 “Considering all of the facts and

circumstances, we find that there was no economic or organizational

relationship between the land and” the Pecandarosa Ranch activity. See

Price v. Commissioner, T.C. Memo. 2014-253, at *66, aff’d, 633 F. App’x

101 (3d Cir. 2016). The Youngs’ use of the property as a residence and

Ms. Young and Mr. Todd’s acquisition of it for that purpose, discussed

below, weigh against finding a high degree of organizational and

economic integration between the land and the ranching activity even

though the ranching activity primarily took place on the land. See id.

That is especially true here in view of the 2019 division of the land into

the separate residence and chapel tracts and the Youngs’ 2023 attempt

to sell the residence tract separately from the chapel tract. See id.

Furthermore, respondent correctly notes that there is no evidence that

the holding of the land was organized as a business during the years at

31 To the extent the Youngs may be asserting that Mr. Young participated in

the purchase of Pecandarosa Ranch, that assertion is factually incorrect. Mr. Todd,

not Mr. Young, participated in the purchase.

32 To the extent respondent may be asserting that Mr. Young owned or held an

interest in the land during the years at issue, there is nothing in the record to indicate

that is true in either a legal or equitable sense. The record does not disclose whether

Mr. Young was a trustee or beneficiary of the Janet Sue Todd 2004 Living Trust, which

owned the land during the years at issue, at any time.

33 The Youngs are incorrect in categorically stating that “when a taxpayer

purchase[s] property with the primary intent to use it in farming, the land and farming

are treated as one activity.” See Boddy v. Commissioner, T.C. Memo. 1984-156, 1984

Tax Ct. Memo LEXIS 514, at *22 n.6 (“[W]hen land is purchased or held with the intent

to farm, it does not automatically follow that the holding of land for appreciation and

the farming must be considered a single activity.”), aff’d, 756 F.2d 884 (11th Cir. 1985)

(unpublished table decision).

24

[*24] issue; that the Youngs did not place title to the land in a business

name during that time; and that there is no evidence that the Youngs

filed returns or kept books for landholding or that the landholding

activity cross-advertised with the ranching activity. Pecandarosa

Ranch’s undated business plan also contains no discussion of

landholding or land appreciation.

While the Youngs are correct that Ms. Young and Mr. Todd “did

not delay in pecan-harvesting preparations after purchasing the

property” and thus that Price is distinguishable in that respect, the

property’s function as a residence ultimately played too large a role in

the landholding activity to permit the land to be integrated with the

ranching activity. While Pecandarosa Ranch’s undertakings fluctuated

over time, the property’s use as a residence did not. Cf. Betts v.

Commissioner, T.C. Memo. 2010-164, 2010 WL 2990300, at *10 (“[The

taxpayer] may have purchased the land primarily for the purpose of her

first horse activity; however, it was also her primary residence, and she

remained on the property between her two horse activities.”). When

asked at trial about whether she discussed the reasons for purchasing

the property with Mr. Todd, Ms. Young replied in part: “It wasn’t the

first time we looked at something, and then said, oh, this is [an]

emotional decision. This looks good, buy it.” When asked what the

reason was for the property purchase, Ms. Young replied in part: “Well,

it was our home. I mean, we were purchasing a new home. The fact

that it had everything that we wanted, plus the potential for more. It

was the right property for us. It’s a special place.” She added: “[Y]ou

drive onto the property, and people [are] just, like, wow.” 34 We conclude

that the Youngs’ attempt to integrate the ranching activity with the

assumed landholding activity is artificial and not reasonably supported

by the record.

We will not consider integrating only the chapel tract with the

ranching activity absent any guidance from the parties about how the

Treasury Regulation § 1.183-2(b) analysis would proceed, even

assuming such integration is possible, considering that the chapel tract

did not exist as a separate tract until after the years at issue.

“Consequently, we hold that the [land] is not to be considered an asset

of” Pecandarosa Ranch. See Price, T.C. Memo. 2014-253, at *67.

34 After the Youngs’ counsel asked Ms. Young for clarification, Ms. Young

added that “we felt like we had an income stream that was already established. That

grove had been going for a long time, [and] that was just going to supplement the

property.”

25

[*25] C.

Whether the Activity Was Engaged In for Profit

Having decided that the ranching activity is separate from the

holding of the land but is otherwise a single activity comprising the

other undertakings, we must next consider whether the Youngs 35

engaged in the ranching activity during the years at issue with the

intent to make a profit. See Treas. Reg. § 1.183-2(a) (requiring a

determination of whether “the facts and circumstances . . . indicate that

the taxpayer entered into the activity, or continued the activity, with the

objective of making a profit”). An activity is engaged in for profit if the

taxpayer entertained an actual and honest profit objective in engaging

in the activity. 36 See Dreicer v. Commissioner, 78 T.C. 642, 644–45

(1982), aff’d, 702 F.2d 1205 (D.C. Cir. 1983) (unpublished table decision);

see also Treas. Reg. § 1.183-2(a). And, in the Tenth Circuit, the circuit

to which this case is appealable absent a stipulation to the contrary, see

§ 7482(b)(1)(A), profit must be the dominant or primary objective,

Hildebrand v. Commissioner, 28 F.3d 1024 (10th Cir. 1994), aff’g Krause

v. Commissioner, 99 T.C. 132 (1992). The taxpayer’s expectation of

profit must be in good faith but need not be reasonable. See Keanini v.

Commissioner, 94 T.C. 41, 46 (1990); Dreicer, 78 T.C. at 644–45; Allen v.

Commissioner, 72 T.C. 28, 33 (1979). Whether the requisite profit

objective exists is determined by looking at all the surrounding facts and

circumstances. See Keanini, 94 T.C. at 46; Treas. Reg. § 1.183-2(b).

Greater weight is given to objective facts than to a taxpayer’s mere

statement of intent. See Thomas v. Commissioner, 84 T.C. 1244, 1269

(1985), aff’d, 792 F.2d 1256 (4th Cir. 1986); see also Treas. Reg.

§ 1.183-2(a).

The Treasury Regulations provide a nonexhaustive list of nine

factors that should be considered: (1) the manner in which the taxpayer

carries on the activity; (2) the expertise of the taxpayer or the taxpayer’s

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 similar

35 The parties’ posttrial briefs effectively assume without discussion that each

of the Youngs qualifies as a “taxpayer [who] entered into the activity, or continued the

activity,” see Treas. Reg. § 1.183-2(a), and whose intent is thus relevant for purposes

of section 183. We are satisfied with that approach on the record before us.

36 Section 183(d) provides a presumption that an activity with a specified

number of taxable years in which the gross income derived from the activity exceeds

the deductions attributable to the activity is engaged in for profit. While the Youngs

briefly summarize section 183(d) in their Simultaneous Opening Brief, their posttrial

briefs do not argue that section 183(d) applies, and we conclude that it does not.

26

[*26] activities; (6) the taxpayer’s history of income or loss with respect

to the activity; (7) the amount of occasional profits, if any; (8) the

financial status of the taxpayer; and (9) whether elements of personal

pleasure or recreation are involved. Treas. Reg. § 1.183-2(b). “No one

factor is determinative,” and it is not intended that “a

determination . . . be made on the basis that the number of

factors . . . indicating a lack of profit objective exceeds the number of

factors indicating a profit objective, or vice versa.” Id.

“Evidence from years outside the years in issue can be relevant if

it provides context to evaluate the taxpayer’s overall requisite profit

motive.” Den Besten v. Commissioner, T.C. Memo. 2019-154, at *18; cf.

§ 6214(b). Nonetheless, “we look at the profit picture in respect of the

years at issue in terms of prior actual and anticipated future operations

as they appeared at those times; actual profits or losses in those and

subsequent years have probative, although not determinative,

significance in such evaluation.” Smith v. Commissioner, T.C. Memo.

1993-140, 1993 WL 99970, at *9.

1.

Manner in Which Taxpayer Carries On the Activity

The fact that a taxpayer carries on an activity in a businesslike

manner and maintains complete and accurate books and records may

indicate that an activity is engaged in for profit. Treas. Reg.

§ 1.183-2(b)(1). This may be indicated where a taxpayer changes

operating methods, adopts new techniques, or abandons unprofitable

methods in a manner consistent with an intent to improve profitability.

Id. Characteristics of a businesslike operation also include the

preparation of a business plan. See Mathis v. Commissioner, T.C. Memo.

2013-294, at *9 (citing Bronson v. Commissioner, T.C. Memo. 2012-17,

aff’d, 591 F. App’x 625 (9th Cir. 2015)).

The Youngs used a personal bank account for Pecandarosa Ranch

during the years at issue, and Pecandarosa Ranch’s books and records

were deficient during that time. Although Ms. Young oversaw ETI’s

accounting, which used QuickBooks, and had education in business

management (including two accounting courses), the Youngs did not

keep adequate books and records or maintain a general ledger for

Pecandarosa Ranch. While Ms. Young retained copies of invoices,

receipts, and statements, she did so for the purpose of permitting Ms.

Burch to prepare the Youngs’ returns. The Youngs point to spreadsheets

prepared by either Ms. Young or Ms. Burch recording Pecandarosa

Ranch’s income and expenses for the years at issue as evidence of a

27

[*27] businesslike operation, but the record does not establish that the

Youngs made use of them in decision making. The record indicates only

that the spreadsheets facilitated tax return preparation. It is unlikely

that the spreadsheets could have enabled informed decision making

because they did not allocate expenses among different undertakings or

even identify what Pecandarosa Ranch’s undertakings were. The lack

of such analysis is especially troubling in view of several significant

asset purchases (and related section 179 expenses) during the years at

issue. 37 See supra notes 23 and 24.

While the Youngs point out that we have previously found the

existence of a profit motive where a taxpayer “did not maintain a formal

set of books for [a] pecan operation,” Cole v. Commissioner, T.C. Memo.

1992-51, 1992 Tax Ct. Memo LEXIS 56, at *15, the construction of the

arena and Mr. Young’s arrival at the ranch meant that by the years at

issue, the Pecandarosa Ranch activity was no longer solely a pecan

farming operation whose income and expenses might reliably be tracked

through informal methods. There is also no indication in the record that

the Youngs made significant changes or refinements to their method of

pecan farming or performing other undertakings during the years at

issue despite Mr. Young’s relevant experience, nor does the record

37 We do not go as far as respondent, who points, for example, to a $108,000

expense for a trailer in 2014 as a failure of cost control. The fact that the Youngs did

not make a profit in team roping before the purchase of the trailer does not show that

the trailer could not have been used to control losses from the activity, and there is

insufficient evidence in the record to support such a finding. Nor does the fact that the

trailer was fully expensed under section 179 show that it had only one year or less of

useful life. Cf. Hotel Kingkade v. Commissioner, 180 F.2d 310, 312 (10th Cir. 1950)

(“Generally, an expenditure should be treated as of a capital nature if it brings about

the acquisition of an asset having a period of useful life in excess of one year or if it

secures a like advantage to the taxpayer which has a life of more than one year.”), aff’g

12 T.C. 561 (1949). As far as the record discloses, the only reason Pecandarosa Ranch

deducted this expense in full for federal income tax purposes (as opposed to capitalizing

it and depreciating it over a period of years) was the availability of a section 179

election, which respondent has not challenged except to the extent section 183

disallows the section 179 expenses for the years at issue.

Nonetheless, we also disagree with the Youngs’ argument that the trailer

purchase provides evidence of cost control because it allegedly enabled the Youngs to

save on meal and hotel expenses during team roping competitions. There is not a

sufficient foundation in the record for us to find that the trailer purchase resulted in

(or could have been expected to result in) net cost savings. Separately, with regard to

pecan harvesting equipment, we note that there is no foundation in the record for us

to conclude that the Youngs were responsible for providing pecan harvesting

equipment to Mr. Crose (as opposed to Mr. Crose’s providing his own equipment).

28

[*28] establish that Pecandarosa Ranch’s undertakings were conducted

similarly to other profitable activities.

The record does not establish the existence of a business plan

before or during the years at issue. The only business plan in the record

is an undated one Ms. Young created during the examination. Even

assuming arguendo that Ms. Young based the plan on alleged

contemporaneous notes that are not in the record, the plan forecasted a

90% drop in annual costs from $100,000 during 2012–15 to $10,000

during 2016–22. Actual annual expenses for 2015–22, however,

exceeded $100,000 in each case, and we have not heard a credible

explanation about the discrepancy between the alleged business plan

and the facts. A clear implication of the plan was that Pecandarosa

Ranch would deliver a modest cumulative profit by 2020 through a

remarkable degree of cost savings: Projected revenue for 2020 was only

$102,500, so the drop in annual costs from $100,000 to $10,000 was

critical to the plan’s projected profit. The business plan, however,

remained vague on where the cost savings would be found, and the

record does not disclose that a systematic cost-cutting effort ever

occurred. 38 Nor did the business plan break down forecasted expenses

by undertaking, and it offered few details about how Pecandarosa Ranch

would generate the amounts of revenue the plan predicted.

38 The Youngs point to a few isolated examples of cost-cutting they gave in their

testimony. According to the Youngs, at unestablished times they (1) explored so-called

glamping (i.e., glamorous camping) as a revenue stream but discontinued the service

because it involved too much labor for too little profit, (2) offered a horse boarding

service before discontinuing it because their insurance premium payments were too

high, and (3) offered floral arrangements for wedding and corporate event customers

but discontinued that undertaking because it involved too much labor for too little

profit.

As an initial matter, these undertakings do not establish the type of systematic

cost-cutting effort contemplated in the business plan, and their relationship to the

years at issue, if any, is unestablished. Moreover, what we would prefer to see instead

is evidence that the Youngs refined their operating methods to improve profitability

after making a reasonable initial business plan or investigation of profitability, not

evidence that the Youngs repeatedly abandoned entire undertakings or lines of

business after becoming disappointed by time and expense considerations they never

adequately investigated. The need to end the horse boarding undertaking, for

example, was at least partly self-inflicted because, in Ms. Young’s words, “to find

insurance for the [event] venue, they made us stop horse boarding. They said it’s too

dangerous. You can’t have that on the same place where you’re serving alcohol and

having guests.” The interaction between the various undertakings on Pecandarosa

Ranch would have been an appropriate topic of business planning.

29

[*29] Regarding Pecandarosa Ranch’s pecan harvesting operation, Mr.

Todd and Ms. Young did not conduct a feasibility study regarding pecan

harvesting before purchasing the property. Contrary to the Youngs’

suggestion, there is not a sufficient foundation for us to conclude that

the prior owners’ pecan harvesting operation was profitable or that Mr.

Todd and Ms. Young believed it was. The record indicates only that they

spoke with the prior owners and Mr. Crose—none of whom testified—

about how harvesting was conducted and that proper maintenance of

the grove permitted Mr. Crose to be paid a reduced share of the pecan

haul. The undated business plan even describes the pecan harvesting

operation as being in a startup phase and states that Pecandarosa

Ranch’s financial objectives include creating a long-term and profitable

revenue source, statements which run counter to the idea that pecan

harvesting on Pecandarosa Ranch had long been profitable.

Despite our admonition early during trial that we “want it

abundantly clear what time frame we’re talking about” and that “the

most relevant information is . . . going to be for 2013 and 2014,” the

record is confusing and disorienting as to the timing of the Youngs’ plans

for the ranch and how Pecandarosa Ranch’s operations evolved. When

asked at trial whether she “recall[ed] when the roping, horse boarding,

arena, venue rental, and all those operations began,” Ms. Young replied

vaguely and in relevant part that “they all started at different times.”

The lack of clarity on this point underscores the existence of

recordkeeping and business planning deficiencies during the years at

issue, as well as the likely personal, residential, or recreational (rather

than commercial) character of the ranching activity during those

years. 39 We view evidence about the Youngs’ later operation of a

wedding and event venue on the property, among other undertakings,

as largely anachronistic and uninformative about how the Youngs

operated the ranching activity during the years at issue, whose

character centered on pecan farming and team roping. Likewise, despite

the fact that advertising, website, and social media materials are in the

record, we do not ascribe much weight to them because there is virtually

39 Although we need not make any decision on the point, some of the evidence

in the record can be understood to suggest that any profit motive the Youngs may have

had developed after the years at issue. For example, while Ms. Young testified that

the determining factor in discontinuing floral design at the event venue was “what we

had coming in and what we spent,” she added that “that is categorized in QuickBooks.

So I can run that. And I can look at that section of the venue, versus weddings and

rentals.” That is precisely our point: Keeping reasonably detailed books and records

in later years permitted the type of informative financial analysis across multiple lines

of business that the Youngs did not attempt during the years at issue.

30

[*30] no indication that they were part of marketing efforts during the

years at issue, if any such efforts occurred. 40 Finally, many of the steps

the Youngs took to formalize Pecandarosa Ranch’s operations (e.g.,

formation of a limited liability company, opening a separate bank

account, adoption of QuickBooks, and dividing the property into

separate residence and business tracts) occurred after they came under

audit in 2015 and do not bear heavily on their motives during the years

at issue. This factor favors respondent.

2.

Expertise of Taxpayer or Advisers

Preparation for an activity by extensive study of its accepted

business, economic, and scientific practices, or consultation with those

who are expert therein, may indicate that a taxpayer has a profit motive

where the taxpayer carries on the activity in accordance with such

practices. Treas. Reg. § 1.183-2(b)(2). Where a taxpayer has such

preparation or procures such expert advice but does not carry on the

activity in accordance with such practices, a lack of intent to derive

profit may be indicated unless it appears that the taxpayer is attempting

to develop new or superior techniques which may result in profits. Id.

Mr. Young was an experienced ranch manager. He had extensive

experience with team roping, hay baling, pecan harvesting, and working

with cattle and horses. Mr. Young also attended seminars conducted by

the Oklahoma Pecan Growers Association and took lessons from world

champion team ropers. Despite Mr. Young’s relevant experience,

however, there is no clear indication in the record that he applied his

expertise to improve profitability or conform any aspect of Pecandarosa

Ranch to accepted business or technical practices during the years at

issue. The record discloses no clear operational refinements on the

Youngs’ part to improve profitability during that time. Ms. Young also

testified that construction on the arena began before she met Mr. Young.

While we do not credit that uncorroborated testimony on the uncertain

record before us, the Youngs’ own account implies that Pecandarosa

Ranch’s engagement in undertakings making use of the arena (and

40 Although many of these materials are undated or bear dates that may reflect

only the date they were accessed or printed, the record discloses that the Youngs made

posts on Craigslist to sell pecan wood in 2016 and hay in 2017 and that Pecandarosa

Ranch’s Facebook page was created in October 2017. Comments on a printout of the

Horse Motels International website bear 2016 and 2017 dates, and comments on a

ChamberOfCommerce.com printout bear 2018 and 2019 dates.

31

[*31] deduction of expenses related to it) is not entirely attributable to

Mr. Young’s relevant experience. 41

As far as the record discloses, although Ms. Young had a general

business background, she did not have experience with ranch

management before moving to Pecandarosa Ranch. While she and Mr.

Todd spoke with Pecandarosa Ranch’s then owners and Mr. Crose about

the pecan grove’s harvesting before buying the property, there is no

credible evidence that the conversation concerned profitability or

business considerations, or that they conducted any meaningful

investigation into the profitability of their activity. Mr. Todd and Ms.

Young, however, joined the Oklahoma Pecan Growers Association in

2009, subscribed to pecan-related periodicals, and continued employing

Mr. Crose (a professional pecan harvester) until 2014. 42 Nonetheless,

their efforts fell short of preparation, extensive study, or expert

consultation because they did not conduct an investigation regarding

the profitability of pecan harvesting before purchasing the property for

use as their residence. This factor is neutral.

3.

Time and Effort Expended by Taxpayer in Carrying

On the Activity

The fact that a taxpayer devotes much of her personal time and

effort to carrying on an activity, particularly if the activity does not have

substantial personal or recreational aspects, may indicate an intention

to derive a profit. Treas. Reg. § 1.183-2(b)(3). A taxpayer’s withdrawal

from another occupation to devote most of his or her energies to the

activity may also be evidence that the activity is engaged in for profit.

Id. The fact that a 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 the

activity. Id.

41 Ms. Young testified that “my purpose [in constructing the arena] was to start

a business at the ranch that involves horses, with the right people helping me” and

that “I had met a lady . . . very shortly before that. And we were going to raise horses,

train them; she was a trainer.” We do not credit this testimony because it is

uncorroborated, and the alleged horse trainer did not testify and was not identified.

Even assuming arguendo that there was such a plan, there is no credible evidence that

it was a businesslike plan or that Ms. Young adequately investigated the profitability

considerations.

42 A copy of an article by the Texas A&M AgriLife Extension Service titled

“Improved Pecans” is in the record as Exhibit 135-J, but there is no foundation for us

to conclude when (if ever) the Youngs or Mr. Todd reviewed it.

32

[*32] Respondent states that he “does not dispute that Mr. Young spent

substantial time in the Pecandarosa Ranch activity, having started full

time at Pecandarosa Ranch beginning in July 2013.” We agree,

although we also agree with respondent that there were substantial

personal and recreational elements to the time Mr. Young spent on the

Pecandarosa Ranch activity. See infra OPINION Part II.C.9. Ms.

Young worked only 15 hours per week at ETI during the years at issue,

although it is unclear from the record how much of her remaining time

she devoted to Pecandarosa Ranch. The Youngs, however, were

physically active on Pecandarosa Ranch, provided manual labor for it,

and sometimes worked after dark. Mr. Crose and other qualified

laborers also assisted the Youngs (or Mr. Todd, as applicable) in carrying

out the activity. Mr. Young also resigned from his job at Hughes Cattle

Co. before he started to work at Pecandarosa Ranch. On balance, this

factor favors the Youngs.

4.

Expectation That Assets Used in Activity May

Appreciate in Value

Treasury Regulation § 1.183-2(b)(4) provides:

The term profit encompasses appreciation in the value of

assets, such as land, used in the activity. Thus, the

taxpayer may intend to derive a profit from the operation

of the activity, and may also intend that, even if no profit

from current operations is derived, an overall profit will

result when appreciation in the value of land used in the

activity is realized since income from the activity together

with the appreciation of land will exceed expenses of

operation. See, however, paragraph (d) of § 1.183-1 for

definition of an activity in this connection.

A profit objective may be inferred from expected appreciation of an

activity’s assets only where the appreciation exceeds operating expenses

and would be sufficient to recoup the accumulated losses of prior years.

See Foster v. Commissioner, T.C. Memo. 2012-207, 2012 WL 3000350,

at *7 (first citing Golanty v. Commissioner, 72 T.C. 411, 427–28 (1979),

aff’d, 647 F.2d 170 (9th Cir. 1981) (unpublished table decision); and then

citing Hillman v. Commissioner, T.C. Memo. 1999-255). A vague and

unauthenticated notion that assets are appreciating does not constitute

a bona fide expectation that the appreciation will offset past and future

losses. See La Musga v. Commissioner, T.C. Memo. 1982-742, 1982 Tax

Ct. Memo LEXIS 4, at *15–16.

33

[*33] We have already addressed Treasury Regulation § 1.183-1(d) and

ruled that ranching and landholding are separate activities. The

parties’ arguments on this factor, however, largely concern appreciation

in Pecandarosa Ranch’s property value, even though landholding is

separate from the Pecandarosa Ranch activity. Nonetheless, the Youngs

have asked us specifically to consider “the investments that [the Youngs]

made to develop new structures on the property for use in the business”

as a potential source of appreciation. The record, however, leaves us

with no clear means of making that evaluation. As an initial matter,

some of the structures, including the wedding and event venue, were

constructed after the years at issue. Cf. supra note 15 (noting other

improvements after the years at issue). Those structures are not

probative of whether the Youngs had an expectation during the years at

issue that business-use assets would appreciate enough for them to

recoup their losses.

In any event, the Youngs have not explained which structures

they consider to be for business use. The 2013 appraisal, for example,

lists 12 improvements, and categorizing the purpose of all of them is not

self-explanatory given that Pecandarosa Ranch also served as the

Youngs’ residence. The Youngs have not provided us with a list of

alleged business-use structures in which they purportedly had an

expectation of appreciation, let alone citations of the record documenting

those structures’ change in value over time, establishing an expectation

that specific structures would appreciate, or establishing the operating

expenses attributable to those structures. That type of explanation is

crucial because we must evaluate not only whether some appreciation

potential existed but also whether recoupment of past losses would be

possible through appreciation of business-use structures.

The increase in Pecandarosa Ranch’s property value over time,

which is documented in appraisals in the record, is not even

approximate proof of how much business-use structures could be

expected to appreciate because (1) some of the increase is due to costly

construction after the years at issue, not asset appreciation, (2) some of

the increase is attributable to the land, not structures, cf. Golanty, 72

T.C. at 429–30, and (3) there were residential structures, not just

business-use structures, and it is sometimes difficult to discern which

category a particular structure falls into. 43 Likewise, any suggestion

43 We note the possibility (unexplored by the parties) of applying a business-use

percentage to a given structure in lieu of categorizing it as entirely for either business

34

[*34] that the $750,000 difference between the ranch’s $2 million

purchase price in 2008 and its $2,750,000 appraised value in 2013 is due

to appreciation should be rejected: Construction began on the arena in

the interim, which the 2013 appraisal considered (valuing the arena at

$399,500), and an allocation of the 2008 purchase price between the land

and then-existing structures would also be needed to determine how

much of the rest of the difference is due to land appreciation or

appreciation in residential structures. Some explanation of how to

account for all of the moving parts we have discussed would be necessary

before we could consider finding that, as of the years at issue,

business-use structures could be expected to appreciate sufficiently to

recoup past and future losses.

The Youngs cite some of Mr. Young’s testimony for the proposition

that they had an expectation that trained horses for team roping would

appreciate. The cited testimony, however, does not clearly establish

whether the Youngs had a contemporaneous expectation of profit even

if trained horses generally have some potential to appreciate. The

record does, however, establish that horse sales were a very minor part

of Pecandarosa Ranch’s operations. Three horses were sold in 2014 for

a total of $7,000, and the 2016 profit and loss statement shows another

$2,457 of income from “Horse Sales.” Mr. Young’s testimony that he has

sold team roping horses on occasion was vague and does not support an

expectation of significant asset appreciation. Although the Youngs were

members of the American Quarter Horse Association, the American

Paint Horse Association, and the Pinto Association, the record does not

establish that they showed any horses. Cf. Ellis v. Commissioner, T.C.

Memo. 1984-50, 1984 Tax Ct. Memo LEXIS 619, at *38–39 (“It is clear

that when a quarter horse is successfully shown, the value of that horse

increases.”). Finally, the undated business plan does not discuss asset

appreciation, let alone appreciation of horses, as a source of profit, and

the Youngs have not explained how much of their operating expenses

was attributable to horses. We note that the parties have stipulated

that the Youngs did not breed horses and that their horses were gelded,

so the Youngs are arguing only that unidentified team roping horses

might have increased in value, not (for example) that they might have

commanded stud fees. Pecandarosa Ranch had no prospect of recouping

its substantial losses through horse sales even if its horses appreciated

or residential use. This consideration further underscores the need for detailed

analysis before drawing a conclusion that business-use structures could be expected to

appreciate sufficiently to recoup past and future losses.

35

[*35] somewhat, which is speculative on the record before us. This

factor favors respondent.

5.

Success of Taxpayer in Carrying On Similar or

Dissimilar Activities

The fact that a taxpayer has engaged in similar activities in the

past and converted them from unprofitable to profitable enterprises may

indicate that the taxpayer is engaged in the present activity for profit,

even though the activity is presently unprofitable. Treas. Reg. § 1.1832(b)(5). In Wondries v. Commissioner, T.C. Memo. 2023-5, at *11, we

ruled that a taxpayer’s success in turning unprofitable car dealerships

into profitable ones indicated that the taxpayer and his spouse were

engaged in a dissimilar ranch business for profit.

We already discussed Mr. Young’s work experience supra

OPINION Part II.C.2. There is no evidence that Mr. Young, who worked

as an employee for various ranches, converted unprofitable enterprises

to profitable ones. Neither is there any evidence that Ms. Young

engaged in similar activities in any capacity. While we acknowledge

that it was challenging for Ms. Young to assume a leadership role at ETI

after Mr. Todd’s death, ETI never reported any losses as far as the record

discloses. Ms. Young founded her own stockbrokerage business, which

she eventually sold, but the record does not disclose how profitable it

was. This factor is neutral.

6.

Taxpayer’s History of Income or Losses with Respect

to the Activity

A series of losses in the initial or startup stage of an activity may

not be an indication that the activity is not engaged in for profit. Treas.

Reg. § 1.183-2(b)(6). Where losses continue to be sustained beyond the

period which customarily would be necessary to bring the operation to

profitable status, such continued losses, if not explainable as due to

customary business risks or reverses, may be indicative that the activity

is not engaged in for profit. Id. If losses are sustained because of

unforeseen circumstances which are beyond the control of the taxpayer,

such as drought, disease, fire, theft, weather damages, other involuntary

conversions, or depressed market conditions, such losses would not be

an indication that the activity is not engaged in for profit. Id. A series

of years in which net income was realized would be strong evidence that

the activity is engaged in for profit. “If an activity’s cumulative losses

are of such magnitude that an overall profit on the entire operation,

36

[*36] including recoupment of past losses, could not possibly be

achieved, the activity’s history of losses is compelling evidence of a lack

of intention to make a profit.” Carmody v. Commissioner, T.C. Memo.

2016-225, at *25.

Respondent argues that the 2008–22 income tax returns show a

cumulative net loss of $2,953,041. We agree that they do. The Youngs

argue that they had only a $616,560 cumulative net loss over the same

period once interest, tax, and depreciation expenses are backed out. The

Youngs have not explained the reason for their adjustments to the

reported loss history, and there is inadequate foundation in the record

for us to adopt them. 44 Similar to operating expenses, financial costs

incurred in connection with an activity such as interest, taxes, and

depreciation may be properly viewed as bearing on taxpayers’ intent to

make a profit, at least absent a convincing explanation about why they

do not.

In any event, both respondent’s calculation and the Youngs’

calculation support the same conclusion. Cf. Himmel v. Commissioner,

T.C. Memo. 2025-35, at *21–22. Each shows a large cumulative net loss,

as well as an unbroken or nearly unbroken history of annual losses.

(The Youngs show a $68,964 profit in 2021 after adjustments, whereas

their unadjusted 2021 Schedule C shows a $271,648 loss.) Given the

lengthy loss history—the only dispute as to which is its precise

magnitude—we proceed to discuss the parties’ arguments about the

reasons for it.

The Youngs argue that an unfortunate series of events prevented

Pecandarosa Ranch from turning an early profit, including Mr. Todd’s

cancer diagnosis in 2009 (resulting in increased labor costs), severe

drought conditions in Oklahoma during the years at issue (affecting

harvest conditions and pecan prices), and Mr. Crose’s decision not to

harvest pecans in 2014 (resulting in no revenue from pecan farming

44 We informed the Youngs at trial that their proposed Exhibit 146-P, which

we excluded from evidence and which a lay witness (the Youngs’ accountant Luann

Rinowski) prepared and described as a “normalized [earnings before interest, taxes,

depreciation, and amortization] calculation,” was “in the nature of expert testimony[,]

and there are rules that should have been followed to designate this witness as an

expert witness to testify regarding calculations designed to convince the Court that

there was a profitability potential out of this business.” See generally Rule 143(g).

While we are concerned that the Youngs have attempted an end run around this ruling

on brief, it is sufficient for us to state that without admissible testimony explaining it,

the Youngs’ adjusted loss history lacks an adequate foundation for us to connect it to

the Youngs’ intent.

37

[*37] during 2014). We acknowledge these challenges, but the losses

continued long after the years at issue and long after the activity was

arguably in a startup phase. 45 To name some of the largest ones, the

2020 Schedule C reflects a $871,580 net loss, and the Youngs’ own

adjusted loss history shows a $116,463 loss in 2019. The record does not

clearly indicate why the losses continued, especially in view of the

undated business plan’s forecast that expenses would decrease

substantially after the years at issue. We are mindful, however, that

there are credible partial 46 explanations for some of the early losses and

that “farming is not the most profitable business in which one can be

engaged.” 47 Faulconer v. Commissioner, 748 F.2d 890, 900 n.12 (4th Cir.

1984), rev’g and remanding T.C. Memo. 1983-165. On balance and

under the circumstances here, though, this factor favors respondent.

7.

Amount of Occasional Profits, if Any

The amount of profits in relation to the amount of losses incurred,

and in relation to the amount of a taxpayer’s investment and the value

of assets used in the activity, may demonstrate the taxpayer’s intent.

Treas. Reg. § 1.183-2(b)(7). An occasional small profit from an activity

45 It would be inconsistent for us to view specific undertakings, such as the

event venue, as being in a startup phase long after the years at issue because the

parties have litigated this case on the basis that the Pecandarosa Ranch activity was

a single unified activity. Litigating this case as if each undertaking were a separate

activity would have been a substantially different analytical undertaking from the

path chosen by the parties.

46 Pecan harvesting was not the only undertaking during the years at issue, so

Mr. Crose’s absence does not explain losses related to other undertakings. Separately,

the labor expense for 2010 was less than the loss shown for 2010 in the Youngs’

adjusted loss table, so increased labor expenses do not entirely explain that year’s loss

although the 2011 labor expense was greater than the 2011 loss shown in the Youngs’

table.

We are also mindful that some of the Pecandarosa Ranch losses are

attributable to section 179 expenses for asset purchases, see supra notes 23 and 24,

and that hypothetical sales of those assets at a later date may have generated section

1245 recapture income, see § 1245(a)(1) and (2) (providing that deductions allowable

under section 179 are included in the recomputed basis of section 1245 property, which

in turn generally increases the amount of ordinary income realized on the disposition

of section 1245 property and recaptures the section 179 expense); see also § 179(d)(1)(B)

(requiring section 179 property to be “section 1245 property (as defined in section

1245(a)(3))” unless it is qualified real property within the meaning of section 179(e)).

Nonetheless, the Youngs have not pressed this point, except perhaps by implication

from the depreciation addback they proposed. Moreover, the fact that some of their

losses are attributable to expenses other than section 179 expenses negates the

possibility that—even absent significant depreciation of those assets over time—their

losses could be fully recouped through section 1245 recapture income.

47

38

[*38] generating large losses, or from an activity in which the taxpayer

has made a large investment, would not generally be determinative that

the activity is engaged in for profit. Id. However, substantial profit,

though only occasional, would generally be indicative that an activity is

engaged in for profit, where the investment or losses are comparatively

small. Id. Moreover, an opportunity to earn a substantial ultimate

profit in a highly speculative venture is ordinarily sufficient to indicate

that the activity is engaged in for profit even though losses or only

occasional small profits are generated. Id.

The Youngs never reported a profit from the Pecandarosa Ranch

activity on any of their 2008–22 income tax returns. Even the Youngs’

adjusted loss history shows only a single $68,964 annual profit, in 2021.

This is merely an occasional small profit from an activity generating

large losses and in which large investments have been made. The record

does not indicate that the Pecandarosa Ranch activity was a highly

speculative venture overall despite the potential for winning team

roping prizes of unestablished amounts. Cf. Gallegos, T.C. Memo.

2021-25, at *23. This factor favors respondent.

8.

Financial Status of Taxpayer

The fact that a taxpayer does not have substantial income or

capital from sources other than the activity may indicate that an activity

is engaged in for profit. Treas. Reg. § 1.183-2(b)(8). 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. Id.

Ms. Young had substantial income from ETI. 48 She (and, as

applicable, Mr. Todd or Mr. Young) reported $15,985,429 of nonpassive

passthrough income from ETI, as well as $2,942,958 of wages, for 2008–

22. The reported losses from Pecandarosa Ranch for those years totaled

$2,953,041, so the ETI income was substantial in relation to the reported

48 Also of note, ETI and the ranching activity were economically

interdependent after the years at issue because ETI was a guarantor of the 2020

Regent Bank loan that Pecandarosa Ranch, LLC, used to construct the event center

and undertake related projects. We do not rely heavily on that consideration, however,

because it occurred long after the years at issue.

39

[*39] losses, and the reported losses offset the ETI income. 49 This factor

favors respondent.

9.

Elements of Personal Pleasure or Recreation

The presence of personal motives in carrying on an activity may

indicate that the activity is not engaged in for profit, especially where

there are recreational or personal elements involved. Treas. Reg.

§ 1.183-2(b)(9). On the other hand, a profit motivation may be indicated

where an activity lacks any appeal other than profit. Id. However, an

activity will not be treated as not engaged in for profit merely because

the taxpayer has purposes or motivations other than solely to make a

profit. Id. The fact that the taxpayer derives personal pleasure from

engaging in the activity is not sufficient to cause the activity to be

classified as not engaged in for profit if the activity is in fact engaged in

for profit as evidenced by other factors. Id.

Mr. Young enjoyed farming and being in the country although he

also credibly testified that he often worked past dark and that his work

involved manual labor. If these were the only relevant facts, we might

regard this factor as neutral. Cf. Jackson v. Commissioner, 59 T.C. 312,

317 (1972) (“[S]uffering has never been made a prerequisite to

deductibility.”).

Nonetheless, Pecandarosa Ranch made major investments

related to team roping during or just before the years at issue, including

purchasing a $108,000 trailer, cf. supra note 37, and constructing an

arena. Mr. Young participated in team roping long before he married

Ms. Young—without any indication in the record that he treated it as a

business or made profits from it—and continued to do so at Pecandarosa

Ranch’s expense. Mr. Young enjoyed team roping and participated in

the United States Team Roping Championships, the World Series of

Team Roping, and Allstar Team Roping. Team roping is distinguishable

from farming in that it may constitute a sport or hobby even though it

involves hard work. Cf. Gallegos, T.C. Memo. 2021-25, at *3–5. There

was a significant recreational or personal element to the team roping

undertaking, and this recreational or personal element was substantial

to the Pecandarosa Ranch activity overall despite the existence of other,

49 This statement is still true if we substitute the $616,560 adjusted cumulative

net loss figure preferred by the Youngs for the $2,953,041 reported loss figure. We

emphatically reject the Youngs’ argument that because their tax savings were not even

greater, “[t]his shows that [the Youngs] were not and never have been motivated to

incur large losses to escape paying their tax liabilities.”

40

[*40] more laborious undertakings. Cf. id. at *24–25. This factor favors

respondent.

10.

Conclusion

Of the nine factors listed in Treasury Regulation § 1.183-2(b), six

favor respondent, one favors the Youngs, and two are neutral. After

weighing the factors and the facts and circumstances of this case, we

hold that the Youngs did not have an actual and honest objective to

operate Pecandarosa Ranch for a profit during the years at issue. The

record is imprecise in several respects, but it leaves us with the firm

impression that the Youngs did not have any profit motive for the

ranching activity as of the years at issue. It is impossible to

chronologically evaluate much of the testimony we heard and some of

the documents in evidence. Lacking exact dates, we give little weight to

evidence about lines of business that do not appear on the stipulated

profit and loss statements until after the years at issue. In some cases

there is no clear evidence at all that the Youngs planned them during

the years at issue, let alone engaged in them; in others, the undated

business plan created during the examination would provide the only

scant evidence, but we do not credit Ms. Young’s testimony that the plan

was based on contemporaneous notes that do not appear in the record.

Accordingly, we sustain respondent’s disallowance of the Youngs’

claimed loss deductions attributable to Pecandarosa Ranch for the years

at issue on the ground that they did not engage in the ranching activity

for profit within the meaning of section 183 during the years at issue.

III.

Accuracy-Related Penalties

The last issue is whether the Youngs are liable for section 6662(a)

accuracy-related penalties for the years at issue. We hold that they are.

Respondent determined 20% accuracy-related penalties on the

grounds that the underpayments are attributable to one or more of the

following: negligence or disregard of rules or regulations, see

§ 6662(b)(1), (c); substantial understatements of income tax, see

§ 6662(b)(2), (d); substantial valuation misstatements, see § 6662(b)(3),

(e); or disallowance of claimed tax benefits by reason of a transaction

lacking economic substance, see § 6662(b)(6). The Commissioner bears

the burden of production with respect to accuracy-related penalties. See

§ 7491(c). To satisfy that burden, the Commissioner must offer

sufficient evidence to indicate that it is appropriate to impose the

penalty or addition to tax. See Higbee v. Commissioner, 116 T.C. 438,

41

[*41] 446 (2001). The Commissioner’s burden of production also

includes showing compliance with section 6751(b). See Graev v.

Commissioner, 149 T.C. 485, 492–93 (2017), supplementing and

overruling in part 147 T.C. 460 (2016). Once the Commissioner comes

forward with sufficient evidence to show that it is appropriate to impose

a particular penalty, the taxpayer has the burden of proof to show that

the Commissioner’s penalty determination is incorrect, including the

burden of proving that penalties are inappropriate because of

reasonable cause. See Higbee, 116 T.C. at 446–47.

Respondent’s Simultaneous Opening Brief addresses neither the

substantial valuation misstatement ground nor the economic substance

transaction ground for the penalties, so we deem those grounds to be

conceded and do not discuss them further. See Mendes, 121 T.C.

at 312–13. Section 6662(a) imposes a 20% penalty on the portion of an

underpayment of tax attributable to any substantial understatement of

income tax, see § 6662(b)(2), or negligence or disregard of rules or

regulations, see § 6662(b)(1). An understatement is substantial if it

exceeds the greater of (1) 10% of the tax required to be shown on the

return for the taxable year or (2) $5,000. See § 6662(d)(1)(A). Negligence

includes any failure to make a reasonable attempt to comply with the

provisions of the Code, and disregard includes any careless, reckless, or

intentional disregard. See § 6662(c). The understatements for the years

at issue are substantial as an arithmetic matter. It is therefore

unnecessary for us to determine whether the underpayments are

attributable to negligence or disregard of rules or regulations. See

Treas. Reg. § 1.6662-2(c) (providing that only one accuracy-related

penalty for a given year may be applied with respect to any given portion

of an underpayment, even if that portion is subject to the penalty on

more than one ground).

Section 6751(b) provides that, with certain exceptions not

applicable here, the “initial determination” of a penalty or addition to

tax must be “personally approved (in writing) by the immediate

supervisor of the individual making such determination.” We have

interpreted section 6751(b) to require supervisory approval before the

Internal Revenue Service (IRS) Examination Division formally notifies

the taxpayer in writing that it has completed its work and made an

unequivocal decision to assert penalties. See Belair Woods, LLC v.

Commissioner, 154 T.C. 1, 15 (2020). In a nonprecedential opinion, the

Tenth Circuit set a lower bar for section 6751(b) compliance, holding the

requirement met so long as written supervisory approval is obtained by

the date the IRS issues a Notice of Deficiency. See Minemyer v.

42

[*42] Commissioner, Nos. 21-9006, et al., 2023 WL 314832, at *5 (10th

Cir. Jan. 19, 2023), aff’g in part, rev’g in part and remanding T.C. Memo.

2020-99. We need not decide, however, which standard applies here.

RA Hagelberg’s immediate supervisor provided the requisite approval

on December 30, 2016, over ten months before the issuance of the Notice

of Deficiency on November 13, 2017. There is also no indication in the

record—and the Youngs have not argued—that the Examination

Division notified the Youngs in writing of a decision to assert penalties

before RA Hagelberg’s immediate supervisor approved the assertion of

penalties. Respondent has thus met his burden of production with

respect to the accuracy-related penalties.

The Youngs, however, assert that they had reasonable cause for

their position and acted in good faith. Section 6664(c)(1) provides that

the penalty under section 6662(a) shall not apply to any portion of an

underpayment if it is shown that there was reasonable cause for the

taxpayer’s position and the taxpayer acted in good faith. See Higbee,

116 T.C. at 448. This determination is made on a case-by-case basis,

taking into account all of the pertinent facts and circumstances. See

Treas. Reg. § 1.6664-4(b)(1).

Generally, the most important factor in determining whether the

section 6664(c)(1) reasonable cause and good faith exception applies is

the extent of the taxpayer’s effort to assess the proper tax liability. See

Treas. Reg. § 1.6664-4(b)(1). Reliance on professional advice may

constitute reasonable cause and good faith, but only if considering all

the circumstances such reliance was reasonable. See id. paras. (b)(1),

(c)(1); see also Freytag v. Commissioner, 89 T.C. 849, 888 (1987), aff’d,

904 F.2d 1011 (5th Cir. 1990), aff’d, 501 U.S. 868 (1991). Advice is “any

communication . . . setting forth the analysis or conclusion of a person,

other than the taxpayer, provided to (or for the benefit of) the taxpayer

and on which the taxpayer relies, directly or indirectly, with respect to

the imposition of the section 6662 accuracy-related penalty.” Treas. Reg.

§ 1.6664-4(c)(2). Advice does not have to be in any particular form. Id.

Reasonable cause exists if a taxpayer relies in good faith on the advice

of a qualified tax adviser where the following three elements are

present: (1) the adviser was a competent professional who had sufficient

expertise to justify the reliance; (2) the taxpayer provided necessary and

accurate information to the adviser; and (3) the taxpayer actually relied

in good faith on the adviser’s judgment. See Neonatology Assocs., P.A.

v. Commissioner, 115 T.C. 43, 99 (2000), aff’d, 299 F.3d 221 (3d Cir.

2002).

43

[*43] There is no credible evidence in the record that the Youngs took

any substantial steps to ascertain their proper tax liabilities or the

application of section 183. The Youngs argue that they relied on Ms.

Burch to prepare their tax returns for the years at issue. Mere return

preparation, however, does not constitute advice. See Neonatology

Assocs., P.A., 115 T.C. at 100 (“The mere fact that a certified public

accountant has prepared a tax return does not mean that he or she has

opined on any or all of the items reported therein.”); Flume v.

Commissioner, T.C. Memo. 2020-80, at *37 (“Simply employing a tax

return preparer for the years at issue does not permit [the taxpayers] to

avoid accuracy-related penalties.”). Respondent correctly notes that

“[t]he record only reflects that Ms. Burch advised Ms. Young to keep

books for Pecandarosa Ranch on QuickBooks, something Ms. Young

already knew and had been doing for ETI for years in overseeing its

accounting operations.” Even with respect to that advice, Ms. Young

implemented it only in 2015, after the years at issue. Ms. Burch did not

testify, and the record contains no evidence of any other advice provided

by her.

The Youngs also argue that “all examined expenses were

substantiated during the IRS audit.” Nonetheless, the Youngs’ proper

tax liability is determined not only through substantiating Pecandarosa

Ranch’s expenses but also by determining whether Pecandarosa Ranch

was engaged in for profit within the meaning of section 183. The Youngs

did not make a reasonable effort to ascertain how that requirement

applied for the years at issue.

We have considered all of the parties’ arguments and, to the

extent they are not discussed herein, find them to be irrelevant, moot,

or without merit.

To reflect the foregoing,

Decision will be entered for respondent.