                         T.C. Memo. 2005-252



                       UNITED STATES TAX COURT



  JACOB R. RAMSBURG, JR. AND NORMA J. RAMSBURG, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 6140-03.                  Filed October 31, 2005.



     David Samuel De Jong and Frank W. Dunham III, for

petitioners.

     Roger W. Bracken and Ann Welhaf, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


     CHIECHI, Judge:    Respondent determined deficiencies of

$69,505, $18,717, and $120,737 in petitioners’ Federal income tax

(tax) for 1996, 1997, and 1998, respectively.
                               - 2 -

     The only issue remaining for decision1 is whether section

469(g)(1)2 permits petitioners to treat for 1998 certain losses

from a passive activity (passive losses) as losses not from a

passive activity (nonpassive losses).3   We hold that it does not.

                         FINDINGS OF FACT

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

     At the time petitioners filed the petition in this case,

they resided in Thurmont, Maryland.

     Petitioner Jacob R. Ramsburg, Jr. (Mr. Ramsburg) and Carroll

K. Stottlemeyer (Mr. Stottlemeyer) have been friends since they

were children.   In 1972, Mr. Ramsburg hired Mr. Stottlemeyer to

work for Frederick Underwriters, Inc. (Frederick Underwriters), a

corporation 94 percent to 96 percent of whose stock Mr. Ramsburg

owned at all relevant times.   In 2004, Mr. Stottlemeyer retired.



     1
      Petitioners and respondent agree that the Court’s resolu-
tion of the issue remaining for decision will resolve whether
petitioners are entitled to a net operating loss (NOL) deduction
for each of the years 1996 and 1997 that is attributable to an
alleged NOL carryback from 1998. There also are other questions
relating to certain determinations in the notice of deficiency
(notice) that are computational in that their resolution flows
automatically from our resolution of the issue that we address
herein.
     2
      All section references are to the Internal Revenue Code in
effect for the years at issue. All Rule references are to the
Tax Court Rules of Practice and Procedure.
     3
      As discussed below, petitioners had both ordinary passive
losses and sec. 1231 passive losses. For convenience, we shall
sometimes refer collectively to petitioners’ ordinary passive
losses and sec. 1231 passive losses as petitioners’ passive
losses.
                              - 3 -

     In 1980, Mr. Ramsburg suggested to Mr. Stottlemeyer that

they form a partnership that would engage in the horse business.

Mr. Ramsburg made that suggestion in order to, inter alia, help

Mr. Stottlemeyer who was having family problems.   On September

15, 1980, Mr. Ramsburg and Mr. Stottlemeyer formed a general

partnership known as Kildare Timmy (Kildare Timmy).   The partner-

ship agreement that they signed with respect to Kildare Timmy

(Kildare Timmy partnership agreement) provided:

                      PARTNERSHIP AGREEMENT

     This Partnership Agreement is dated September 15, 1980,
     between Carroll K. Stottlemeyer (Scotty) and J. R.
     Ramsburg Jr. (JR) hereafter known as partners.

     Scotty is actively involved in the business of training
     and racing standard bred horses. JR wants to invest
     some money and become involved in this business.
     Accordingly, Scotty and JR have agreed to the following
     terms of their partnership:

     The partnership name will be called KILDARE TIMMY.

     Scotty and JR will each own 50% of the assets, liabili-
     ties and capital interest of the partnership.

     Scotty and JR will each receive 50% of the profits of
     the partnership.

     Losses incurred by the partnership will be allocated to
     the partners based upon cash contributed to the part-
     nership. The partner that contributes the cash to the
     partnership or guarantees partnership debt so that the
     partnership can incur the losses will receive the
     benefit of the losses.

     Scotty will keep the checkbook and will handle the day-
     to-day management of the partnership.

     The partnership address will be 1201 East Street,
     Frederick, Maryland.
                                - 4 -

     When Kildare Timmy was formed, its business activities,

except for some minor horse breeding activities, were limited to

racing horses.    At all relevant times, Kildare Timmy hired

trainers, including Dane Snyder and Dave Dempster (Kildare

Timmy’s trainers), to maintain, care for, and train its race-

horses at stables located in Washington, Pennsylvania.

     In 1986, Kildare Timmy became more involved in horse breed-

ing activities.    At all relevant times, Kildare Timmy’s

broodmares were maintained and cared for by Mr. Ramsburg at

stables located on his farm in Thurmont, Maryland.

     At all relevant times until at least 1995, Mr. Stottlemeyer

generally performed day-to-day management services for Kildare

Timmy (Mr. Stottlemeyer’s management services).    Those services

included attending horse sales, selecting horses to buy, and

dealing with Kildare Timmy’s trainers.    In return for Mr.

Stottlemeyer’s management services, Mr. Stottlemeyer did not

receive any salary from Kildare Timmy or increases in his Kildare

Timmy capital account.

     During at least 1987 through 1996, Mr. Stottlemeyer made

cash capital contributions to Kildare Timmy totaling nearly

$300,000 (i.e., approximately $282,187).    He made most of those

contributions from the salary that he received as an employee of
                                - 5 -

Frederick Underwriters.4   From at least 1986 through 1997, Mr.

Ramsburg made cash capital contributions to Kildare Timmy total-

ing approximately $1,336,459.   The total amount of Mr. Ramsburg’s

cash capital contributions included $283,500 that, as found

below, he borrowed from Frederick Underwriters and contributed to

Kildare Timmy.   On January 1, 1998, the date on which Kildare

Timmy distributed all of its assets to Mr. Ramsburg (discussed

below), Mr. Stottlemeyer did not own a 50-percent capital inter-

est in Kildare Timmy.

     On November 1, 1992, Frederick Underwriters made two loans

in the amounts of $140,000 and $143,500, respectively, to Mr.

Ramsburg in his individual capacity and not in his capacity as a

general partner of Kildare Timmy (collectively, Frederick Under-

writers’ 1992 loans to Mr. Ramsburg).   On that date, Mr. Ramsburg

signed in his individual capacity and not in his capacity as a

general partner of Kildare Timmy two promissory notes payable to

Frederick Underwriters in the amounts of $140,000 and $143,500,

respectively, that evidenced such respective loans.   (We shall

refer collectively to that $140,000 promissory note and that

$143,500 promissory note as Mr. Ramsburg’s 1992 notes.)   Each of

Mr. Ramsburg’s 1992 notes provided for interest at the annual


     4
      In order to make cash capital contributions to Kildare
Timmy, Mr. Stottlemeyer directed Frederick Underwriters to
transfer on his behalf certain amounts of his salary to Kildare
Timmy.
                              - 6 -

rate of 3.61 percent to be paid annually commencing on December

31, 1992, and for the entire principal balance and any accrued

and unpaid interest to be paid on October 30, 1995.   Mr. Ramsburg

transferred the proceeds of Frederick Underwriters’ 1992 loans to

Mr. Ramsburg to Kildare Timmy as capital contributions.5


     5
      The parties stipulated that the “treatment of the Frederick
[Underwriters’ 1992] loans [to Mr. Ramsburg] on the partnership’s
balance sheet was unchanged until the partnership terminated in
1998" and that “At the end of 1997, the Frederick [Underwriters’
1992] loans [to Mr. Ramsburg] remained unpaid.” Those stipula-
tions are contrary to certain checklists (discussed below) used
by Keller Bruner and Company (Keller Bruner), the certified
public accounting firm employed by Kildare Timmy and petitioners
in preparing the tax returns for Kildare Timmy and petitioners.
(We shall hereinafter refer to the checklists used by Keller
Bruner as the Keller Bruner checklists.) As found below, Mr.
Ramsburg’s 1992 notes and Frederick Underwriters’ 1992 loans to
Mr. Ramsburg were not outstanding, according to the Keller Bruner
checklists, at the end of 1997 or on the next day (i.e., Jan. 1,
1998) on which Kildare Timmy distributed all of its assets to Mr.
Ramsburg. According to the Keller Bruner checklists, in 1995
Frederick Underwriters’ 1992 loans to Mr. Ramsburg were paid in
full and refinanced by two new loans that Frederick Underwriters
made to Mr. Ramsburg in the amounts of $140,000 and $143,500,
respectively, and that were evidenced by two promissory notes,
each providing for interest at the annual rate of 5.79 percent
and a maturity date of Oct. 30, 1998. (We shall hereinafter
refer to those 1995 loans and those 1995 promissory notes as
Frederick Underwriters’ 1995 loans to Mr. Ramsburg and Mr.
Ramsburg’s 1995 notes, respectively.) In their stipulations of
fact, petitioners and respondent disregard the information shown
in the Keller Bruner checklists and treat Frederick Underwriters’
1992 loans to Mr. Ramsburg and Mr. Ramsburg’s 1992 notes as
outstanding at the end of 1997 and on the next day (i.e., Jan. 1,
1998) on which Kildare Timmy distributed all of its assets to Mr.
Ramsburg. We presume that they do so because they believe that
the material facts (e.g., the loan principal amount, the identity
of the debtor, the identity of the creditor) surrounding both
Frederick Underwriters’ 1992 loans to Mr. Ramsburg and Frederick
Underwriters’ 1995 loans to Mr. Ramsburg are the same. Moreover,
petitioners do not contend, and in any event petitioners have
                                                   (continued...)
                              - 7 -

     Kildare Timmy did not execute a note with respect to either

of the Frederick Underwriters’ 1992 loans to Mr. Ramsburg.

Kildare Timmy did not make any payments of principal to Mr.

Ramsburg or Frederick Underwriters with respect to either of such

loans.

     On December 31, 1994, Mr. Stottlemeyer executed a document

entitled “NOTE” (Mr. Stottlemeyer’s note)6 that provided in

pertinent part:

          I Carroll K. Stottlemeyer, after date, FOR VALUE
     RECEIVED, the Undersigned, jointly and severally,
     promise to pay to the order of Jacob R. Ramsburg Jr.,
     the lesser of my share of cash proceeds from disposi-
     tion of horses owned by the entity known as Kildare
     Timmy or the sum of one hundred fourty six thousand
     seven hundred and fifty Dollars payable at the offices
     of Frederick Underwriters, with interest from date at
     the rate of 0% per annum. [Reproduced literally.]



     5
      (...continued)
failed to carry their burden of showing, that Frederick Under-
writers did not make the Frederick Underwriters’ 1995 loans to
Mr. Ramsburg in his individual capacity, that Mr. Ramsburg did
not sign Mr. Ramsburg’s 1995 notes in his individual capacity,
and that he did not transfer the proceeds of Frederick Underwrit-
ers’ 1995 loans to Mr. Ramsburg to Kildare Timmy as capital
contributions. In any event, whether (1) Frederick Underwriters’
1992 loans to Mr. Ramsburg and Mr. Ramsburg’s 1992 notes or
(2) Frederick Underwriters’ 1995 loans to Mr. Ramsburg and Mr.
Ramsburg’s 1995 notes were outstanding at the end of 1997 and on
the next day (i.e., Jan. 1, 1998) on which Kildare Timmy distrib-
uted all of its assets to Mr. Ramsburg does not affect our
findings and conclusions herein. For convenience, we shall
hereinafter refer only to Frederick Underwriters’ 1992 loans to
Mr. Ramsburg and Mr. Ramsburg’s 1992 notes.
     6
      By using the term “Mr. Stottlemeyer’s note”, we do not
intend to suggest that for tax purposes there was a loan by Mr.
Ramsburg to Mr. Stottlemeyer.
                                - 8 -

Mr. Stottlemeyer’s note did not specify any date(s) on which Mr.

Stottlemeyer was to make any payment(s) thereunder.

     At a time not disclosed by the record before petitioners’

taxable year 1996, Mr. Ramsburg began operating as a sole propri-

etorship a horse-racing business under the name Troy McDougal

(Mr. Ramsburg’s sole proprietorship).7   Mr. Ramsburg’s sole

proprietorship raced two- and three-year old horses.   Mr.

Ramsburg’s sole proprietorship sold the three-year old horses

that he raced after the racing season ended.   At all relevant

times, Mr. Ramsburg’s sole proprietorship retained Dan Altmeyer

(Mr. Altmeyer) to serve as the trainer for its horses.   In return

for his services, Mr. Ramsburg’s sole proprietorship gave Mr.

Altmeyer a one-third interest in any horses that it purchased

(Mr. Ramsburg’s sole proprietorship’s horses).   At all relevant

times, Mr. Altmeyer trained Mr. Ramsburg’s sole proprietorship’s

horses for half a year in Florida and for half a year in Pennsyl-

vania.

     Beginning in 1995, Mr. Stottlemeyer became ill and was

diagnosed with a brain tumor.   In the spring of 1995, Mr.

Stottlemeyer underwent surgery, which was followed by a long

recovery period.   During the period Mr. Stottlemeyer was recover-

ing, Mr. Ramsburg assumed Mr. Stottlemeyer’s day-to-day manage-


     7
      At a time not disclosed by the record during petitioners’
taxable year 1998, the name of Mr. Ramsburg’s sole proprietorship
was changed from Troy McDougal to J R Ramsburg Stables.
                               - 9 -

ment role for Kildare Timmy.

     At a time in 1996 or 1997 not disclosed by the record, but

before December 8, 1997, Mr. Stottlemeyer concluded, and informed

Mr. Ramsburg, that Mr. Stottlemeyer should withdraw from Kildare

Timmy because he no longer was able to perform Mr. Stottlemeyer’s

management services for that partnership.   Thereafter, Mr.

Stottlemeyer and Mr. Ramsburg decided to terminate Kildare Timmy.

     On December 8, 1997, Mr. Ramsburg gave Mr. Stottlemeyer a

letter outlining the terms of the termination of Kildare Timmy

(Kildare Timmy termination agreement), which Mr. Stottlemeyer

signed on that date.   The Kildare Timmy termination agreement

provided in pertinent part:

     In view of all that is going on in your life, I can
     understand your not wanting to continue in the horse
     business, and understand that you are unable to make a
     capital contribution this year. I know that you have
     not been able to make a 50-50 capital contribution
     since 1991, but felt that your contribution to the
     daily operations was sweat equity. I believe now is
     the time to consider changing our partnership arrange-
     ment from 50-50. I would like to make the following
     offer to you:

          1)   The partnership will purchase no more horses.
          2)   We will wind up the business of the partner-
               ship by the end of this year, and I will
               assume all responsibility for the checking
               account at Frederick County National Bank.
          3)   On January 1, 1998, I will purchase all of
               the horses and equipment owned by us jointly
               at book value and have them transferred dur-
               ing 1998 to my name individually.
          4)   I will assume all of the liabilities owed by
               us as a result of the horse racing and breed-
               ing done by the Kildare Timmy partnership.
                                - 10 -

     On January 1, 1998, Kildare Timmy distributed all of its

assets to Mr. Ramsburg, including 7 race horses and 12 breeding

horses (sometimes referred to collectively as racing and breeding

horses),8 the balance (i.e., $908.71) in Kildare Timmy’s bank

account (Kildare Timmy bank account balance), and certain stud

rights known as Cams Card Skark stallion interest (stud rights).

Neither Kildare Timmy nor its partners obtained an appraisal of

the racing and breeding horses and the stud rights that Kildare

Timmy distributed to Mr. Ramsburg upon termination of that

partnership.

     On or about the date on which Kildare Timmy distributed all

of its assets to Mr. Ramsburg, Mr. Ramsburg repaid with his

personal funds the Frederick Underwriters’ 1992 loans to Mr.

Ramsburg.

     After the termination of Kildare Timmy, Mr. Ramsburg contin-

ued operating Mr. Ramsburg’s sole proprietorship.    For at least

part of 1998, Mr. Ramsburg used in Mr. Ramsburg’s sole propri-

etorship all 19 of the racing and breeding horses that Kildare

Timmy had distributed to him.    In 1998, Mr. Ramsburg sold 9 of

those racing and breeding horses, and Mr. Ramsburg’s sole propri-


     8
      The names of the racing and breeding horses that Kildare
Timmy distributed to Mr. Ramsburg were: Idealists Hanover,
Happening Hanover, Rare Guy, Brief Wars, Justen’s Western, Bar B
Wars, Overture Hanover, Overture Siera, Vidalita Hanover, Western
Skylark, Yankee Skylark, Northern Crush, Tarport Reactor, Yankee
Bardot, Western Shuffle, Pizzacato, Yankee Shuffle, Yankee
Goddess, and Rock Legend.
                                 - 11 -

etorship continued using the remaining 10 such horses in its

business.   As discussed below, petitioners reported in their 1998

tax return the following gain or loss on the sale of those nine

horses:

                    Horses                Gain or (Loss)
             Idealists Hanover               ($1,839)
                  Brief Wars                   2,129
               Western Skylark                   129
                   Rare Guy                   (3,779)
                Overture Siera                (3,319)
             Happening Hanover                (2,883)
                Yankee Skylark                 1,199
              Overture Hanover                  (911)
              Vidalita Hanover                (2,267)

     In 1999, Mr. Ramsburg sold three additional racing and

breeding horses that Kildare Timmy had distributed to him, and

Mr. Ramsburg’s sole proprietorship continued using the remaining

seven such horses in its business.        As discussed below, petition-

ers reported in their 1999 tax return the following gain or loss

on the sale of those three horses:9

                    Horses                Gain or (Loss)
                  Bar B Wars                 ($2,067)
              Justen’s Western                58,933
               Western Shuffle                30,301

     In 2002, Mr. Ramsburg sold three additional racing and

breeding horses that Kildare Timmy had distributed to him.       As

discussed below, petitioners reported in their 2002 tax return



     9
      See infra note 16.
                               - 12 -

the following gain or loss on the sale of those three horses:

                 Horses                 Gain or (Loss)
             Northern Crush                ($2,578)
             Tarport Reactor                  (885)
              Yankee Bardot                  $1,055

     For each of the taxable years 1986 through 1998, Kildare

Timmy, which used a taxable year ending December 31, timely filed

Form 1065, U.S. Partnership Return of Income (partnership re-

turn), which Mr. Ramsburg signed as a general partner.   Kildare

Timmy employed Keller Bruner to prepare those returns.   In

preparing those returns, Dawson Grove and Brian Rippeon (Mr.

Rippeon), who worked for Keller Bruner, relied on information and

representations that Mr. Ramsburg and/or Mr. Stottlemeyer pro-

vided to them.

     The respective partnership returns that Kildare Timmy filed

for the years 1986 through 1998, including certain schedules

included as part of those returns, showed, inter alia, the

following with respect to Kildare Timmy and with respect to Mr.

Ramsburg and Mr. Stottlemeyer:
                                                                   - 13 -

       Ordinary
        income
        (loss)
     from trade                                                  Distributive share
          or                                                     of ordinary income
      business       Capital account at     Capital contributed (loss) from trade or   Net gain (loss) Withdrawals and        Capital account
Year activities       beginning of year         during year      business activities under section 1231 distributions         at end of year




        Kildare
         Timmy          R1          S2         R         S          R          S          R          S        R        S        R         S
1986   ($16,387)       $1,193     $1,193    $21,102      $0     ($16,387)      $0         $0        $0        $0      $0      $5,908    $1,193

1987    (42,504)        5,908      1,193     55,100    25,000    (29,735)   (12,769)    (2,478)   (1,061)      0       0      28,795    12,363

1988    (85,199)       28,795     12,363     25,560    25,160    (42,600)   (42,600)          0      0         0       0      11,755    (5,077)

1989       (3,448)     11,755     (5,077)    15,370    15,250     (1,724)    (1,724)          0      0       5,500   5,500    24,071     7,119

1990    (74,929)       24,071      7,119     24,000    24,000    (37,464)   (37,465)    (4,285)   (4,285)      0       0      12,172    (4,781)

1991   (194,535)       12,172     (4,781)    33,562    33,562   (97,268)    (97,267)    (4,992)   (4,991)      0       0     (56,525) (73,478)

1992   (203,170)      (56,526)   (73,478)   195,793    34,292   (172,898)   (30,272)   (18,423)   (3,226)      0       0     (52,054) (72,684)

1993   (202,647)      (52,054)   (72,684)   171,898    30,297   (172,250)   (30,397)    (5,465)     (964)      0       0     (57,871) (73,748)

1994   (172,298)      (57,871)   (73,748)   157,798    30,297   (144,541)   (27,757)    (2,920)     (561)      0       0     (47,534) (71,769)

1995   (215,002)     (47,534)    (71,769)   184,332    30,832   (184,192)   (30,810)    5,313        889       0       0     (42,081) (70,858)

1996   (130,806)      (42,081)   (70,858)   104,497    33,497   (99,059)    (31,747)    (2,071)     (664)      0       0     (38,714) (69,772)

1997   (153,819)      (38,714)   (69,772)    63,947       0     (153,819)       0      (14,983)      0         0       0     (143,569) (69,772)

1998       (4,592)   (143,569)   (69,772)   283,500       0      (4,592)        0         0          0      65,567     0         0         0

       1
        R refers to Mr. Ramsburg.
       2
        S refers to Mr. Stottlemeyer.
                              - 14 -

     Included as part of the 1998 partnership return for Kildare

Timmy’s short and final taxable year was Schedule K-1, Partner’s

Share of Income, Credits, Deductions, Etc. (Schedule K-1),

relating to Mr. Ramsburg.   A statement (explanatory statement

relating to Mr. Ramsburg’s Schedule K-1) entitled “Schedule K-1,

Column C Reconciliation” purported to explain how the amount

shown for 1998 (i.e., a loss of $4,592)10 in Item J, Column (c)

of such Schedule K-1 (i.e., Partner’s share of lines 3, 4, and 7,

Form 1065, Schedule M-2) was calculated.     The explanatory state-

ment relating to Mr. Ramsburg’s 1998 Schedule K-1 showed the

following:

                   Description           Amount
             Ordinary Income (Loss)     ($4,592)
              Loss on Disposition1      (69,772)
             Total to Schedule K-1,     (74,364)
                Item J, Column C
     1
      The explanatory statement relating to Mr. Ramsburg’s Sched-
ule K-1 did not provide any details about “Loss on Disposition”.

     Included as part of the 1998 partnership return was Schedule

K-1 relating to Mr. Stottlemeyer.     A statement (explanatory

statement relating to Mr. Stottlemeyer’s Schedule K-1) entitled

“Schedule K-1, Column C Reconciliation” purported to explain how

the amount shown for 1998 (i.e., $0) in Item J, Column (c) of

such Schedule K-1 (i.e., Partner’s share of lines 3, 4, and 7,



     10
      The loss of $4,592 is the amount shown in the chart above
as Mr. Ramsburg’s distributive share of ordinary loss from trade
or business activities.
                              - 15 -

Form 1065, Schedule M-2)11 was calculated.   The explanatory

statement relating to Mr. Stottlemeyer’s 1998 Schedule K-1 showed

the following:

                  Description           Amount
             Gain on Disposition1      $69,772
            Total to Schedule K-1,       69,772
               Item J, Column C
     1
      The explanatory statement relating to Mr. Stottlemeyer’s
Schedule K-1 did not provide any details about “Gain on Disposi-
tion”.

     The 1998 partnership return included Form 4797, Sales of

Business Property (Form 4797).   In Part III of that form, Gain

From Disposition of Property Under Sections 1245, 1250, 1252,

1254, and 1255, Kildare Timmy claimed the following with respect

to the racing and breeding horses that it distributed to Mr.

Ramsburg:




     11
      The amount of $0 is the amount shown in the chart above as
Mr. Stottlemeyer’s distributive share of ordinary income or loss
from trade or business activities.
                                         - 16 -

                                                 Cost or
                                               other basis
                                       Gross      plus     Depreciation
                  Date                 sales     expense      allowed   Adjusted   Total
    Horse       acquired   Date sold   price     of sale   or allowable   basis     gain
   Yankee       10/02/88   01/01/98     $0       $16,000      $16,000      $0       $0
   Goddess
 Rock Legend    10/17/88   01/01/98      0       10,000       10,000        0        0
   Yankee       10/01/89   01/01/98      0        5,000        5,000        0        0
   Shuffle
   Yankee       09/30/90   01/01/98      0       15,000       15,000        0        0
   Skylark
Yankee Bardot   09/15/91   01/01/98      398     13,000       12,602        398      0
   Tarport      11/24/92   01/01/98    3,411     16,000       12,589      3,411      0
   Reactor
  Idealists     11/15/94   01/01/98    4,339      9,500        5,161      4,339      0
   Hanover
  Pizzacato     01/16/95   01/01/98    3,405      7,000        3,595      3,405      0
 Brief Wars     03/13/95   01/01/98    2,121      4,360        2,239      2,121      0
   Western      04/24/95   01/01/98    2,202      4,240        2,038      2,202      0
   Skylark
  Northern      10/29/95   01/01/98    7,017     12,000        4,983      7,017      0
    Crush
  Rare Guy      10/02/95   01/01/98    5,029      8,600        3,571      5,029      0
  Overture      02/01/95   01/01/98      911      1,875          964        911      0
   Hanover
 Bar B Wars     04/08/96   01/01/98    7,090     10,570        3,480      7,090      0
   Western      04/08/96   01/01/98    2,705      4,320        1,615      2,705      0
   Shuffle
  Justen’s      05/13/96   01/01/98    2,655      4,240        1,585      2,655      0
   Western
  Overture      09/25/96   01/01/98    3,319      5,300        1,981      3,319      0
    Siera
  Happening     11/26/96   01/01/98    3,883      6,200        2,317      3,883      0
   Hanover
  Vidalita      11/26/96   01/01/98    3,883      6,200        2,317      3,883      0
   Hanover

In Part III of Form 4797 included in the 1998 partnership return,

Kildare Timmy also claimed the following with respect to the sale

of the stud rights that Kildare Timmy distributed to Mr.

Ramsburg:

                    Gross           Cost or other      Depreciation
   Date             sales            basis plus           allowed      Adjusted    Total
 acquired Date sold price          expense of sale     or allowable      basis     gain
 01/13/95 01/01/98 $12,160             $25,000            $12,840       $12,160     $0

      In preparing each of the respective partnership returns for
                                   - 17 -

the years 1990 through 1998, Keller Bruner used the Keller Bruner

checklist.12    The Keller Bruner checklist showed for each of the

years 1992 through 1997, inter alia, the following with respect

to various claimed notes payable to Frederick Underwriters by

Kildare Timmy:13

      Year                         Notes payable                       Amount
   1992 Keller   N/P Frederick Underwriters Dated 11-1-92   @ 3.61%   $140,000
Bruner checklist            Due 10-30-95 from JR only1
                 N/P Frederick Underwriters Dated 11-1-92   @ 3.61%   143,500
                            Due 10-30-95 from JR only1
   1993 Keller   N/P Frederick Underwriters Dated 11-1-92   @ 3.61%   140,000
Bruner checklist            Due 10-30-95 from JR only
                 N/P Frederick Underwriters Dated 11-1-92   @ 3.61%   143,500
                            Due 10-30-95 from JR only
   1994 Keller   N/P Frederick Underwriters Dated 11-1-92   @ 3.61%   140,000
Bruner checklist            Due 10-30-95 from JR only
                 N/P Frederick Underwriters Dated 11-1-92   @ 3.61%   143,500
                            Due 10-30-95 from JR only
   1995 Keller   N/P Frederick Underwriters Dated 11-1-95   @ 5.79%    140,000
Bruner checklist            Due 10-30-98 from JR only
                 N/P Frederick Underwriters Dated 11-1-95   @ 5.79%    143,500
                            Due 10-30-98 from JR only
   1996 Keller   N/P Frederick Underwriters Dated 11-1-95   @ 5.79%    140,000
Bruner checklist            Due 10-30-98 from JR only
                 N/P Frederick Underwriters Dated 11-1-95   @ 5.79%    143,500
                            Due 10-30-98 from JR only
   1997 Keller   N/P Frederick Underwriters Dated 11-1-95   @ 5.79%    140,000
Bruner checklist            Due 10-30-98 from JR only
                 N/P Frederick Underwriters Dated 11-1-95   @ 5.79%    143,500
                            Due 10-30-98 from JR only
     1
       It is not altogether clear what was intended by the use of the phrase
“from JR only” that appeared in the Keller Bruner checklist for each of the
years 1992 through 1997. In any event, we have found that Mr. Ramsburg, in
his individual capacity and not in his capacity as a general partner of
Kildare Timmy, borrowed the money in question and then contributed such money
to Kildare Timmy as a capital contribution.



     12
      For each of the years 1990 through 1993, the Keller Bruner
checklist was called “Partnership Return Of Income Checklist”.
For each of the years 1994 through 1998, the Keller Bruner
checklist was called “Partnership (or LLC) Return Of Income
Checklist”.
     13
          See supra note 5.
                                 - 18 -

     Petitioners jointly filed Form 1040, U.S. Individual Income

Tax Return (Form 1040), for their taxable year 1998 (1998 re-

turn).14     Petitioners’ 1998 return showed, inter alia, taxable

income of $0 and total tax of $0.     In calculating the taxable

income of $0 reported in petitioners’ 1998 return, petitioners

claimed, inter alia, a loss of $809,668 in Schedule E, Supplemen-

tal Income and Loss (Schedule E), included as part of that

return.     Such claimed loss included a nonpassive loss of

$784,668, which was shown in Schedule E as resulting from the

“ENTIRE DISPOSITION OF [A] PASSIVE ACTIVITY” conducted by Kildare

Timmy.

     Petitioners’ 1998 return included Form 4797, Sales of

Business Property (petitioners’ 1998 Form 4797).     In Part I of

that form (Form 4797, Part I), Sales or Exchanges of Property

Used in a Trade or Business and Involuntary Conversions From

Other Than Casualty or Theft--Property Held More Than 1 Year,

petitioners reported, inter alia, a “28% Rate” loss of $21,749

attributable to Kildare Timmy.

     In Part II of petitioners’ 1998 Form 4797, Ordinary Gains

and Losses, petitioners claimed, inter alia, a loss of $11,541.

In an explanatory statement attached to that form, petitioners

claimed that such claimed ordinary loss was attributable to,

inter alia, Mr. Ramsburg’s sole proprietorship’s sale of nine of


     14
          Keller Bruner prepared petitioners’ 1998 return.
                                     - 19 -

the racing and breeding horses that Kildare Timmy distributed to

him.       In that explanatory statement, petitioners claimed the

following, inter alia, with respect to the sale of those nine

horses:

                            ORDINARY GAINS AND LOSSES
                                                              Cost        Gain
   Description    Date acquired Date sold Sales price     or basis      or (loss)
Idealists Hanover    01/01/98    04/01/98   $2,500         $4,339       ($1,839)
                                                           1
    Brief Wars       01/01/98    11/01/98   12,750           10,621       2,129
                                                             1
 Western Skylark     01/01/98    11/01/98    5,000             4,871        129
                                                             1
     Rare Guy        01/01/98    11/01/98    1,500             5,279     (3,779)
 Overture Siera      01/01/98    06/01/98        0             3,319     (3,319)
Happening Hanover    01/01/98    05/01/98    1,000             3,883     (2,883)
                                                                  1
 Yankee Skylark      01/01/98    11/01/98    1,200                  1     1,199
Overture Hanover     01/01/98    06/01/98        0               911       (911)
Vidalita Hanover     01/01/98    06/01/98    1,616             3,883     (2,267)
   Total to Form 4797, Part II, Line 10     25,566           37,107     (11,541)
       1
       There is an unexplained discrepancy between the cost or basis that
petitioners claimed in petitioners’ 1998 return with respect to each of the
four horses Brief Wars, Western Skylark, Rare Guy, and Yankee Skylark that
Kildare Timmy distributed to Mr. Ramsburg and the amount that Kildare Timmy
reported in its 1998 partnership return as the gross sales price for which it
allegedly sold each such horse to Mr. Ramsburg. It is petitioners’ position
that Mr. Ramsburg purchased each of the above-referenced horses from Kildare
Timmy for a price equal to Kildare Timmy’s adjusted basis in each such horse
as reflected in Kildare Timmy’s books and records. Thus, under petitioners’
position, Mr. Ramsburg’s cost or basis in each of the four horses in question
on the date on which Kildare Timmy distributed those horses to him should have
been equal to the price that he claimed he paid for each such horse. However,
Kildare Timmy reported in its 1998 partnership return the following gross
sales price, and petitioners reported in their 1998 return the following cost
or basis, with respect to each of those horses:

                               Gross sales price    Cost or basis
                               reported in 1998      reported in
                                  partnership    petitioners’ 1998
                   Horses           return              return
                 Brief Wars         $2,121             $10,621
               Western Skylark       2,202               4,871
                  Rare Guy           5,029               5,279
               Yankee Skylark          0                     1

Thus, in petitioners’   1998 return, petitioners claimed a significantly higher
cost or basis in each   of Brief Wars and Western Skylark and a higher cost or
basis in each of Rare   Guy and Yankee Skylark than the gross sales price that
Kildare Timmy claimed   in its 1998 partnership return it received for each such
horse.
                                   - 20 -

At the bottom of petitioners’ 1998 Form 4797, petitioners indi-

cated that the ordinary loss of $11,541 claimed in that form was

attributable to the “ENTIRE DISP OF PAS ACT” conducted by Kildare

Timmy.

     On May 17, 1999, petitioners jointly filed Form 1045,

Application for Tentative Refund (Form 1045), for each of the

taxable years 1996 and 1997, in which they claimed refunds based

on an alleged NOL for 1998 that they carried back from that year

to each of those earlier years.        The claimed NOL for 1998 was

attributable to petitioners’ having treated as nonpassive losses

in petitioners’ 1998 return petitioners’ passive losses (i.e.,

ordinary passive losses and petitioners’ section 1231 passive

losses)15 attributable to Kildare Timmy.          Form 1045 showed the

following:

                                        2d preceding           1st preceding
                                    tax year ended 1996     tax year ended 1997
                                     Before       After      Before     After
                                   carryback    carryback   carryback carryback
 Adjusted gross income from tax    $369,867     $369,867    $402,727 $402,727
return or as previously adjusted
  Net operating loss deduction         0         360,918        0      124,219
         after carryback
           Deductions               133,168      133,168     316,113   316,113
         Taxable income             236,699     (124,219)     86,614   (37,605)
           Income tax                69,543         0         18,899      0
       Total tax liability           69,543         0         18,899      0

Form 1045 also showed decreases of $69,543 and $18,899 in peti-



     15
      The parties stipulated that the respective amounts of
ordinary passive losses and sec. 1231 passive losses that peti-
tioners claimed were attributable to Kildare Timmy were incorrect
and stipulated the correct amount of each such loss.
                                   - 21 -

tioners’ total tax liabilities for their taxable years 1996 and

1997, respectively.

     At a time not disclosed by the record, petitioners jointly

filed Form 1040 for their taxable year 1999 (petitioners’ 1999

return).    That return included Form 4797 (petitioners’ 1999 Form

4797).    In Part II of that form, Ordinary Gains and Losses,

petitioners claimed an ordinary gain of $89,471.             In an explana-

tory statement attached to petitioners’ 1999 Form 4797, petition-

ers claimed that that ordinary gain was attributable to, inter

alia, the sale of three of the racing and breeding horses that

Kildare Timmy distributed to Mr. Ramsburg.             Petitioners claimed

the following with respect to the sale of those three horses:16

                    Date        Date                       Cost       Gain
     Horse        acquired      sold     Sales Price     or basis   or (loss)
 J R Ramsburg     01/01/98    06/04/99     $3,585         $7,090    ($2,067)
    Stables
 J R Ramsburg     01/01/98    11/05/99      61,050         2,655     58,933
    Stables
 J R Ramsburg     01/01/98    11/05/99      32,457         2,705     30,301
    Stables
  Total to be included in Form 4797,        $97,092      $12,450    $87,167
            Part II, Line 10

     At a time not disclosed by the record, petitioners jointly

filed Form 1040 for their taxable year 2002 (petitioners’ 2002


     16
      Although petitioners’ 1999 return did not provide the
names of the three horses that Mr. Ramsburg sold, the cost or
basis of each of those horses that was reported in petitioners’
1999 return (i.e., $7,090, $2,655, and $2,705) is the same as the
gross sales price that was reported in Kildare Timmy’s 1998
partnership return with respect to each of the horses Bar B Wars,
Justen’s Western, and Western Shuffle that Kildare Timmy distrib-
uted to Mr. Ramsburg on Jan. 1, 1998, and that petitioners claim
Kildare Timmy sold to Mr. Ramsburg on that date.
                                   - 22 -

return).17   Petitioners’ 2002 return included Form 4797 (peti-

tioners’ 2002 Form 4797).       In Form 4797, Part I, petitioners

reported, inter alia, a loss of $102,281.          In an explanatory

statement to petitioners’ 2002 Form 4797, petitioners claimed

that that loss was attributable to, inter alia, the sale of two

of the racing and breeding horses that Kildare Timmy distributed

to Mr. Ramsburg.     In that explanatory statement, petitioners

claimed the following with respect to the sale of those two

horses:

                  Date     Date                              Cost     Gain
     Horse      acquired   sold   Sales price Depreciation or basis or (loss)
Northern Crush 01/01/98 01/02/02      $0         $4,439     $7,017  ($2,578)
Tarport Reactor 01/01/98 12/11/02     368         2,158      3,411     (885)

     In Part III of petitioners’ 2002 Form 4797, Gain From

Disposition of Property Under Sections 1245, 1250, 1252, 1254,

and 1255, petitioners also claimed the following with respect to

a horse named Yankee Bardot:

                   Gross     Cost or other   Depreciation
  Date     Date    sales      basis plus        allowed   Adjusted
acquired   sold    price   expense of sale   or allowable   basis Total gain
01/01/98 07/31/02 $1,200         $398            $253       $145    $1,055

     Respondent issued to petitioners a notice for their taxable

years 1996, 1997, and 1998.       In the notice, respondent, inter

alia, disallowed petitioners’ claimed nonpassive losses.18            The


     17
      The record does not contain any tax return of petitioners
for 2000 or 2001.
     18
      Petitioners’ claimed nonpassive losses included petition-
ers’ ordinary passive losses and petitioners’ sec. 1231 passive
                                                   (continued...)
                               - 23 -

notice provided in pertinent part:

     (a) As a result of adjustments in 1998, you do not have
     a net operating loss carryback in 1996 and 1997.
     Therefore, taxable income is increased $360,919 and
     $124,219 for 1996 and 1997 respectively.

     (b), (c) t is determined that the losses claimed in the
     amounts of $784,668[19] on Schedule E and $21,749[20] on
     Form 4797 for the disposition of Kildare Timmy partner-
     ship is not allowed. You have not established that you
     are entitled to the loss. [Reproduced literally.]

                               OPINION

Burden of Proof

     Petitioners bear the burden of proving that the determina-

tions in the notice are erroneous.21     See Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933).

The Court’s Evaluation of Evidence
in the Record on Which Petitioners Rely

     Petitioners have attempted to satisfy their burden of proof

in this case through certain testimonial and documentary evi-

dence.


     18
      (...continued)
losses. See supra note 3.
     19
          See supra note 15.
     20
         See supra note 15.
     21
      The parties do not address the application of sec. 7491(a)
in the instant case. In any event, on the record before us, we
find that petitioners did not introduce credible evidence with
respect to the factual issues presented. On that record, we
further find that petitioners have failed to carry their burden
of establishing that they satisfied the applicable requirements
of sec. 7491(a)(2). Under such circumstances, we conclude that
the burden of proof does not shift to respondent under sec.
7491(a) with respect to the factual issues presented.
                               - 24 -

       Testimonial Evidence

       At the trial in this case, petitioners called Mr. Ramsburg,

Mr. Stottlemeyer, and Mr. Rippeon as witnesses.    With respect to

the testimony of Mr. Ramsburg, we did not find him to be credi-

ble.    In addition, we found Mr. Ramsburg’s testimony to be

evasive, uncorroborated, and/or self-serving in certain material

respects.    We shall not rely on such testimony of Mr. Ramsburg to

establish petitioners’ position in this case.

       With respect to the testimony of Mr. Stottlemeyer, we found

his testimony to be implausible, questionable, vague, conclusory,

and/or uncorroborated in certain material respects.    We also

found Mr. Stottlemeyer’s testimony to serve in certain material

respects the interests of Mr. Ramsburg, who was Mr.

Stottlemeyer’s longtime friend from childhood and the owner of

Frederick Underwriters, Mr. Stottlemeyer’s employer, and who gave

Mr. Stottlemeyer the opportunity to be his partner in Kildare

Timmy.    We shall not rely on such testimony of Mr. Stottlemeyer

to establish petitioners’ position in this case.

       With respect to the testimony of Mr. Rippeon, one of the

certified public accountants employed by Keller Bruner to prepare

petitioners’ returns for the years at issue, Kildare Timmy’s

partnership returns, and the Keller Bruner checklists utilized in

preparing such partnership returns, Mr. Rippeon had no personal

knowledge about any of the underlying facts with respect to the
                                 - 25 -

matters reported in those returns and checklists.       Instead, Mr.

Rippeon relied on representations and documents that Mr. Ramsburg

and/or Mr. Stottlemeyer provided to him.       We shall not rely on

Mr. Rippeon’s testimony about any of the underlying facts with

respect to the matters reported in the returns and checklists in

question to establish petitioners’ position in this case.

     Documentary Evidence

     The record contains various documents on which petitioners

rely that were prepared, and/or that contained information

supplied, by Mr. Ramsburg and/or Mr. Stottlemeyer.22      We shall

not rely on such documents to establish petitioners’ position in

this case.

Section 469(g)(1)

     We must decide whether section 469(g)(1)23 permits petition-

     22
      The documents on which petitioners rely included certain
tax returns of petitioners and Kildare Timmy, respectively. A
tax return is merely a statement of the claim of the person
filing such return and does not establish the truth of the
matters set forth therein. See, e.g., Wilkinson v. Commissioner,
71 T.C. 633, 639 (1979).
     23
          Sec. 469(g)(1) provides in pertinent part:

     SEC. 469.     PASSIVE ACTIVITY LOSSES AND CREDITS LIMITED.

           *       *       *       *       *        *       *

          (g) Dispositions of Entire Interest in Passive
     Activity.--If during the taxable year a taxpayer dis-
     poses of his entire interest in any passive activity
     (or former passive activity), the following rules shall
     apply:
                                                   (continued...)
                                 - 26 -

ers to treat for 1998 petitioners’ passive losses attributable to

Kildare Timmy as nonpassive losses.       It is petitioners’ position

that section 469(g)(1) allows such treatment.      Respondent dis-

agrees.

     In support of petitioners’ position, petitioners argue that

Mr. Ramsburg

     disposed of his entire interest in the activity of the
     Kildare Timmy partnership in a transaction in which
     gain or loss was recognized, as required by §469(g)(1)
     * * *

     23
          (...continued)
                   (1) Fully Taxable Transaction.--

                       (A) In general.--If all gain or loss
                  realized on such disposition is recognized,
                  the excess of–-

                            (i) any loss from such activity for
                       such taxable year (determined after the
                       application of subsection (b)), over

                            (ii) any net income or gain for
                       such taxable year from all other passive
                       activities (determined after the appli-
                       cation of subsection (b)),

                  shall be treated as a loss which is not from
                  a passive activity.

                       (B) Subparagraph (A) not to apply to
                  disposition involving related party.--If the
                  taxpayer and the person acquiring the inter-
                  est bear a relationship to each other de-
                  scribed in section 267(b) or section
                  707(b)(1), then subparagraph (A) shall not
                  apply to any loss of the taxpayer until the
                  taxable year in which such interest is ac-
                  quired (in a transaction described in sub-
                  paragraph (A)) by another person who does not
                  bear such a relationship to the taxpayer.
                              - 27 -


           The transaction in which gain or loss was recog-
     nized was the taxable liquidation of the Kildare Timmy
     partnership. The liquidation was fully taxable because
     the only property distributed in liquidation was money.
     * * * As a result, the Petitioners incurred a loss on
     the disposition of Jacob R. Ramsburg, Jr.’s interest in
     the Kildare Timmy partnership in the amount of $69,772.
     * * *

          Provided that the Tax Court finds that the sale of
     the horses from the partnership to Mr. Ramsburg was a
     sale for tax purposes, it is clear that the liquidation
     of the partnership, involving the distribution of only
     money, was a fully taxable transaction under §731 of
     the Code. Section 731(a) of the Code provides that
     gain or loss is recognized in the case of a liquidating
     distribution by a partnership to a partner which only
     consists of money. Any gain or loss recognized pursu-
     ant to §731(a) of the Code is “considered as gain or
     loss from the sale or exchange of the partnership
     interest of the distributee partner.” I.R.C. §731(a)
     * * *.

          With regard to the [sic] Mr. Ramsburg’s purchase
     of the horses from the Kildare Timmy partnership, Mr.
     Ramsburg and Mr. Stottlemeyer were dealing at arms’
     length. The evidence indicates that, at the time the
     sale of the horses was agreed to, each owned 50% of the
     capital interest of the partnership. * * * Specifi-
     cally, the form of the transaction was structured as a
     sale, the transaction was accounted for on the 1998
     partnership return and the Petitioners’ 1998 individual
     tax return as a sale, both of which were prepared by
     Petitioners’ certified public accountants. * * *

With respect to Kildare Timmy’s claimed sale of its horses to Mr.

Ramsburg, petitioners contend:

     the evidence establishes that [petitioner] Jacob R.
     Ramsburg, Jr. purchased the horses[24] from the Kildare


     24
      Although not altogether clear, it appears that, when
petitioners contend that Mr. Ramsburg purchased the “horses” from
Kildare Timmy, petitioners intend to include in their reference
to the “horses” not only Kildare Timmy’s racing and breeding
horses but also its stud rights, and we so assume hereinafter.
                                                   (continued...)
                             - 28 -

     Timmy partnership at book value prior to the liquida-
     tion of the partnership and that, as a result, the only
     assets distributed to Mr. Ramsburg in liquidation of
     the partnership consisted of the remaining balance in
     the partnership checking account [Kildare Timmy bank
     account balance] and the proceeds from the partner-
     ship’s sale of the horses to Mr. Ramsburg. Under
     §731(a)(2) of the Code, Petitioners therefore recog-
     nized a loss on the distribution of the cash balance of
     the checking account and the proceeds from the sale of
     the horses. The fact that the fair market value of the
     horses owned by the Kildare Timmy partnership was not
     precisely determined does not change the fact that Mr.
     Ramsburg recognized a loss on the receipt of the liqui-
     dating distribution from the partnership. * * * Mr.
     Stottlemeyer effectively received, in liquidation of
     the partnership, a credit equal to his 50% share of the
     assets of the partnership against his liability to Mr.
     Ramsburg in the amount of $146,750.

     In support of respondent’s position that section 469(g)(1)

does not permit petitioners to treat for 1998 petitioners’

passive losses attributable to Kildare Timmy as nonpassive

losses, respondent argues:

     a taxpayer who disposes of an interest in a passive
     activity may deduct suspended losses only if three
     conditions are satisfied: (1) the taxpayer disposes of
     his entire interest in the activity; (2) the disposi-
     tion is in the form of a fully taxable transaction
     (i.e., one in which the full amount of the gain or loss
     inherent in the activity is recognized); and (3) the
     person acquiring the interest is not related to the
     taxpayer. I.R.C. § 469(g). The petitioners failed to
     satisfy any of these conditions.

According to respondent,



     24
      (...continued)
If petitioners do not intend to include Kildare Timmy’s stud
rights in their reference to the “horses” that Mr. Ramsburg
allegedly purchased from Kildare Timmy, petitioners must concede
that Kildare Timmy distributed to Mr. Ramsburg not only money but
also such stud rights in liquidation of his interest in that
partnership.
                             - 29 -

     petitioners are not entitled to claim the suspended
     passive activity losses because they have not estab-
     lished that they (1) disposed of their entire interest
     (2) in a fully taxable transaction (3) to an unrelated
     party.

          Indeed the evidence established that petitioners
     maintained and increased their interest in the passive
     activity. Moreover, petitioner failed to establish
     that the liquidating distribution petitioner received
     when the partnership terminated required recognition of
     either gain or loss under the provisions of I.R.C. §
     731. Finally, the liquidating distribution petitioner
     received from the partnership was between related
     parties within the provisions of I.R.C. § 469(g)(1)(B).

     We need not decide whether respondent is correct in arguing

that petitioners have not established that Mr. Ramsburg (1) did

not dispose of his entire interest in the passive activity in

question (2) to an unrelated party.   Even if we were to reject

such contentions of respondent, on the record before us, we

nonetheless would, and do, find that petitioners have failed to

carry their burden of showing that section 469(g)(1) permits them

to treat for 1998 petitioners’ passive losses attributable to

Kildare Timmy as nonpassive losses.   That is because on that

record we find that petitioners have failed to carry their burden

of establishing that, as required by section 469(g)(1)(A), they

recognized under section 731 all of the gain or all of the loss,

as the case may be, realized when Mr. Ramsburg received from

Kildare Timmy a distribution in liquidation of his interest in

that partnership.

     It is petitioners’ position that the distribution in liqui-
                                 - 30 -

dation of Mr. Ramsburg’s interest in Kildare Timmy that that

partnership made to him on January 1, 1998, “was a fully taxable

transaction under §731”.     That is because, according to petition-

ers, “the only property distributed in [that] liquidation was

money.”     Petitioners acknowledge on brief that the linchpin in

their position under section 731, and thus in their position

under section 469(g)(1)(A), is the Court’s acceptance of their

contention that the alleged “sale of the horses from the partner-

ship to Mr. Ramsburg was a sale for tax purposes”.     We thus turn

to petitioners’ contention that Mr. Ramsburg purchased Kildare

Timmy’s racing and breeding horses and stud rights for their

respective book values.

     On the record before us, we find that petitioners have

failed to show that, in form or in substance, Mr. Ramsburg

purchased Kildare Timmy’s racing and breeding horses and stud

rights on January 1, 1998, immediately before that partnership

made a distribution of assets to him in liquidation of his

interest in that partnership.     No money changed hands from Mr.

Ramsburg to Kildare Timmy when he allegedly purchased the horses

and the stud rights in question; nor did any money change hands

from Kildare Timmy to Mr. Ramsburg when that partnership alleg-

edly distributed the proceeds from such alleged sale to Mr.

Ramsburg in liquidation of his interest in that partnership.25

     25
          The only money distributed by Kildare Timmy to Mr.
                                                       (continued...)
                             - 31 -

Petitioners claim that no money needed to change hands between

Kildare Timmy and Mr. Ramsburg because the money that Mr.

Ramsburg allegedly paid to Kildare Timmy to purchase the horses

and the stud rights in question would have been immediately

distributed by Kildare Timmy to Mr. Ramsburg in liquidation of

his interest in that partnership.   On the record before us, we

reject petitioners’ self-serving claim.   Petitioners, in effect,

ask us to accept their contention that Mr. Ramsburg purchased

Kildare Timmy’s racing and breeding horses and stud rights

because that is what Mr. Ramsburg told (1) Mr. Stottlemeyer, his

longtime friend and partner, (2) Mr. Rippeon, his accountant who

prepared Kildare Timmy’s 1998 partnership return and petitioners’

1998 return, and (3) the Court at the trial in this case.    As

stated above, we are unwilling to rely on the testimony of Mr.

Ramsburg, Mr. Stottlemeyer, and Mr. Rippeon to establish peti-

tioners’ position in this case.   We also are unwilling to rely on

documents in the record that were prepared, and/or that contained

information supplied, by Mr. Ramsburg and/or Mr. Stottlemeyer,

such as Kildare Timmy’s 1998 partnership return in which that

partnership claimed to have sold to Mr. Ramsburg its racing and

breeding horses and stud rights for their respective book values.

     Based upon our examination of the entire record before us,


     25
      (...continued)
Ramsburg in liquidation of his interest in that partnership was
the Kildare Timmy bank account balance.
                              - 32 -

we find that petitioners have failed to carry their burden of

establishing that Mr. Ramsburg purchased from Kildare Timmy on

January 1, 1998, its racing and breeding horses and stud rights.

On that record, we further find that petitioners have failed to

carry their burden of establishing that Mr. Ramsburg received

only money from Kildare Timmy in liquidation of his interest in

that partnership.   On the record before us, we find that on

January 1, 1998, Kildare Timmy distributed to Mr. Ramsburg in

liquidation of his interest in that partnership not only money

(i.e., the Kildare Timmy bank account balance) but also its

racing and breeding horses and stud rights.26

     26
      On the record before us, we also find that petitioners
have failed to carry their burden of establishing that on Jan. 1,
1998, Mr. Stottlemeyer “effectively received [from Kildare
Timmy], in liquidation of the partnership, a credit equal to his
50% share of the assets of the partnership against his liability
to Mr. Ramsburg [under Mr. Stottlemeyer’s note] in the amount of
$146,750.” In addition, Mr. Stottlemeyer’s note that he signed
on Dec. 31, 1994, provided that Mr. Stottlemeyer promised to pay
to Mr. Ramsburg the “lesser of my [Mr. Stottlemeyer’s] share of
cash proceeds from [the] disposition of horses owned by the
entity known as Kildare Timmy or the sum of one hundred fourty
[sic] six thousand seven hundred and fifty Dollars * * * with
interest * * * at the rate of 0% per annum.” Mr. Stottlemeyer’s
note did not specify any date(s) on which Mr. Stottlemeyer was to
make any payment(s) thereunder. On the record before us, we find
that petitioners have failed to carry their burden of establish-
ing that there was a loan by Mr. Ramsburg to Mr. Stottlemeyer
that was evidenced by Mr. Stottlemeyer’s note. See, e.g., Haag
v. Commissioner, 88 T.C. 604, 616 n.6 (1987), affd. without
published opinion 855 F.2d 855 (8th Cir. 1988). Assuming
arguendo that petitioners had carried their burden of establish-
ing that there was a loan by Mr. Ramsburg to Mr. Stottlemeyer
that was evidenced by Mr. Stottlemeyer’s note, we have found that
there was no sale by Kildare Timmy to Mr. Ramsburg of its horses
and stud rights. As a result, there were no “cash proceeds from
                                                   (continued...)
                                - 33 -

     Having rejected the linchpin in petitioners’ position under

section 469(g)(1)(A) (viz., Mr. Ramsburg purchased from Kildare

Timmy its horses and stud rights immediately before Kildare Timmy

made a distribution to him in liquidation of his interest in that

partnership), we shall now analyze whether, as required by

section 469(g)(1)(A), petitioners recognized all of the gain or

all of the loss, as the case may be, realized upon the distribu-

tion by Kildare Timmy to Mr. Ramsburg of Kildare Timmy’s horses

and stud rights and Kildare Timmy’s bank account balance.

     Section 731(a) provides:

     SEC. 731. EXTENT OF RECOGNITION OF GAIN OR LOSS ON
     DISTRIBUTION.

          (a) Partners.--In the case of a distribution by a
     partnership to a partner--

               (1) gain shall not be recognized to such
          partner, except to the extent that any money dis-
          tributed exceeds the adjusted basis of such part-
          ner’s interest in the partnership immediately
          before the distribution, and

               (2) loss shall not be recognized to such
          partner, except that upon a distribution in liqui-
          dation of a partner’s interest in a partnership
          where no property other than that described in
          subparagraph (A) or (B) is distributed to such
          partner, loss shall be recognized to the extent of
          the excess of the adjusted basis of such partner’s
          interest in the partnership over the sum of--

                    (A)   any money distributed, and


     26
      (...continued)
[the] disposition of horses owned by * * * Kildare Timmy”.
Consequently, pursuant to the terms of Mr. Stottlemeyer’s note,
Mr. Stottlemeyer did not owe Mr. Ramsburg anything.
                              - 34 -

                    (B) the basis to the distributee, as
               determined under section 732, of any unreal-
               ized receivables (as defined in section
               751(c)) and inventory (as defined in section
               751(d)).

     On the record before us, we find that petitioners have

failed to carry their burden of establishing (1) Mr. Ramsburg’s

adjusted basis in his interest in Kildare Timmy27 and (2) the

fair market value of each of the noncash assets (i.e., the racing

and breeding horses and the stud rights) that Kildare Timmy

distributed to Mr. Ramsburg in liquidation of his interest in

that partnership.   On that record, we further find that petition-

ers have failed to carry their burden of showing whether the

total of (1) the Kildare Timmy bank account balance of $908.71

and (2) the aggregate of the respective fair market values of the

racing and breeding horses and the stud rights that we have found

Kildare Timmy distributed to Mr. Ramsburg in liquidation of his

interest in that partnership was equal to, greater than, or less

than Mr. Ramsburg’s adjusted basis in such partnership interest.

As a result, we find that petitioners have failed to carry their

burden of showing (1) whether Mr. Ramsburg realized a gain or a

loss upon Kildare Timmy’s distribution to him of the horses, stud

rights, and bank account balance in question and (2) whether all

     27
      Respondent appears to take the position, with no explana-
tion, that Mr. Ramsburg’s adjusted basis in his interest in
Kildare Timmy was $139,569 (before taking into account Kildare
Timmy’s $4,592 loss from trade or business activities that it
claimed in its 1998 partnership return and that it reported in
that return as Mr. Ramsburg’s distributive share of such loss).
                              - 35 -

of any such gain or all of any such loss, as the case may be, was

to be recognized under section 731(a).28   Assuming arguendo that

     28
      We seriously doubt that sec. 731(a) required petitioners
to recognize all of any gain or all of any loss, as the case may
be, realized upon Kildare Timmy’s distribution to Mr. Ramsburg of
the horses, stud rights, and bank account balance in question.
It is significant that if there were a gain realized upon such
distribution, the assets that Kildare Timmy distributed to Mr.
Ramsburg included not only money but Kildare Timmy’s racing and
breeding horses and stud rights. Under sec. 731(a), gain is not
to be recognized except to the extent that any money distributed
exceeds the adjusted basis of the partner’s interest in the
partnership immediately before the distribution. If there were a
loss realized upon the distribution by Kildare Timmy to Mr.
Ramsburg of the horses, stud rights, and bank account balance in
question, sec. 731(a)(2) provides that loss is not to be recog-
nized except that, upon a distribution in liquidation of a
partner’s interest in a partnership, where no property is dis-
tributed other than money, unrealized receivables as defined in
sec. 751(c), and inventory as defined in sec. 751(d), loss is to
be recognized to the extent of the excess of the adjusted basis
of the partner’s interest in the partnership over the sum of
(1) any money distributed and (2) the basis to the distributee,
as determined under sec. 732, of any such unrealized receivables
and any such inventory. In this connection, for purposes of sec.
731(a)(2), each of Kildare Timmy’s racing and breeding horses and
its stud rights may constitute an unrealized receivable as
defined in sec. 751(c), but only to the extent of the amount to
be treated as gain to which sec. 1245(a) would apply if at the
time Kildare Timmy distributed each such asset to Mr. Ramsburg,
that partnership had sold each such asset at its fair market
value. See secs. 731(a)(2)(B), 751(c). Thus, for purposes of
sec. 731(a)(2), any determination of whether Kildare Timmy
distributed “unrealized receivables” to Mr. Ramsburg depends on
Kildare Timmy’s basis in and the fair market value of each such
horse and stud rights. Even if there were any sec. 1245(a) gain
associated with any of Kildare Timmy’s horses or stud rights,
none of any loss realized by Mr. Ramsburg upon the distribution
to him by Kildare Timmy of the horses, stud rights, and bank
account balance in question would be recognized under sec.
731(a)(2). That is because a distribution of an unrealized
receivable in the form of sec. 1245(a) gain necessarily involves
the distribution of the underlying asset (i.e., each of the
horses and the stud rights in question) to which the sec. 1245(a)
gain attaches. Therefore, the distribution in liquidation of Mr.
                                                   (continued...)
                              - 36 -

we had found that Mr. Ramsburg disposed of his entire interest in

the passive activity in question to an unrelated person, on the

record before us, we find that petitioners have failed to carry

their burden of establishing that, as required by section

469(g)(1)(A), they recognized all of any gain or all of any loss,

as the case may be, realized upon any such disposition.

     Based upon our examination of the entire record before us,

we find that section 469(g)(1) does not permit petitioners to

treat for 1998 petitioners’ passive losses attributable to

Kildare Timmy as nonpassive losses.

     We have considered all of the contentions and arguments of

the parties that are not discussed herein, and we find them to be

without merit, irrelevant, and/or moot.29

     28
      (...continued)
Ramsburg’s interest in Kildare Timmy would have included property
other than money, unrealized receivables, and inventory. See
sec. 731(a)(2). Moreover, if any of Kildare Timmy’s horses or
stud rights that it distributed in liquidation of Mr. Ramsburg’s
interest in that partnership were not to have any sec. 1245(a)
gain associated with it, none of any loss realized by Mr.
Ramsburg upon that distribution would be recognized under sec.
731(a)(2). That is because the distribution in liquidation of
Mr. Ramsburg’s interest in Kildare Timmy would have included
property other than money, unrealized receivables, and inventory.
See sec. 731(a)(2).
     29
      We shall, however, address petitioners’ contention that on
Jan. 1, 1998, the date on which we have found Kildare Timmy
distributed to Mr. Ramsburg its horses and stud rights and the
Kildare Timmy bank account balance, Mr. Stottlemeyer owned a 50-
percent capital interest in Kildare Timmy. In support of that
contention, petitioners assert, inter alia, that, in addition to
cash, Mr. Stottlemeyer made capital contributions to Kildare
Timmy of Mr. Stottlemeyer’s management services. On the record
                                                   (continued...)
                             - 37 -

     To reflect the foregoing,


                                        Decision will be entered

                                   for respondent.




     29
      (...continued)
before us, we reject petitioners’ contention that Mr.
Stottlemeyer owned a 50-percent capital interest in Kildare Timmy
on Jan. 1, 1998. In this regard, we have found that (1) Mr.
Ramsburg and Mr. Stottlemeyer made cash capital contributions to
Kildare Timmy totaling around $1,336,459 and $282,187, respec-
tively, (2) in return for Mr. Stottlemeyer’s management services,
Mr. Stottlemeyer did not receive any salary from Kildare Timmy or
increases in his Kildare Timmy capital account, and (3) on Jan.
1, 1998, Kildare Timmy distributed all of its assets (i.e., the
racing and breeding horses, the stud rights, and the Kildare
Timmy bank account balance) to Mr. Ramsburg and distributed none
of its assets to Mr. Stottlemeyer.
