                        T.C. Memo. 2001-90



                      UNITED STATES TAX COURT



             ROBERT AND KAREN O’CONNOR, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 22345-97.                    Filed April 11, 2001.



     John L. Burghardt, for petitioners.

     Kathryn K. Vetter, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     GERBER, Judge:   In a notice of deficiency addressed to

petitioners, respondent determined deficiencies and penalties as

follows:
                                   - 2 -

                                              Penalty
          Year      Deficiency              Sec. 6662(a)

          1993          $114,257               $22,851
          1994           171,550                34,310
          1995           189,541                37,908

     The issues for our consideration are:        (1) Whether

petitioners’ solely owned S corporation was engaged in a farming

activity for profit under section 183 for the taxable years 1993,

1994, and 1995; (2) whether petitioners are entitled to deduct

various amounts claimed as contributions; and (3) whether

petitioners are subject to the accuracy-related penalties under

section 6662(a).1

                          FINDINGS OF FACT2

     When they filed their petition, Robert and Karen O’Connor

resided in Corning, California.      Petitioners owned all of the

outstanding shares of Omega Waste Management, Inc. (Omega), which

was incorporated in December 1989.         Omega filed a Form 1120, U.S.

Corporation Income Tax Return, for 1989.        In 1990, Omega elected

S corporation status.

     During the years at issue, Omega was a recycling broker and

consulting firm that arranged for hauling of recyclable materials



     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the taxable periods under
consideration, and all Rule references are to the Tax Court Rules
of Practice and Procedure.
     2
       The parties’ stipulation of facts and exhibits are
incorporated herein by this reference.
                                 - 3 -

and designed and managed rubbish removal and recycling programs.

Omega was also involved in farming activity on approximately

1,400 acres of land leased from the Christian Boys Ranch, Inc.

(CBR).

     From 1990 through 1995, petitioners reported passthrough

income from Omega on Schedules E, Supplemental Income and Loss,

attached to their individual income tax returns as follows:

                    Year         Net Income

                    1990          $52,303
                    1991           57,867
                    1992           51,437
                    1993          217,787
                    1994          483,949
                    1995          660,375

     For the same period Robert O’Connor (petitioner) reported

wages as follows:

                    Year          Amount

                    1990         $40,900
                    1991          52,869
                    1992          47,394
                    1993          50,390
                    1994          53,618
                    1995          46,894

     Petitioners organized CBR under the nonprofit laws of the

State of California on June 24, 1982.       CBR is a section 501(c)(3)

corporation for tax reporting purposes.       Petitioner has served on

CBR’s board of directors and as its president since its

incorporation in 1982.     Karen O’Connor has also served on CBR’s

board of directors and as CBR’s vice president and secretary-
                                - 4 -

treasurer since 1982.    Unrelated parties have also served on

CBR’s board of directors.

     In 1987, CBR purchased from Ben Larralde (Larralde) an

1,800-acre ranch property in Corning, California.    Three hundred

acres of the ranch consisted of an almond orchard.    During the

years in issue, the orchard was not irrigated, and most of the

almond trees were either dead or stunted from lack of

maintenance.   During the years in issue, petitioners maintained

their residence on the ranch property.

     On May 1, 1990, Omega and CBR entered into a 5-year

agreement under which Omega leased from CBR approximately 1,400

acres of ranchland that included the 300-acre almond orchard.

Petitioners signed the agreement as officers of both CBR and

Omega.   In turn, Larralde then leased the 1,400 acres from Omega

for use as grazing land for cattle.     Larralde’s rent was based on

the number of head of livestock grazing on the property.    To

accommodate Larralde, Omega built fences, graded roads, and

enlarged ponds. From 1990 through 1995, Omega paid rent to CBR as

follows:

                  Year                   Rent

                  1990                  $9,000
                  1991                  11,515
                  1992                  21,951
                  1993                  31,865
                  1994                  31,020
                  1995                  43,000
                               - 5 -

     Pursuant to the CBR lease, Omega was to furnish any

machinery, equipment, water, fertilizer, chemicals, and labor to

plant, grow, and harvest any and all crops.   Omega was also

responsible for all costs and expenses associated with the

raising of livestock, including, but not limited to, fencing

construction and maintenance, barn maintenance, road maintenance,

and feed costs.   The maximum number of livestock allowed to graze

on the property was 200.   Normal repairs were to be absorbed by

Omega, but CBR was responsible for major repairs costing more

than $2,000.   Omega and CBR entered into a new leasing agreement

on May 1, 1995.   Only petitioner signed the new agreement between

CBR and Omega as an officer of both CBR and Omega.   The new

agreement was similar to the previous lease with CBR; however,

Omega would now pay CBR $3,000 per month for the rental of land

and $1,400 per month for the rental of certain mobile homes.    On

its income tax returns for 1990 through 1995, Omega reported

receipts and net losses from farming activity as follows:

          Year             Receipts           Net Loss

          1990                -0-              $39,698
          1991              $2,692             163,687
          1992               5,620             191,516
          1993              12,938             148,268
          1994               4,385             155,156
          1995                 185             135,239
            Total           25,820             833,564

     From 1990 through 1995, Omega’s receipts from its farm

activity consisted of the following components:
                                - 6 -

                  Pasture       Almond         Livestock
     Year           Rent         Sales           Sales

     1990            -0-          -0-             -0-
     1991          $2,692         -0-             -0-
     1992           5,620         -0-             -0-
     1993          12,076         -0-             -0-
     1994            -0-         $2,363         $2,021
     1995            -0-          -0-              185

     Petitioner sought and received advice from various advisers

and agricultural experts.    One such adviser was Jose Collado

(Collado), a certified public accountant licensed to practice in

the State of California.    Before providing accounting services

for petitioner, Collado had provided accounting services to

almond farmers and cattle ranchers located near the Omega farm

activity.   Aside from providing accounting services to Omega,

Collado regularly advised petitioner to make improvements to

Omega’s existing farm activity and to consider alternative

farming methods in order to lower expenses and increase income.

Petitioner was advised to increase the size of Omega’s herd,

replace dead or unproductive almond trees, and improve

irrigation.

     In addition to the advice Omega received from Collado,

Omega’s bookkeeper arranged meetings with various agricultural

experts with whom petitioner would discuss changes to Omega’s

existing farm activity and/or alternative farming techniques

suitable to Omega’s particular terrain and climate.      Petitioner

attended a 1-day olive grower’s convention where he sought advice
                               - 7 -

regarding Omega’s farm activity.    Petitioner never changed

Omega’s farming methods or implemented the improvements suggested

by Collado or the agricultural experts.

     Omega claimed deductions for contributions to CBR consisting

of the payment of Omega’s employees for the performance of

services for the benefit of CBR.    The labor expenses were

described as amounts for the building and/or maintenance of

corrals, silos, a radius wall, the orchard, a septic system,

buildings, equipment, and grounds.     From 1990 to 1995, the

amounts claimed by Omega as its section 170(c)(2) contributions

of Omega’s employees’ labor to CBR were as follows:

                 Year              Amount

                 1990           $13,170
                 1991            39,593
                 1992            20,631
                 1993           121,149
                 1994            76,711
                 1995            95,016

These amounts were passed through to and deducted by petitioners

subject to adjusted gross income limitations.

     In 1990, petitioners made contributions of property to CBR.

The donated items included two dismantled metal buildings, one

2,500-gallon butane tank, one Austin-Western Pettybone crane, one

Clark forklift, and one sheer press.     Petitioners valued these

items at $107,500.   Five of the six donated items were valued by

petitioners at over $5,000 each.    Petitioners attached a Form

8283, Noncash Charitable Contributions, to their 1990 Federal
                                - 8 -

income tax return.   The Form 8283 was signed by Jane Dolan

(Dolan), a California probate referee, in support of the claimed

values.   Petitioners were unable to deduct all of the property

donations claimed for 1990 because of adjusted gross income

limitations.

     In 1991, petitioners donated various items to CBR and

claimed a deduction of $640,888.    Petitioners valued many of the

items at more than $5,000 each.    Petitioners attached an

equipment appraisal letter, a list of the appraised items, and a

Form 8283 to their 1991 Federal income tax return.    Dolan again

signed as appraiser.   The Form 8283 contained the statement that

the items had been acquired by petitioners between 1964 and 1991,

and that all items were purchased for amounts equal to or greater

than their appraised values.    The items listed, among others,

included the following:   Mobile buildings; water tanks; bailers;

feed; weigh scales; stereo equipment; an aluminum can machine;

compactors; pumps; motors; cargo containers; a fire engine;

freezers; rubbish bins; canned drink machines; appliances; air-

conditioners; kitchen equipment; cattle trailers; conveyors;

flatbed trailers; fencing; vehicles; street sweepers; water

troughs; furniture; a glass crusher; gates; rolltop bins; a

security system; and animals.    Each item was:   Categorized by its

general location at CBR; described as new, used, or discard; and

assigned a value.    Many of the items were rusted and in a state
                                - 9 -

of disrepair.    Many of the donated vehicles were inoperable and

had not been registered for several years.   Some of the vehicles

were over 30 years old.

     CBR did not begin its formal operations at the ranch

property until after the years in issue.   By the end of 1998,

some of the buildings and infrastructure were in place, and CBR

was making final preparations to open the ranch property for its

charitable purposes.    In 1999, CBR began operating a program in

conjunction with Remi Vista, a section 501(c)(3) organization

that has operated homes for boys for approximately 27 years.

                               OPINION

     The first issue we consider is whether the losses claimed in

Omega’s farming activity for 1993, 1994, and 1995 were incurred

in an activity carried on with an actual and honest profit

objective within the meaning of section 183.   Respondent

determined that the activities were “not engaged in for profit”

within the meaning of section 183(a).    Petitioners must show that

respondent’s determination is erroneous.   See Welch v. Helvering,

290 U.S. 111 (1933).

     It does not appear that Omega engaged in regular and

continuous farming activity.   Instead, Omega leased the 1,400

acres of agricultural property from CBR and in turn leased the

same acreage to a third party under a per-head grazing

arrangement.    Omega depended upon the third-party lease, some of
                              - 10 -

its own livestock activity, and an almond grove for income.

Omega was responsible for expenses in connection with the

property and paid CBR rent of more than $30,000 for each of the

years under consideration.   For 1993, Omega’s only receipt from

the “farming” activity was $12,076 rent from the third-party

lease.   For 1994, Omega’s only receipts were $2,363 from almond

sales and $2,021 from the sale of livestock.    For 1995, Omega’s

only receipt was $185 from the sale of livestock.    Finally, we

note that Omega’s reported expenses for 1993, 1994, and 1995, in

addition to the rent to CBR, exceeded $100,000 annually and were

generally increasing.   Accordingly, Omega’s annual expenses

vastly exceeded steadily decreasing receipts.    With this backdrop

we analyze whether Omega’s activity was “not engaged in for

profit” within the meaning of section 183.

     The ordinary and necessary expenses incurred in carrying on

an activity which constitutes a trade or business are generally

deductible.   See sec. 162(a); sec 1.183-2(a), Income Tax Regs.

Section 183 provides, in part, that if an individual’s or an S

corporation’s activity is “not engaged in for profit”, then no

deduction attributable to that activity shall be allowed except

as otherwise provided under section 183(b).    One of the

motivating factors behind the passage of section 183 was the

desire to create a more objective standard to determine whether a

taxpayer was carrying on a business for the purpose of realizing
                               - 11 -

a profit or was instead merely attempting to create and use

losses to offset his income.   See Jasionowski v. Commissioner, 66

T.C. 312, 321 (1976); S. Rept. 91-552 (1969), 1969-3 C.B. 423.

     To establish that an activity is one engaged in for profit,

a taxpayer must show that the activity was entered into with the

dominant hope and intent of realizing a profit.   See Wolf v.

Commissioner, 4 F.3d 709, 713 (9th Cir. 1993) (profit must be the

predominant, primary or principal objective), affg. T.C. Memo.

1991-212; Vorsheck v. Commissioner, 933 F.2d 757, 758 (9th Cir.

1991); Machado v. Commissioner, T.C. Memo. 1995-526, affd.

without published opinion 119 F.3d 6 (9th Cir. 1997); Warden v.

Commissioner, T.C. Memo. 1995-176, affd. without published

opinion 111 F.3d 139 (9th Cir. 1997).   We consider whether an

activity is engaged in for profit on a case-by-case basis, taking

into account the facts and circumstances involved.   See Golanty

v. Commissioner, 72 T.C. 411, 426 (1979), affd. without published

opinion 647 F.2d 170 (9th Cir. 1981).

     Petitioners’ expectation of profit need not be reasonable,

but petitioners must establish that they conducted their

activities with a good-faith expectation of making a profit.     See

Engdahl v. Commissioner, 72 T.C. 659, 666, (1979); Golanty v.

Commissioner, supra at 425-426; sec. 1.183-2(a), Income Tax Regs.

In assessing a profit motive, greater weight is to be given to

objective facts than the taxpayer’s mere statement of intent.
                              - 12 -

See Independent Elec. Supply, Inc. v. Commissioner, 781 F.2d 724,

726-727 (9th Cir. 1986), affg. Lahr v. Commissioner, T.C. Memo.

1984-472; Dreicer v. Commissioner, 78 T.C. 642, 644-645 (1982),

affd. without opinion 702 F.2d 1205 (D.C. Cir. 1983); sec. 1.183-

2(a), Income Tax Regs.

     A nonexclusive list of factors set forth in the income tax

regulations guides our section 183 analysis by providing relevant

facts and circumstances to be considered in determining whether

the requisite profit objective has been shown.   These factors

include:   (1) The manner in which the taxpayer carried on the

activity; (2) the expertise of the taxpayer or his advisers; (3)

the time and effort expended by the taxpayer in carrying on the

activity; (4) the expectation that assets used in the activity

may appreciate in value; (5) the success of the taxpayer in

carrying on similar or dissimilar activities; (6) the taxpayer’s

history of income or loss with respect to the activity; (7) the

amount of occasional profit, if any, which is earned; (8) the

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

personal pleasure or recreation are involved.    See sec. 1.183-

2(b), Income Tax Regs.   Although no one factor is conclusive, a

record of substantial losses over many years and the unlikelihood

of achieving a profit are indicative that an activity is not

engaged in for profit.   See Hildebrand v. Commissioner, 28 F.3d

1024, 1027 (10th Cir. 1994), affg. Krause v. Commissioner, 99
                              - 13 -

T.C. 132 (1992); Cannon v. Commissioner, 949 F.2d 345, 352 (10th

Cir. 1991), affg. T.C. Memo. 1990-148; sec. 1.183-2(a), Income

Tax Regs.

     Where a taxpayer carries on an activity in a businesslike

manner and maintains complete and accurate books and records,

where the activity is conducted in a manner substantially similar

to that of other comparable businesses that are profitable, and

where changes are made to the activity’s operating method if

necessary to improve profitability, such circumstances indicate

that the activity is engaged in for profit.   See sec. 1.183-

2(b)(1), Income Tax Regs.   Similarly, a taxpayer’s business plan

may tend to show businesslike operations.   See Sanders v.

Commissioner, T.C. Memo. 1999-208.

     The only record of Omega’s activity viewed by the Court was

a summary containing a review of the farm receipts and

expenditures.   The summary, however, did not provide the kind of

detailed and relevant information that could be used by

petitioners or the Court for evaluating the farm activity’s

profitability, such as:   A detailed listing of farm expenses; the

number and types of animals bought and sold by petitioners; the

number of animals on the property that produced pasture rent; the

specific items of farm equipment that were depreciated; and the

specific items that were repaired and maintained.   Omega

maintained only one bank account for both the farm activity and
                             - 14 -

the recycling business and failed to maintain a budget or make

projections as to the future profitability of the farm activity.

     There is no indication here that Omega’s activity was

changed and/or that plans were carried out to ameliorate the

substantial excess of expenditures over receipts.   Accurate books

and records could have provided the data to make educated

decisions toward achieving profitability.   See, e.g., Wesinger v.

Commissioner, T.C. Memo. 1999-372, and the cases cited therein.

     There is very little evidence in the record to establish how

other comparable and profitable farming activities operate.

Given petitioner’s business acumen with respect to the recycling

business and the fact that petitioners’ accountant and others

provided guidance with regard to profitability, we find it

particularly compelling that petitioner did not follow the advice

of his accountant or the agricultural experts with whom

petitioner sought counsel and thus continued to permit Omega to

incur heavy losses in its farm activity.    During a 6-year period,

including the years under consideration, Omega’s recycling

business income increased exponentially while petitioner did

nothing to change Omega’s farm-activity losses.   Omega maintained

minimal herds of livestock and did nothing to improve the quality

of its crop.

     It also appears that petitioner structured Omega’s leases

with Larralde and CBR to maximize Omega’s expenses while no
                               - 15 -

action was taken to increase the receipts from the farm activity.

Petitioner testified that sometimes he did not charge Larralde

rent but instead accepted livestock in trade.    Pursuant to the

existing leases, Omega was required to fix water pumps and mend

fences in order to provide adequate water and pasture for Omega’s

and Larralde’s livestock.    CBR was required to fix major

mechanical failures; however, in reality, Omega paid for these

repairs and petitioner claimed the costs as charitable

contributions in the form of labor performed by Omega’s

employees.

      According to petitioners, the almond trees on the property

were maintained to produce organically grown almonds that could

be sold at a higher market price than almonds that were not

produced organically.    However, petitioner also testified that

the almond trees were dwarfed and stunted due to a lack of proper

care and could not be watered or chemically fertilized.

Therefore, the only way to maximize output from the almond trees

while still maintaining organic certification was to replace the

dead or stunted trees.   Yet, from 1990 through 1995, Omega spent

a total of $467 on replacement trees for the orchard.     We find it

difficult to envision a profitable farm activity where the very

crops from which a profit could be derived are not cared for or

replaced with regularity.
                               - 16 -

     Petitioners argue that Omega was financially unable to make

changes to its farming methods and that property liens kept them

from obtaining loans to improve the farm and its profitability.

Petitioners’ argument does not ring true.    Omega’s net income,

after accounting for farming losses was $217,787, $483,949, and

$660,375 for 1993, 1994, and 1995, respectively.    Therefore,

Omega was capable of acquiring livestock, providing irrigation

for the almond orchard, and/or purchasing new trees to replace

unproductive ones.

     Omega’s profitable business activity was hauling and

recycling rubbish, and petitioner admits that he had little

experience with farming.    He argues, however, that his

consultations with experts demonstrate petitioners’ ongoing

effort to bring Omega’s farming activity into profitability.

     Petitioners did present evidence that advice was sought and

received concerning increasing herd sizes and replacing trees in

or expanding the orchard.    Petitioner also attended a 1-day olive

growers convention and sought other related advice regarding

Omega’s farm operation.    Finally, petitioner met with the

accountant to discuss the financial statements and the high

expenses and paucity of income.    In spite of the advice sought

and/or received, nothing was done to change the farming activity

of Omega.   Although petitioner testified that he spent extensive

time engaged in Omega’s farming activity, there is little in the
                              - 17 -

record to corroborate his testimony or to show that his efforts

were directed at improving profitability.   In that regard, it is

noted that petitioners lived on the property.   In addition, as

argued by respondent, petitioner’s efforts in operating a

successful recycling business limited the time available for

petitioner to work on the farming activity.

     In this case there was no possibility for increase in the

value of the land inuring to Omega because it was a lessee.    In

addition, there was no expectation that any of the depreciable

property used in the farming operation would increase in value.

Petitioners also argue that their farm was in existence for only

2 years before the years in issue and therefore it was expected

that losses would be sustained for a reasonable period under the

circumstances.   Petitioners’ argument has little merit.   From

1990 through 1995, Omega incurred expenditures totaling $833,564

in the farm activity.   During the 3 years under consideration,

Omega’s expenditures totaled $438,663.   Accordingly, expenditures

were increasing rather than abating.   In sharp contrast, over the

farm activity’s 6-year existence, farm activity receipts totaled
                               - 18 -

$2,206, $2,363, and $20,388 from the sale of livestock, almonds,

and grazing rights, respectively.3

     During the 3 years in issue, Omega’s recycling activities

were highly profitable.    As discussed above, Omega’s net income,

after reductions for farm-activity expenses, was $217,787,

$483,949, and $660,375 for 1993, 1994, and 1995, respectively.

Petitioners also received wages from Omega.    The farm activity

losses substantially reduced Omega’s gross income from its

recycling business, which provided significant passthrough tax

benefits to petitioners.    The receipt of a substantial amount of

income from sources other than the activity, especially if the

losses from the activity generate large tax benefits, may

indicate that the taxpayer does not intend to conduct the

activity for profit.   See sec. 1.183-2(b)(8), Income Tax Regs.

     In summary, petitioners/Omega did not possess the requisite

intent to profit from the farm operations.    Petitioners are

therefore subject to the restrictions set forth in section 183

for activities not engaged in for profit.

     Next we consider whether petitioners are entitled to deduct

amounts claimed as contributions to CBR during the 1990 and 1991

tax years and carried over into the years in issue.    We consider


     3
       The only sales of almonds occurred in 1994. Most of the
farm’s income came from pasture rent, which totaled $2,692,
$5,620, and $12,076, for 1991, 1992, and 1993, respectively.
Omega had no revenue from pasture rent during 1990, 1994, and
1995.
                               - 19 -

two types of contributions:    (1) Whether petitioners properly

valued the property contributions of tangible property given to

CBR, and (2) whether amounts claimed as paid to Omega’s employees

for services performed for the benefit of CBR are deductible.

      Section 170(a)(1) allows a deduction for charitable

contributions (as defined in section 170(c)) made within the

taxable year.   In general, the amount of a charitable

contribution made in property other than money is the fair market

value of the property at the time of the contribution.    See sec.

1.170A-1(c)(1), Income Tax Regs.    Fair market value is defined as

the price at which the property would change hands between a

willing buyer and a willing seller, neither being under any

compulsion to buy or sell and both having reasonable knowledge of

the relevant facts.   See sec. 1.170A-1(c)(2), Income Tax Regs.

Fair market value is a question of fact.    See Skripak v.

Commissioner, 84 T.C. 285 (1985).    Petitioners have the burden of

showing their entitlement to their claimed deductions.    See Welch

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

     Under section 1.170A-13(b)(3), Income Tax Regs., if a

contributed item is valued at over $500, the taxpayer is required

to maintain written records showing the manner of acquisition,

the fair market value, the method used to determine the value,

and the cost or other basis.    If a contributed item is valued at

over $5,000, the donor must obtain a qualified appraisal for the
                              - 20 -

contributed property, attach a fully completed appraisal summary

to the Federal income tax return, and maintain reasonably

detailed records containing a description of the property, the

fair market value of the property at the time of the donation,

the method used in determining the fair market value, and the

cost or other basis.   See sec. 1.170A-13(c)(2), Income Tax Regs.

     A qualified appraisal shall include, inter alia, a

description of the property in sufficient detail for a person who

is not generally familiar with the type of property to ascertain

that the property that was appraised is the property that was

contributed, a description of the physical condition of the

property, the qualifications of the qualified appraiser, the

method of valuation used to determine the fair market value, and

the specific basis for the valuation.   See sec. 1.170A-13(c)(3),

Income Tax Regs.   The appraisal summary shall include, inter

alia, a description of the property in sufficient detail for a

person who is not generally familiar with the type of property to

ascertain that the property that was appraised is the property

that was contributed, a brief summary of the physical condition

of the property, the manner of acquisition, and the cost or other

basis.   See sec. 1.170A-13(c)(4), Income Tax Regs.
                              - 21 -

     Respondent argues that petitioners are not entitled to

deductions for the carryover4 of charitable contributions from

1990 and 1991 to 1993, 1994, and 1995 because the fair market

values of the contributed property carried over from 1990 and

1991 have not been established.   Petitioners claimed as

separately computed passthrough deductions from Omega noncash

charitable contributions of tangible property to CBR of $107,500

and $640,888 for 1990 and 1991, respectively.   Because of 50-

percent limitation, petitioners could not deduct all of their

claimed contributions during the 1990 and 1991 tax years.

Because they claimed contribution carryovers from the 1990 and

1991 tax years, these years’ contributions are at issue in this

case.

     There is no dispute about whether the property was

contributed to CBR.   Instead, the question is whether the values

claimed represent the fair market values of the items

contributed.   To establish fair market values for the tangible

property contributed to CBR, petitioners employed Dolan, a

probate referee licensed by the State of California.    Dolan

submitted an appraisal report to petitioners.   We find, on the


     4
       Generally, in the case of individuals, deductions for
charitable contributions are limited to 50 percent of adjusted
gross income. See sec. 170(b)(1)(A). Excess contributions may
be carried forward for up to 5 years. Carryover contributions
are deducted after deducting current year contributions. If
there are carryovers from more than 1 prior year, the carryover
from the earlier year is used first. See sec. 170(d)(1).
                               - 22 -

basis of photographs and other evidence in the record, that the

appraisal report inadequately describes the physical condition of

the items.    See sec. 1.170A-13(c)(3)(ii)(B), Income Tax Regs.

Additionally, the appraisal does not contain the method of

valuation that the appraiser used when attributing values to the

property.    See sec. 1.70A-13(c)(3)(ii)(J), Income Tax Regs.

Finally, the appraisal does not contain the specific basis for

the valuation.    See sec. 1.170A-13(c)(3)(ii)(K), Income Tax Regs.

Petitioners were unable to explain the absence of the required

information.    The items were generally described as “new”,

“used”, or “discard”, and in a limited number of cases “good”,

“fair”, or “dismantled”.    Without a more detailed description the

appraiser’s approach and methodology cannot be evaluated.      In

that regard, the appraiser was not called to testify, and no

other appraisers were offered by petitioners.    Accordingly,

petitioners have not fully complied with the requirements imposed

by the regulations.    See sec. 1.170A-13(c), Income Tax Regs.

      Although petitioner testified as to the condition of the

contributed items, his testimony was evasive on cross-

examination, and his testimony was inconsistent with photographic

evidence of the contributed property.    Many of the items

contributed by petitioners, such as mechanized farm equipment,

industrial machinery, fuel tanks, and vehicles appear to be

rusted and in a state of disrepair.     Petitioners offered no sales
                              - 23 -

receipts, canceled checks, or other contemporaneous evidence that

could aid in the valuation of the contributed property.5

Accordingly, petitioners have not shown that they are entitled to

deductions greater than the amounts already claimed during the

1990 and 1991 tax years.

     Next we consider whether petitioners may claim contributions

for unreimbursed expenses incurred by Omega in connection with

services performed by Omega employees for the benefit of CBR.

Petitioners contend that certain services performed by Omega

employees at the behest of petitioners and for the benefit of CBR

entitle petitioners to deduct as passthrough charitable

contributions the salaries paid in connection with services

performed.   Respondent argues that petitioners are not entitled

to a deduction for the salaries paid to Omega employees for work

performed on the ranch because the work benefited Omega.

     There are in dispute charitable “cash contributions”6 of

$121,149, $76,711, and $95,016 for the tax years 1993, 1994, and

1995, respectively.   Aside from petitioner’s self-serving

testimony, petitioners submitted a schedule showing some of the

pay periods during the years in issue; however, the schedule is


     5
       Petitioners’ only receipt was for a mobile home with a
purchase date of June 13, 1983, at a price of $19,500. It is not
known whether this mobile home was an item contributed to
Christian Boys Ranch, Inc. (CBR).
     6
       In effect, these are gifts of services as opposed to cash
contributed to CBR.
                               - 24 -

incomplete, and at least one page has been submitted twice.7

Although the schedule identifies specific employees, the number

of hours each employee worked, and the general areas where work

was performed, the schedule does not show Omega’s actual cost of

labor, nor does the schedule break down the specific services

performed.   The labor expenses included amounts for the building

and/or maintenance of corrals, silos, a radius wall, the orchard,

a septic system, buildings, equipment, and grounds.   Omega was

already obligated for some of these expenditures under the

CBR/Omega agreement.   Further, petitioners have not shown whether

Omega had already claimed deductions for the same labor expenses

as employees’ salaries.   Importantly, it appears that the

services could have benefited Omega and/or petitioners, and they

have not shown how CBR obtained primary benefit from the

services.    See Babilonia v. Commissioner, 681 F.2d 678 (9th Cir.

1982), affg. per curiam T.C. Memo. 1980-207.

     Petitioners relied on their bookkeeper to notify the

accountant/tax preparer as to which expenses benefited Omega and

which benefited CBR.   However, petitioners began living on the

CBR ranch property several years before CBR opened its doors for

operation in 1999.   Because they lived on the CBR property before




     7
       Several periods are missing from each year a cash
deduction was claimed. Most periods from 1995 were omitted.
                                  - 25 -

its opening, petitioners also may have personally benefited from

the services contributed.

       Petitioners’ poor record keeping and inability to show that

all of the expenditures were for the benefit of CBR is of their

own making.       However, the record establishes that CBR benefited

directly and primarily from certain of the services of Omega

employees.       After considering all of the evidence, we hold that

petitioners are entitled to claim contributions for services by

Omega to CBR of $3,300, $9,900, $5,200, $30,000, $19,000, and

$24,000 for the tax years 1990, 1991, 1992, 1993, 1994, and 1995,

respectively.8

       The final issue for our consideration is whether petitioners

are liable for the accuracy-related penalties under section 6662,

which respondent determined were due to negligence, disregard of

rules and regulations, and substantial understatement of income

tax.       An accuracy-related penalty is imposed on a taxpayer if any

portion of an underpayment of tax is attributable to either

negligence or disregard of rules or regulations or any

substantial understatement of income tax.      See sec. 6662(a) and

(b)(1) and (2).       The term “negligence” includes any failure to

make a reasonable attempt to comply with the provisions of the

Internal Revenue Code, and the term “disregard” includes any


       8
       Amounts are decided for the years 1990, 1991, and 1992 for
purposes of determining the amount of the carryover, if any, to
the years before the Court.
                                - 26 -

careless, reckless, or intentional disregard.      See sec. 6662(c).

Negligence also includes any failure by the taxpayer to keep

adequate books and records or to substantiate items properly.

See sec. 1.6662-3, Income Tax Regs.      An individual taxpayer’s

understatement is substantial if the amount of the understatement

exceeds the greater of 10 percent of the tax required to be shown

on the return or $5,000.    See sec. 6662(d)(1)(A).    The accuracy-

related penalty is not to be imposed if it is shown that there

was reasonable cause for the underpayment and that the taxpayer

acted in good faith.   See sec. 6664(c)(1).     Petitioners have the

burden of showing that they are not liable for the accuracy-

related penalties.   See Welch v. Helvering, 290 U.S. 111 (1933).

     In support of his determination, respondent contends that

petitioners allowed the accumulation of substantial amounts of

losses from Omega’s farm activity to reduce the income produced

by Omega’s recycling business.    Respondent’s contention that

Omega’s farming activity was continued for the purpose of using

losses to reduce Omega’s highly profitable recycling business

income is supported by the facts.    The size of Omega’s

expenditures compared to the meager revenue it received without

attempting to increase receipts or cut expenses, on this record,

supports no other conclusion.    Over a 6-year period, Omega’s farm

activity generated losses totaling $833,564, with gross receipts

totaling only $25,820.     There is no other apparent motivation in
                              - 27 -

the record for continually incurring these unabated expenditures.

We also note that petitioners maintained their residence on the

ranch property and it was the situs for future charitable

activity, to commence a few years after the years under

consideration.

     Respondent also argues that petitioners claimed large

overvalued deductions for contributions of property to CBR in

1990 and 1991.   In addition, respondent contends that petitioners

failed to furnish a qualified appraisal identifying the values of

items contributed to CBR as required by the regulations.     We have

already held that petitioners’ property valuations are

substantially overstated and that contributions of labor to CBR

are deductible in greatly reduced amounts.

     Petitioners argue that any underpayment was reasonable

because they acted in good faith and they relied on the advice of

a certified public accountant to whom they provided complete and

accurate records.   The evidence does not bear out petitioners’

argument.   Instead, the record reflects that petitioners failed

to follow the advice of their accountant with regard to achieving

profitability in their farm operation.   They have not established

that they acted in good faith.   In addition, petitioners failed

to provide adequate records to support their claimed deductions

for contributions to CBR.   Thus, petitioners have not shown that

their actions were reasonable or that they attempted to comply
                             - 28 -

with the Internal Revenue Code and the underlying regulations.

We therefore hold petitioners liable for the accuracy-related

penalties.

     To reflect the foregoing,

                                      Decision will be entered

                                 under Rule 155.
