                          T.C. Memo. 1996-285



                      UNITED STATES TAX COURT



    JAMES C. VALLETTE AND ARLEEN R. VALLETTE, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 3380-94.                        Filed June 20, 1996.



     James Alvin Watson, for petitioners.

     Emile L. Hebert III, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     LARO, Judge:   James C. Vallette and Arleen R. Vallette

petitioned the Court to redetermine respondent’s determination of

deficiencies in their 1989 and 1990 Federal income taxes.

Respondent determined an $18,990 deficiency for 1989 and a

$14,840 deficiency for 1990.    Following concessions by the

parties, we must decide whether petitioners operated a cattle

breeding activity with the requisite profit objective within the

meaning of section 183.    We hold they did not.     Unless otherwise
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stated, section references are to the Internal Revenue Code in

effect for the years in issue.    Rule references are to the Tax

Court Rules of Practice and Procedure.      Dollar amounts are

rounded to the nearest dollar.    James C. Vallette and Arleen R.

Vallette are referred to as Mr. Vallette and Mrs. Vallette,

respectively.

                         FINDINGS OF FACT

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

These facts and the exhibits submitted therewith are incorporated

herein by this reference.   Petitioners resided in Sulphur,

Louisiana, when they petitioned the Court.      They filed 1989 and

1990 Forms 1040, U.S. Individual Income Tax Return, using the

filing status of “Married filing joint return”.      Losses from a

self-owned cattle breeding activity were reported on petitioners'

1989 and 1990 Schedules F, Farm Income and Expenses.

     In 1979, petitioners began their breeding activity under the

name Vallette Farm, at a site located approximately 1 to 2 miles

from their home.1   They bred heifers with bulls to produce calves

(a “cow-calf operation”).   They sold the bull calves at market,

and they either sold the heifer calves at market or retained the

heifer calves for future breeding.       Before 1979, petitioners had

never owned or operated a cattle breeding business.      Petitioners


     1
       During the subject years, this site included 800 acres of
land. Petitioners owned 110 acres of this land, and they leased
the remaining acreage on a yearly basis. Petitioners never
improved any of the leased land.
                                     - 3 -

started breeding cattle in 1979, after they began receiving

substantial royalties from an oil well that was drilled on their

land.      On their 1979 through 1994 Forms 1040, petitioners

reported the following amounts from cattle breeding and oil:

                       Cattle breeding
                                                              Net royalties
Year          Income     Expenses1           Net Loss            from oil

1979          $2,690     $15,299          $12,609                $157,789
1980           3,862      68,964           65,102                 172,379
1981          21,606      85,028           63,422                 198,030
1982           9,562      70,297           60,735                 226,610
1983           4,570      89,696           85,126                 167,465
1984          12,020     108,025           96,005                 190,019
1985           7,522      93,003           85,481                 159,237
1986          13,984      80,162           66,178                 100,317
1987          21,891      95,901           74,010                 112,640
1988           5,135      93,455           88,320                 142,692
1989           4,234      64,955           60,721                  69,933
1990           - 0 -      67,998           67,998                  72,048
1991          49,320      77,835           28,515                 123,622
1992          13,550      90,689           77,139                 114,921
1993          46,933      87,673           40,740                  97,876
1994          36,053      67,698           31,645                  49,011
  Total      252,932   1,256,678        1,003,746               2,154,589
       1
        Petitioners' largest single expense was depreciation.

       During the subject years, petitioners’ involvement in their

breeding activity included worming and feeding the cattle,

delivering calves, planting grass for the cattle, and maintaining

fences.      Besides petitioners, the primary individuals who worked

in the breeding activity were petitioners’ two sons, Matthew and

Stephen, and their son-in-law, Kim Little.              None of these helpers

received any compensation from petitioners for their help.             All

of these helpers worked full-time for other employers.             Stephen

and Kim also owned and operated other farms.
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     Petitioners have never kept a set of books or records for

their breeding activity.     They have never maintained any records

on the lineage, birth, or disposition of their cattle.

Mr. Vallette enjoys working with cattle.     He grew up around

cattle, and the cattle industry is second nature to him.

                                OPINION

     Respondent disallowed petitioners' losses from their

breeding activity because she determined that the activity was

"not engaged in for profit" under section 183.     Section 183

generally limits the deductions for an activity not entered into

for profit.   Sec. 183(b).   An activity is not engaged in for

profit if deductions are not allowable for the taxable year under

section 162 or section 212(1) or (2).     Sec. 183(c).    Section 162

allows individuals to deduct ordinary and necessary expenses

connected with the conduct of a trade or business.       Section

212(1) and (2) allows individuals to deduct expenses for the

production or collection of income, or for the management,

conservation, or maintenance of property held for the production

of income.    Westbrook v. Commissioner, 68 F.3d 868, 875 (5th Cir.

1995), affg. T.C. Memo. 1993-634.

     An individual engages in an activity for profit for purposes

of section 183 if he or she entered into, or continued, the

activity "with the actual and honest objective of making a

profit".   Dreicer v. Commissioner, 78 T.C. 642, 645 (1982), affd.

without published opinion 702 F.2d 1205 (D.C. Cir. 1983).
                               - 5 -

An individual’s expectation of profit need not be reasonable, but

he or she must have a good faith objective of making a profit.

Allen v. Commissioner, 72 T.C. 28, 33 (1979); sec. 1.183-2(a),

Income Tax Regs.   Whether a taxpayer conducts an activity with

the requisite profit objective rests on the facts of the case.

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

published opinion 647 F.2d 170 (9th Cir. 1981).    More weight is

given to the objective facts than to an individual's subjective

expression of his or her intent.   Sec. 1.183-2(a), Income Tax

Regs.   Because respondent determined that petitioners’ breeding

activity was not engaged in for profit, petitioners must prove

that respondent's determination is in error.    Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933); Westbrook v.

Commissioner, supra at 876.   Petitioners rely almost exclusively

on their limited testimony, which focuses mainly on taxable years

preceding the years in issue, as well as the scant testimony of

Stephen and Kim, which also is aimed primarily at prior years.

The only exhibits in evidence are:     (1) Petitioners’ 1979 through

1994 Forms 1040 and (2) the subject notice of deficiency.      The

parties stipulated to minimal facts, and all of these stipulated

facts are best described as favorable to respondent.

     We are aided by the following nonexclusive factors in

deciding whether an activity is engaged in for profit: (1) The

manner in which the taxpayer carries on the activity; (2) the

expertise of the taxpayer or his or her adviser; (3) the time and
                               - 6 -

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 losses in the activity; (7) the amount of occasional

profits, if any, that are earned; (8) the financial status of the

taxpayer; and (9) the elements of personal pleasure or

recreation.   Westbrook v. Commissioner, supra at 876; sec.

1.183-2(b), Income Tax Regs.   None of these nine factors is

dispositive, in and of itself, and a decision does not rest on

the number of factors satisfied.    Golanty v. Commissioner, supra

at 426; sec. 1.183-2(b), Income Tax Regs.   We assess each factor

with the aid of our common sense, and we bear in mind the insight

that we have gained from a lifetime of experience, as well as our

understanding of how the relevant statutory scheme was meant to

apply to the facts at hand.    Ranciato v. Commissioner, 52 F.3d

23, 25-26 (2d Cir. 1995), remanding T.C. Memo. 1993-536.

     Bearing these basic principles in mind, we turn to the nine

factors, analyzing and discussing them one at a time.

     1.   Manner in which the activity is conducted

     We consider the manner in which petitioners conducted their

breeding activity.   See sec. 1.183-2(b)(1), Income Tax Regs.

Objective facts showing that a taxpayer carries on an activity in

a businesslike manner are indicative of a profit intent.   The

same is true with respect to the maintenance of complete and
                                   - 7 -

accurate records.   Id.    The fact that an individual adopts a

different method of operating or abandons unprofitable methods

with respect to operating his or her activity may suggest a

desire to earn a profit.     Id.

     Petitioners have failed to persuade us that they conducted

their breeding activity in a businesslike manner.      They rely

merely on their subjective expressions of intent, as well as the

limited testimony of family members.       Petitioners did not produce

any of their activity’s records at trial.      They did not establish

that they used "cost accounting techniques that, 'at a minimum,

provide the entrepreneur with the information he [or she]

requires to make informed business decisions."       Burger v.

Commissioner, 809 F.2d 355, 359 (7th Cir. 1987) (quoting Burger

v. Commissioner, T.C. Memo. 1985-523), affg. T.C. Memo. 1985-523.

They did not demonstrate that they monitored expenses or assessed

their activity's profitability.      They did not establish that they

maintained a budget for their activity, or that they advertized

any of their cattle for sale.      Although Mr. Vallette testified

without contradiction that he tried before the subject years to

remedy his problem with “bad cattle” by switching his breed of

cattle to a breed that his “common knowledge” told him was the

better breed, we do not believe that this self-supporting

statement standing alone is enough to establish a profit intent.

The fact that petitioners’ activity experienced losses year after

year, and that they took no action to explain the losses or to
                                - 8 -

reverse the tide, adds further support to our belief that

petitioners were, at best, indifferent as to whether the losing

trend could be reversed.    See Ranciato v. Commissioner, supra at

26.

      This factor favors respondent's determination.

      2.   Expertise of taxpayers

      We consider the expertise of petitioners with respect to

their activity.    See sec. 1.183-2(b)(2), Income Tax Regs.    A

taxpayer's expertise, research, and study of an activity, as well

as his or her consultation with experts, is indicative of a

profit intent with respect thereto.     Id.   In preparing for an

activity, a taxpayer need not make a formal market study, but he

or she should undertake a basic investigation of the factors that

would affect the activity’s profitability.      Underwood v.

Commissioner, T.C. Memo. 1989-625; Burger v. Commissioner, T.C.

Memo. 1985-523, affd. 809 F.2d 355 (7th Cir. 1987).

      Mr. Vallette’s prior experiences with cattle made him

knowledgeable on the subject.    The mere fact that he was skilled

in the cattle industry, however, does not mean that petitioners

began or continued their breeding activity for profit.     Our

careful review of this factor suggests that the weight of

Mr. Vallette’s expertise and hands-on experience was offset by

petitioners’ lack of knowledge on the economics of the cattle

breeding industry.    Among other things, the record does not

suggest that petitioners:    (1) Sought any professional advice on
                                  - 9 -

the economic aspects of breeding cattle; i.e., on how to make the

activity profitable, see Burger v. Commissioner, 809 F.2d at 359;

(2) read any literature on the business side of breeding cattle;

(3) performed any meaningful economic study on the profit

potential of breeding cattle; (4) prepared any market analysis on

breeding cattle; (5) established a meaningful breeding plan; or

(6) studied, or consulted with professionals on, the magnitude of

expenses which they were likely to encounter.

      This factor favors neither party.     We consider it neutral.

      3.    Time and effort spent in conducting the activity

      We consider the time and effort spent by petitioners in

conducting their activity.      See sec. 1.183-2(b)(3), Income Tax

Regs.      The fact that a taxpayer devotes much of his or her

personal time to an activity may indicate a profit intent.       The

failure of a taxpayer to devote substantial time to an activity

weighs against a profit objective, unless, for example, the

taxpayer employs capable personnel to conduct the activity in his

or her stead.      Employing capable personnel shows a profit intent.

Id.

      Petitioners have not persuaded us that they spent much time

in their breeding activity during the subject years.      Although

the record contains some testimony establishing that petitioners

and their relatives devoted time to the activity during the

subject years, we are not persuaded that this aggregate time
                               - 10 -

weighs toward a profit objective.     This factor favors neither

party.    We consider it neutral.

     4.   Expectation that the assets will appreciate in value

     We consider the expectation that assets used in petitioners’

activity may appreciate in value.     See sec. 1.183-2(b)(4), Income

Tax Regs.    The term "profit" includes the appreciation in the

value of assets used in an activity.     Id.

     Petitioners have not established that they expected their

activity’s assets to increase in value.     Indeed, the value of

petitioners’ cattle decreased after the years in issue.

     This factor supports respondent's determination.

     5.   Taxpayer's success on similar or dissimilar activities

     We consider petitioners’ success on similar or dissimilar

activities.    See sec. 1.183-2(b)(5), Income Tax Regs.   Although

an activity is unprofitable, the fact that a taxpayer previously

converted similar activities from unprofitable to profitable

enterprises may show a profit intent with respect thereto.     Id.

     Petitioners have not established that they experienced any

success in a similar or dissimilar activity.     This factor

supports respondent's determination.

     6.   An activity's history of income and/or losses

     We consider petitioners’ history of income and/or losses

with respect to their activity.     See sec. 1.183-2(b)(6),

Income Tax Regs.    Losses continuing beyond the period customarily

required to make an activity profitable, if not explainable,
                               - 11 -

indicate that the activity is not engaged in for profit.

Although a series of losses at the beginning of an activity does

not necessarily mean that the activity was not entered into for

profit, such a string of losses weighs against a profit intent

absent unforeseen or fortuitous circumstances beyond the

taxpayer's control (e.g., fire, disease, theft).   A string of

substantial losses over many years and the unlikelihood of

turning a profit are important factors in ascertaining intent.

Bessenyey v. Commissioner, 45 T.C. 261, 274 (1965), affd.

379 F.2d 252 (2d Cir. 1967); see also Cannon v. Commissioner,

T.C. Memo. 1990-148, affd. 949 F.2d 345 (10th Cir. 1991).

     The start-up period for a cow-calf operation is 5 to 7

years.   See Hrdlicka v. Commissioner, T.C. Memo. 1985-403.

Petitioners reported a loss from their cow-calf operation for

16 years in a row from 1979 to 1994, totaling $1,003,746.

Petitioners have not established that any of these breeding

losses was due to unforeseen or fortuitus circumstances beyond

their control or that this stream of losses was likely to change.

Petitioners have also offered no evidence, other than their

subjective testimony, to support their assertion that these

losses were from a business.

     Even if we were to assume, arguendo, that petitioners had a

profit objective before the subject years, we would still not be

persuaded that they retained this objective during the subject

years.   In order to fall outside the purview of section 183, one
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need not merely have had a profit objective before the years in

dispute.    The taxpayer must possess the required objective during

each disputed year.   Sec. 1.183-2(b), Income Tax Regs.; see also

Dennis v. Commissioner, T.C. Memo. 1984-4.     Although a profit

intent in a prior year may be evidence of such an intent in a

later year, a prior intent will not serve as a "blank check" for

a taxpayer to continually operate a loss activity outside the

scope of section 183.    See Daugherty v. Commissioner, T.C. Memo.

1983-188.

     This factor favors respondent's determination.

     7.    Amount of occasional profits

     We consider the occasional amount of profits, if any, from

the subject activity.    Sec. 1.183-2(b)(7), Income Tax Regs.   For

the reasons stated immediately above, we hold that this factor

favors respondent’s determination.

     8.    Financial status of taxpayer

     We consider petitioners' financial status.    See sec.

1.183-2(b)(8), Income Tax Regs.    Substantial income from sources

other than an activity, particularly if the activity's losses

generated substantial tax benefits, may indicate that the

activity is not engaged in for profit.    This is especially true

where there are personal or recreational elements involved.

Id.; see Jasionowski v. Commissioner, 66 T.C. 312, 322 (1976).

     From 1979 to 1994, petitioners reported substantial taxable

income independent of their breeding losses.    Petitioners'
                                - 13 -

ability to earn this income let them finance their breeding

activity, and it allowed them to use the activity's losses to

reduce significantly their income tax liability for each year.

     This factor favors respondent's determination.

     9.   Elements of personal pleasure

     We consider the personal pleasure derived by petitioners

from conducting their activity.    See sec. 1.183-2(b)(9), Income

Tax Regs.    Although the mere fact that a taxpayer derives

personal pleasure from a particular activity does not negate a

profit intent with respect thereto, the presence of personal

motives may indicate that the activity is not engaged in for

profit.   This is especially true where there are recreational or

other personal elements involved.     Id.

     Our review of the record, in conjunction with our

observation of petitioners during their testimony, leads us to

believe that they had strong personal reasons for breeding

cattle.     Our observation of petitioners testifying at trial leads

to the inescapable conclusion that they each gained significant

personal pleasure from their involvement in the cattle industry,

and that their enjoyment and satisfaction would have been the

same regardless of the activity’s bottom line.       See Ballich v.

Commissioner, T.C. Memo. 1978-497.       Among other things, we

believe that Mr. Vallette, the backbone of petitioners' breeding

activity, engaged in that activity due to his affection for

cattle.   He has been involved with cattle since a very young age,
                                - 14 -

and his co-workers in the activity have always been his wife and

their immediate family, none of whom were paid.     As this Court

observed, with respect to this factor:

     Unquestionably, an enterprise is no less a 'business'
     because the entrepreneur gets satisfaction from his work;
     however, where the possibility for profit is small (given
     all the other factors) and the possibility for gratification
     is substantial, it is clear that the latter possibility
     constitutes the primary motivation for the activity.
     [Burger v. Commissioner, T.C. Memo. 1985-523, affd. 809 F.2d
     355 (7th Cir. 1987).]

     This factor favors respondent's determination.

     10.   Conclusion

     Based on our discussion above, we conclude that petitioners

operated their activity without an "actual and honest" objective

of making a profit.     The activity provided petitioners with

satisfaction, and any income derived therefrom served only as an

added bonus to them.

     We have considered all arguments made by petitioners for a

contrary holding and, to the extent not discussed above, have

found them to be without merit.     To reflect concessions,

                                      Decision will be entered

                                 under Rule 155.
