                         T.C. Memo. 1999-356



                       UNITED STATES TAX COURT



       JAMES M. GOFORTH AND BRENDA GOFORTH, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 22351-97.                   Filed October 25, 1999.



     William R. Cousins III and Josh O. Ungerman, for

petitioners.

     Candace M. Williams, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


     SWIFT, Judge:    Respondent determined deficiencies in

petitioners’ Federal income taxes as follows:


                       Year          Deficiency
                       1993           $33,320
                       1994            48,176
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     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.

     The issue for decision is whether petitioners' cattle ranch

activity constituted an activity entered into for profit under

section 183.   All references to petitioner in the singular are to

James M. Goforth.


                           FINDINGS OF FACT

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

     At the time the petition was filed, petitioners resided in

Amarillo, Texas.

     From the time he was a child, petitioner grew up on a ranch

and helped raise cattle.

     In 1974, after completing medical school, a residency in

pathology, and 2 years as a military doctor, petitioner began to

practice medicine in Amarillo, Texas.

     Also in 1974, petitioners purchased 640 acres of ranch land,

located approximately 43 miles from petitioners' residence in

Amarillo and from petitioner’s medical office.   On this land

petitioner began to raise Angus-Hereford cattle.   From 1974

through 1982, petitioners purchased additional land adjacent to
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the 640 acres of ranch land, bringing the total ranch acreage to

2,560 acres.

     The 2,560 acres of land consisted of 900 acres suitable for

grazing of cattle, 1,000 acres of canyon land not particularly

suitable for grazing of cattle, 110 acres covered by mesquite

trees, and 550 acres that, because of their inclusion in a

Government conservation program, could not be used for grazing of

cattle.    The 900 acres suitable for grazing of cattle represented

35 percent of the total ranch acreage.

     From 1974 through 1982, petitioner alone worked on the

ranch.    Mrs. Goforth did not participate in raising the cattle,

nor in other work on the ranch.   During those years, petitioner

spent considerable time on the ranch, visiting the ranch almost

each day after completing his work as a doctor.   In 1982,

petitioner began cross-breeding Angus-Hereford cattle with

Brangus bulls and selling the cross-breeds.   Petitioner believed

he could realize more income from sale of the cross-breeds than

from sale of Angus-Hereford cattle.

     In 1983, petitioner had a house built on the ranch that was

intended for use as an eventual retirement home for petitioners.

The home had a view overlooking the scenic Dripping Springs

Canyon.

     From 1983 through 1988, petitioners employed Greg Lichen as

full-time manager of the ranch, and from 1988 through 1994,
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petitioners employed David Randall as full-time manager of the

ranch.

     In 1983, corrals were built on the ranch to hold the cattle,

and petitioner and Lichen built a barn on the ranch.    Also in

1983, petitioner read several brochures, talked with several

breeders of Brangus cattle, and concluded that Brangus cattle

constituted a superior breed of cattle.    Petitioner then decided

to raise and sell Brangus cattle on the ranch.    Petitioner paid

$148,500 for the implantation of 33 Brangus cattle embryos in the

cows on the ranch.

     From 1984 on, petitioner visited the ranch infrequently.     On

weekends, petitioners and their children would occasionally use

the ranch as a weekend retreat, and petitioner occasionally

hunted on the ranch.    In order to learn more about cattle, each

week petitioner spent a few hours reading cattle journals,

magazines, and catalogs.

     Petitioner attempted to increase the number and quality of

Brangus cattle on the ranch by having the cows bred using

artificial insemination.    Petitioner also bought five Brangus

cows with calves.    Petitioner generally would sell the bull

calves and retain the heifers or female calves for future

breeding purposes.
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     Over the years, petitioner entered the cattle in various

cattle shows, and the cattle won several awards.   Petitioner was

proud of the awards and derived personal satisfaction therefrom.

     Petitioner used petitioners’ personal checking account to

pay for ranch expenses.   Petitioner did not maintain a written

business plan, a general ledger, or a written budget with respect

to the ranch.

     In order to be profitable, petitioner needed to maintain at

least 140 head of cattle on the ranch.   In light of the

topography of the ranch, however, the ranch could only support

100 head of cattle.

     In 1995, petitioner sold most of the cattle, and thereafter

petitioner raised only a few head of cattle.   Also in 1995, for

the first time, petitioners' ranch income was greater than

expenses, resulting in a profit of $10,454.

     On their 1983 through 1996 joint Federal income tax returns,

petitioners reported gross income, expenses, and net income or

loss relating to the ranch and income from petitioner’s medical

practice and other activities as follows:
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                            Ranch
             Gross                        Net          Petitioners’
Year        Income*     Expenses      Income (Loss)   Nonranch Income
1983      $ 84,463     $ 308,325      ($ 223,862)      $ 533,198
1984        273,261       277,859          (4,598)         51,615
1985         42,110       288,626        (246,516)        171,230
1986         99,486       359,717        (260,231)        452,981
1987         74,300       241,417        (167,117)        265,788
1988         61,827       189,266        (127,439)        394,278
1989         24,926       213,277        (188,351)        515,927
1990         37,835       182,132        (144,297)        543,930
1991         78,268       170,663         (92,395)        593,948
1992         44,038       144,645        (100,607)        556,674
1993         73,102       151,937         (78,835)        472,653
1994         33,490       147,758        (114,268)        485,229
1995        106,388        95,934          10,454         514,322
1996         22,572        55,392         (32,820)        372,676

Total     $1,056,066   $2,826,948     ($1,770,882)     $5,924,449

           * Each year for 1986 through 1996, petitioners
             received $22,044 from the U.S. Department of
             Agriculture for the 550 acres of ranch land that
             was under the Government conservation program.
             This $22,044 is included in annual ranch gross
             income.


        As reported, petitioners’ net ranch losses offset petitioners’

nonranch income consisting primarily of petitioner’s income from his

medical practice.      As a result, petitioners greatly reduced

their reported Federal income tax liability for 1983 through 1994.

        On audit for 1993 and 1994, respondent determined that the

ranch was not operated for profit, and respondent disallowed under

section 183 petitioners’ claimed ranch losses in excess of income

derived from the ranch.
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                               OPINION

     Under section 183(b)(2), if an activity is not engaged in for

profit, expenses relating thereto are allowable only to the extent

gross income derived from the activity exceeds deductions allowable

under section 183(b)(1) without regard to whether the activity

constitutes a for-profit activity.     See Allen v. Commissioner, 72

T.C. 28, 33 (1979).

     For purposes of section 183, an activity is not considered

engaged in for profit unless it is conducted by the taxpayer with an

actual and honest objective of making a profit.    See Antonides v.

Commissioner, 91 T.C. 686, 693-694 (1988), affd. 893 F.2d 656 (4th

Cir. 1990); Dreicer v. Commissioner, 78 T.C. 642, 645 (1982), affd.

without opinion 702 F.2d 1205 (D.C. Cir. 1983); Barter v.

Commissioner, T.C. Memo. 1991-124, affd. without published opinion

980 F.2d 736 (9th Cir. 1992); Westbrook v. Commissioner, T.C. Memo.

1993-634, affd. 68 F.3d 868 (5th Cir. 1995).

     The regulations under section 183 provide a nonexclusive list

of factors to consider in determining whether an activity is engaged

in for profit.   Such factors include:   (1) The manner in which the

taxpayer carries on the activity; (2) the expertise of the taxpayer

or his advisers; (3) the time and effort expended by the taxpayer in

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

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

taxpayer in carrying on other similar or dissimilar activities;
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(6) the taxpayer's history of income or losses with respect to the

activity; (7) the amount of occasional profits, if any, which are

earned; (8) the financial status of the taxpayer; and (9) whether

elements of personal pleasure or recreation are involved.    See sec.

1.183-2(b), Income Tax Regs.

     The taxpayer's expectation of profit need not be reasonable.

See Golanty v. Commissioner, 72 T.C. 411, 425-426 (1979), affd.

without published opinion 647 F.2d 170 (9th Cir. 1981); Allen v.

Commissioner, supra at 33; sec. 1.183-2(a), Income Tax Regs.     In

determining whether an activity is engaged in for profit, greater

weight is given to objective factors than to a taxpayer's mere

statement of intent.    See sec. 1.183-2(a), 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 important factors bearing on the

taxpayer's objective.    See Golanty v. Commissioner, supra at 426;

sec. 1.183-2(b)(6), Income Tax Regs.    Petitioners have the burden

of proof on this issue.    See Rule 142(a).

     During, before, and after the years in issue, the limited

time petitioners spent working with the cattle on the ranch and

in the ranch activity is consistent with a hobby, not with a

legitimate for-profit activity.    Petitioner’s use of his and

his wife’s personal checking account to pay ranch expenses and

the lack of a written business plan, a ledger, and a budget for
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the ranch indicate that the ranch activity was not carried on

in a businesslike manner.   Petitioner derived personal

satisfaction from raising what he believed were superior cattle

and from awards the cattle won.    Petitioners used the ranch for

a weekend retreat, and petitioners intended to retire on the

ranch.   In order to be profitable, petitioners needed to

maintain at least 140 head of cattle on the ranch.         The ranch

however, supported only a maximum of 100 head of cattle,

precluding any profit from the ranch (except for 1995 when

petitioner liquidated his herd of cattle for a small profit).

From 1983 to 1996, petitioners’ ranch activity accumulated

losses of more than $1.7 million.

     Based on the evidence, we conclude that petitioners have

failed to establish that an actual and honest profit objective

was associated with petitioners’ ranch activity.

     To reflect the foregoing,

                                              Decision will be entered

                                         for respondent.
