                  T.C. Memo. 1999-208



                UNITED STATES TAX COURT



    DEAN L. AND CYNTHIA D. SANDERS, Petitioners v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 24707-96.               Filed June 22, 1999.



     P, a wealthy businessman, engaged in the activity
of showing and selling cutting horses, incurring
substantial losses during the years in issue, and
during preceding and following years.
     Held: Losses disallowed; the activity was not an
activity engaged in for profit; P undertook and carried
on the activity primarily as a hobby.
     Held, further, Ps are liable for sec. 6662
accuracy-related penalties.



Thomas L. Overbey and D. Derrell Davis, for petitioners.

Edith F. Moates, for respondent.
                               - 2 -


             MEMORANDUM FINDINGS OF FACT AND OPINION


     HALPERN, Judge:   By notice of deficiency dated September 10,

1996, respondent determined deficiencies in petitioners' Federal

income taxes and accuracy-related penalties as follows:

                               Accuracy-related penalty
     Year      Deficiency            Sec. 6662(a)
     1992        $74,903              $14,981
     1993        121,151               24,230

     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 issues for decision are:   (1) Whether petitioner Dean L.

Sanders' Schedule F activity constituted an activity not engaged

in for profit within the meaning of section 183(a), and

(2) whether petitioners are liable for section 6662(a) accuracy-

related penalties on account of negligence or disregard of rules

or regulations.1




1
     On brief, petitioners also raise certain issues that depend
on our finding that petitioner Dean L. Sanders' Schedule F
activity was engaged in for profit. Since we do not make that
finding, we need not address those additional issues.
                               - 3 -


                         FINDINGS OF FACT

Introduction

      Some facts have been stipulated and are so found.    The

stipulation of facts, with attached exhibits, is incorporated

herein by this reference.

     Petitioners are husband and wife who, at the time the

petition was filed, resided in Bentonville, Arkansas.

Petitioners made joint returns of income for their taxable

(calendar) years 1992 and 1993 (the 1992 and 1993 returns,

respectively).   Hereafter, we shall use the term "petitioner", in

the singular, to refer only to petitioner Dean L. Sanders.

     During 1992 and 1993, petitioner’s principal source of

income was from his employment as chief executive officer of the

Sam’s Club division of Wal-Mart Stores, Inc. (Wal-Mart).    On the

1992 and 1993 returns, petitioners reported substantial income

from petitioner’s employment by Wal-Mart and from other sources.

On those returns, they also reported “net farm losses” of

$213,838 and $269,913, respectively.   Those losses are detailed

on Schedules F, Profit or Loss From Farming, attached to the 1992

and 1993 returns (the 1992 and 1993 Schedules F, respectively).

On the 1992 and 1993 Schedules F, petitioners identify the

principal activity as “cattle & horses”.    We shall refer to the

activity giving rise to the losses shown on the 1992 and 1993

Schedules F as “the Schedule F activity”.
                               - 4 -


       Petitioner began working for Wal-Mart while he was in

college, and he retired from Wal-Mart after 25 years of service

in 1995.

Schedule F Results

     The 1992 and 1993 Schedules F show the following items of

income, deductions, and losses:

                       1992                    1993
Farm Income
Livestock, produce,   $7,000                    --
 grains, and
 products raised
Other income          36,801                  $21,228
  Gross income                 $43,801                  $21,228

Farm Expenses
Custom hire            4,675                   11,286
Depreciation          73,601                   83,327
Feed                  22,907                   21,140
Fertilizers             --                      2,731
Gasoline               4,167                    4,651
Insurance              6,225                    5,047
Interest              29,478                   25,409
Labor                 31,752                   39,130
Repairs                7,808                    8,417
Supplies              12,105                     --
Taxes                  3,494                    6,266
Utilities              2,426                    4,992
Veterinary             3,482                    6,672
Horse show expenses   47,722                   41,088
Legal & accounting       520                      560
Sale expenses            950                     --
Horse shoeing          1,230                     --
Tenant house           3,243                     --
Dues                    --                        210
Practice work           --                     12,277
Travel                  --                     14,897
Meals & ent.@ 80%      1,854                    3,041
  Total expenses                   257,639               291,141

Net farm profit                   (213,838)             (269,913)
(or loss)
                                - 5 -


The item “Livestock, produce, grains, and products raised” of

$7,000 for 1992 is proceeds from the sale of one or more horses.

The item “Other income” of $36,801 and $21,228 for 1992 and 1993,

respectively, is proceeds (winnings) from horse shows.

     During 1992, petitioner sold another two horses (not

reported on the 1992 Schedule F), one at a gain of $534 and one

at a loss of $7,260.    During 1993, petitioner sold three horses

(not reported on the 1993 Schedule F), all at a gain, for a total

gain of $21,507.

     Schedules F attached to petitioners' joint returns for 1986

through 1996 show income, deductions, and losses as follows:

     Year          Income       Deductions       Loss
     1986         $18,282        $54,165        $35,883
     1987             225         51,394         51,169
     1988           1,571         98,706         97,135
     1989           6,539        123,517        116,978
     1990          16,494        164,907        148,413
     1991          30,107        171,709        141,602
     1992          43,801        257,639        213,838
     1993          21,228        291,141        269,913
     1994          66,137        307,478        241,341
     1995          54,312        422,587        368,275
     1996          27,106        120,794         93,688

Each year’s income is composed of one or two categories:    “Sales

of livestock, produce, grains, and other products you raised”; or

“Other income”.    Petitioners began claiming expenses for horse

shows beginning in 1987.    For 1987 through 1996, petitioner’s

horse show expenses, gross income reported from horse shows, and

the excess (except for 1994 and 1996) of horse show expenses over

horse show income were follows:
                              - 6 -


          Year       Income          Expenses      Excess
          1987           $0             $299         $299
          1988        1,571            8,010        6,439
          1989        3,781           17,419       13,638
          1990       12,971           44,451       31,480
          1991       14,431           39,913       25,482
          1992       36,801           42,722        5,921
          1993       21,228           41,088       19,860
          1994       61,637           54,707       (6,930)
          1995       54,312           67,079       12,767
          1996       27,106           23,400       (3,706)
                    233,838          339,088      105,250

Horse Sales

     Petitioner realized the following gains and losses from

sales of horses from July 1, 1990, through June 1, 1996:2

                     Number of         Gain
          Year      Horses Sold       (Loss)
          1990           3            $14,667
          1991           0               --
          1992           2             (6,726)
          1993           3             21,507
          1994           1              5,392
          1995           8            177,808
          1996           2             97,086
                                      309,734

History of the Schedule F Activity

     Beginning in 1985, petitioner entered into an activity with

a friend and co-worker Tom Coughlin (Coughlin).   Petitioner and

Coughlin purchased 50 or more acres in Arkansas, improved it,

named it the “C&S Ranch” (the Arkansas ranch), and conducted a

“cow and calf operation” thereon.    They also grew and sold fescue


2
     The parties have stipulated the displayed data. They have
also stipulated that petitioners reported an additional $7,000 of
proceeds from the sales of horses on the 1992 Schedule F. Since
we cannot determine whether those proceeds represent a gain or a
loss, we shall disregard them in our discussion of gains and
losses realized from sales of horses.
                                - 7 -


seed and hay.    In 1988, they changed their operation to one

involving horses.    On September 18, 1991, petitioner purchased

Coughlin’s interest in the Arkansas ranch for $12,905 and,

subsequently, changed the name of the ranch to the “Dean Sanders

Ranch”.    Also during 1991, petitioner and Coughlin sold the last

horses that they jointly owned.    During 1992 and 1993, petitioner

bought yearling horses, trained them, took them to various horse

shows, and sold them.    Petitioner had begun purchasing horses on

his own account in 1988.

     In late 1993, in connection with petitioner’s anticipated

retirement from Wal-Mart, petitioners decided to relocate to

Texas.    In 1996, petitioners purchased a 212-acre ranch, the

"Diamond Spur Ranch", in Anderson, Texas (the Texas ranch).      On

May 1, 1996, petitioners formed two limited liability companies:

“Dean Sanders Cutting Horse Ranch, LLC”, which lists its

principal business activity as horse breeding and training and

“Dean and Cindy Sanders Ranch, LLC”, which lists its principal

business activity as real estate.    At the time of trial

(February 23 and 24, 1998), the Arkansas ranch was listed for

sale for $1.5 million.
                                 - 8 -


Quarter Horses; Cutting Horses

     A cutting horse is a quarter horse that is trained to work

with cattle.   Cutting horses and their riders compete in

competitions for which prize money is awarded.    Quarter horses

may be bred and their offspring sold.    Stallions may be stood and

a stud fee charged.   Fees may be charged for training quarter

horses to be cutting horses.   Petitioner bred no horses at the

Arkansas ranch.   From 1986 through 1995 petitioners reported no

stud fees on their income tax returns.    During 1992 and 1993,

petitioner employed Scott Brewer (Brewer) as a trainer.

Petitioner assisted with the training and performed some manual

labor on the Arkansas ranch.   During 1992, petitioner allowed

Brewer to train outside horses on the Arkansas ranch.    Petitioner

billed for that service but kept only $150 out of $6,142 billed,

the remainder going to Brewer.    Petitioners reported no income

from training for 1993.

Competitions

     During 1992 and 1993, Brewer rode as a professional on

petitioner’s horses at cutting horse competitions.    Petitioner

paid him 50 percent of his winnings net of entry fees.    During

those years, petitioner rode in such competitions as an amateur

or nonprofessional.   In those categories, petitioner also could

earn prize money.   Petitioner has competed in all the major
                                - 9 -


cutting horse competitions and claims to have been one of the top

nonprofessionals.

Petitioner’s Plan

     Petitioner had no written business plan for the Schedule F

activity.    Petitioner intended to buy quarter horses, train them

to be cutting horses, show them, establish their reputations, and

sell them.    He intended to devote more time to the Schedule F

activity following his retirement from Wal-Mart.

Record Keeping

     During the years at issue, petitioner prepared neither

profit and loss statements nor written projections of income or

loss for the Schedule F activity.    He maintained no records of

the expenses associated with, or the winnings on account of,

particular horses.   Petitioner maintained a separate checking

account for the Schedule F activity.    Nevertheless, petitioners

often wrote checks on their personal account with respect to the

Schedule F activity.    Petitioner wife received the bank

statements with respect to the Schedule F activity checking

account.    She did not always open those statements, nor did she

always reconcile the statements with the check book.

Advertising

     Prior to and during the years in issue, petitioner did no

advertising with respect to the Schedule F activity.    The horses
                                - 10 -


he sold were sold at auction, following the appearance of a horse

in a competition.

Petitioner's Participation in the Schedule F Activity

     During 1992 and 1993, petitioner worked an average of 50 to

55 hours a week for Wal-Mart.    He spent 15 to 18 hours a week in

connection with the Schedule F activity.   On weekends, he also

spent time on his houseboat.    Petitioner went bird hunting 8 to

10 days a year.

Petitioners’ Residence

     Petitioners resided on the Arkansas ranch, in a house of

approximately 5,700 square feet, containing four bedrooms and

five bathrooms.   The house also had a pool and Jacuzzi.

Respondent’s Adjustments

     Respondent disallowed the total expenses ($257,639 and

$291,141 for 1992 and 1993, respectively) claimed on the 1992 and

1993 Schedules F.3   Respondent explained his disallowance on the

ground that the Schedule F activity was not engaged in for

profit.




3
     Respondent made compensating adjustments to petitioners'
itemized deductions to reflect the deductions allowable under
sec. 183(b). Assuming we sustain respondent’s primary
adjustments, those compensating adjustments are not in question.
                                - 11 -



                                OPINION

I.   Deficiencies

      A.   Issue

      The issue we must address is whether the net farm losses

claimed by petitioners on their 1992 and 1993 Federal income tax

returns result from an activity not engaged in for profit, as

that term is used in section 183.

      B.   Section 183:   For-Profit Requirement

      In pertinent part, section 183(a) provides: “In the case of

an activity engaged in by an individual * * * if such activity is

not engaged in for profit, no deduction attributable to such

activity shall be allowed under this chapter except as provided

in this section.”    Section 183(c) provides: “For purposes of this

section, the term ‘activity not engaged in for profit’ means any

activity other than one with respect to which deductions are

allowable for the taxable year under section 162 or under

paragraph (1) or (2) of section 212.”     Deductions are allowable

under section 162 for expenses of carrying on activities that

constitute a trade or business of the taxpayer and under section

212 for expenses incurred in connection with activities engaged

in for the production or collection of income or for the

management, conservation, or maintenance of property held for the

production of income.     No deductions are allowable under sections

162 or 212 for the expenses of an activity that is carried on
                                - 12 -

primarily as a sport, hobby, or for recreation.     Thus, an

activity carried on primarily for any such purpose is not an

activity engaged in for profit.     See sec. 1.183-2(a), Income Tax

Regs.

     C.     Actual and Honest Profit Objective

        An activity is engaged in for profit if the taxpayer has an

"actual and honest objective of making a profit."     Keanini v.

Commissioner, 94 T.C. 41, 46 (1990) (quoting Dreicer v.

Commissioner, 78 T.C. 642, 644-645 (1982), affd. without opinion

702 F.2d 1205 (D.C. Cir. 1983)).     Although the expectation of

profit need not be reasonable, a bona fide profit objective must

exist.     See Keanini v. Commissioner, supra; Dreicer v.

Commissioner, supra; Golanty v. Commissioner, 72 T.C. 411,

425-426 (1979), affd. without published opinion 647 F.2d 170 (9th

Cir. 1981); sec. 1.183-2(a), Income Tax Regs.     Profit in this

context means economic profit, independent of tax savings.     See

Antonides v. Commissioner, 91 T.C. 686, 694 (1988), affd.

893 F.2d 656 (4th Cir. 1990); Hulter v. Commissioner, 91 T.C.

371, 393 (1988).

        The regulations promulgated under section 183 provide the

following nonexclusive list of factors to be considered in

determining whether an activity is engaged in for profit:

(1) The manner in which the taxpayer carried on the activity,

(2) the expertise of the taxpayer or his or her advisers, (3) the
                               - 13 -

time and effort expended by the taxpayer in carrying on the

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

activity may appreciate in value, (5) the success of the taxpayer

in carrying on other similar or dissimilar activities, (6) the

taxpayer's history of income or loss 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.    Sec.

1.183-2(b), Income Tax Regs.   No single factor is determinative.

See Keanini v. Commissioner, supra at 47; Taube v. Commissioner,

88 T.C. 464, 479-480 (1987); sec. 1.183-2(b), Income Tax Regs.

Petitioner's objective is a question of fact to be determined

from all the facts and circumstances, keeping in mind that

petitioners bear the burden of proof.   See Rule 142(a); Evans v.

Commissioner, 908 F.2d 369, 372-373 (8th Cir. 1990), revg. T.C.

Memo. 1988-468; sec. 1.183-2(a), Income Tax Regs.

     D.   Analysis

           1.   Nature of the Schedule F Activity

     Petitioner became a part owner of a ranch (the Arkansas

ranch) in 1985.   He and another individual used the Arkansas

ranch to raise cattle, horses, and crops, which they sold.    In

1991, petitioner purchased the other individual’s interest in the

Arkansas ranch and ended his relationship with that individual

(with respect to the ranch).   Petitioner began purchasing horses
                                - 14 -

for his own account in 1988.    His plan was to buy quarter horses,

train them to be cutting horses, show them, establish their

reputations, and sell them.    The shows petitioner planned to

enter were competitions for cash prizes.      Petitioner entered his

horses in such competitions from 1987 through 1996.      Petitioner

sold 19 horses from July 1, 1990, through June 1, 1996.

Petitioner made only $150 from training other persons’ horses.

The nature of petitioner’s activity during the years in issue

(the Schedule F activity) was the showing of and sale of cutting

horses.

          2.   Not an Activity Engaged in for Profit

     The Schedule F activity resulted in substantial losses, not

only during the years in issue, but also during preceding and

following years.

     During the years in issue, petitioner sold five horses, two

in 1992 and three in 1993, and had a net loss and a net gain of

$6,726, and $21,507, respectively.       Thus, for the years in issue,

petitioner realized a net gain of $14,781 from the sale of horses

($14,781 = $21,507 - $6,726).    His horse show expenses for 1992

and 1993 exceeded his horse show income for those years.      His net

farm losses for the 2 years were $213,838 and $269,913, as

reported on the 1992 and 1993 Schedules F, respectively, for a

total of $483,751.   Thus, for 1992 and 1993, petitioner incurred
                              - 15 -

expenses of $483,751 to generate a net gain from sales of horses

of $14,781.

     Petitioners did not report any gains or losses from the sale

of horses on their 1987 through 1989 Federal income tax returns.

From July 1, 1990, through June 1, 1996, petitioner’s net gain

from horse sales was $309,734.   The first year in which

petitioners claimed a deduction for horse show expenses in

calculating their Schedule F net farm loss was 1987.    From 1987

through 1996, petitioners reported Schedule F net farm losses of

$1,742,352.   Those losses included a net excess of horse show

expenses over horse show income of $105,250.    Thus, for 1987

(when petitioner’s horse show expenses commenced) through 1996,

petitioner incurred expenses of $1,742,352 to generate a net gain

from sales of horses of $309,734.

     Notwithstanding that the Schedule F activity was not

profitable for any year in which petitioner operated it on the

Arkansas ranch, it is quite clear that, if petitioner entered

into it, or continued it, with the actual and honest objective of

making a profit, it would be an activity engaged in for profit

within the meaning of section 183.     See Dreicer v. Commissioner,

supra at 644-645; sec. 1.183-2(a), Income Tax Regs.    If, on the

other hand, petitioner engaged in the Schedule F activity

primarily as a sport, hobby, or for recreation, petitioner would
                               - 16 -

not have engaged in the activity for profit.    See sec. 1.183-

2(a), Income Tax Regs.

       Petitioner is a wealthy, successful businessman.   Petitioner

testified that he and his wife had long planned that he would

leave Wal-Mart when he was 45 years old.    Petitioner began

working for Wal-Mart when he was in college and retired after

25 years, in 1995, when, we assume, he was approximately 45 years

old.    In 1985, petitioner acquired an interest in the Arkansas

ranch.    In 1987, petitioner began what we have characterized as

the Schedule F activity.    In 1996, following his retirement from

Wal-Mart, petitioner moved to Texas and formed a limited

liability company to engage in the business of horse breeding and

training.    The Texas ranch was substantially bigger than the

Arkansas ranch.    We believe that during the years in issue

petitioner undertook and carried on the Schedule F activity

primarily as a hobby.    We reach that conclusion taking into

account petitioner’s statement of his intent but giving greater

weight to the factors set forth in the regulations, in light of

the facts before us.    Most prominently, the Schedule F activity

failed to generate even occasional profits, a factor to be taken

account of under section 1.183-2(b)(7), Income Tax Regs., which

failure did not seem paramount to petitioner, a wealthy

businessman, another factor to be taken into account, under

section 1.183-2(b)(8), Income Tax Regs.    In the following
                                - 17 -

paragraphs, we detail our analysis of the remaining factors found

in the regulations, which weigh in our conclusion.

           3.    History of Losses

     "Although no one factor is determinative of the taxpayer's

intention to make a profit * * * a record of substantial losses

over many years and the unlikelihood of achieving a profitable

operation are important factors bearing on the taxpayer’s true

intention."     Golanty v. Commissioner, 72 T.C. at 426; see also

sec. 1.183-2(b)(6), Income Tax Regs.      As we have detailed,

petitioner incurred substantial losses in the Schedule F activity

for each of the 10 years that it was carried on at the Arkansas

ranch.

     When a taxpayer's losses occur during the startup period of

an activity, the losses have been held not to indicate the

absence of a profit motive.    See Engdahl v. Commissioner, 72 T.C.

659, 669 (1979) (unremitting losses were not an indication of

lack of profit motive where years in issue fell within startup

period of horse breeding activity).      Petitioners reported

Schedule F losses in connection with the Arkansas ranch beginning

in 1986.   They reported losses in connection with the Schedule F

activity beginning in 1987 (when petitioners first claimed a

deduction for horse show expenses) and continuing through

petitioner's move to the Texas ranch in 1996.      Petitioner had no

written plan for the Schedule F activity, and he has failed to
                                - 18 -

prove that the Schedule F activity was within the anticipated

startup phase of an activity conducted for profit.     As stated, we

think that the Schedule F activity was in the nature of a hobby.

            4.   Manner In Which Taxpayer Carries on Activity

     “The fact that the taxpayer carries on the activity in a

businesslike manner and maintains complete and accurate books and

records may indicate that the activity is engaged in for profit.”

Sec. 1.183-2(b)(1), Income Tax Regs.

     Petitioner did not keep formal or accurate books and records

for the Schedule F activity.    Petitioner’s only records consisted

of canceled checks, invoices for goods and services received, and

bills.    While a taxpayer need not maintain a sophisticated cost

accounting system, the taxpayer should keep records that enable

the taxpayer to make informed business decisions.    See Burger v.

Commissioner, 809 F.2d 355, 359 (7th Cir. 1987), affg. T.C. Memo.

1985-523.    Petitioner’s failure to maintain books of account,

reconcile his bank statement every month (or even open the

envelopes containing the statement and canceled checks), or use

checks only from the account dedicated to the Schedule F activity

evidences a lack of concern for cash-flow.    Also, petitioner did

not keep records respecting the costs associated with individual

horses.    See Dodge v. Commissioner, T.C. Memo. 1998-89 (without

records according to individual horses, taxpayers had no way of

knowing which horses were more profitable or which training
                                - 19 -

regimen was successful at increasing the value of the horses).

As in Dodge, it appears that petitioners retained what they

thought were the minimum records necessary to prepare their tax

returns.   Petitioner’s bookkeeping practices were more consistent

with the Schedule F activity's being a hobby than a      profit-

motivated business.

     Petitioner lacked a written plan.      A business plan does not

have to be a financial plan or a written budget; it may be

evidenced by a taxpayer's actions.       See Phillips v. Commissioner,

T.C. Memo. 1997-128.    Petitioner’s intent was to buy quarter

horses, train them to be cutting horses, show them, establish

their reputation, and sell them.    Petitioner acted in accordance

with that intent, but that does not establish that he was engaged

in a business for which he had a plan for success (i.e.,

profitability).    Given the substantial, but expected, costs

associated with the Schedule F activity, we need more than

petitioner’s representation that he could make money if he sold

enough horses at high enough prices to conclude that petitioner

had a plan to make a profit.    See Ballard v. Commissioner, T.C.

Memo. 1996-68 (taxpayer testified as to his business plan, yet

did not conduct activity in businesslike manner).

     Prior to and during the years in issue, petitioner did not

advertise the Arkansas ranch or his horses in trade magazines or

publications.     While we recognize that horse shows may be one
                              - 20 -

method of advertising horses for sale, e.g., Engdahl v.

Commissioner, supra at 667, petitioner's failure to attempt to

reach a larger customer base is not consistent with a profit

motive.   See Dodge v. Commissioner, supra.

     “A change of operating methods, adoption of new techniques

or abandonment of unprofitable methods in a manner consistent

with an intent to improve profitability may also indicate a

profit motive.”   Sec. 1.183-2(b)(1), Income Tax Regs.

Petitioners argue that petitioner made changes in his operating

methods that indicate a profit motive.   There is no evidence that

most of the changes petitioners refer to, such as, the cattle

weight gain program, taking on outside horses,4 instituting a

breeding program, and maintaining the breeding rights to mares

sold, were implemented prior to or during the years in issue.

Subsequent actions do not materially impact this aspect of our

analysis under section 183 for the years in issue.   See Borsody

v. Commissioner, T.C. Memo. 1993-534, affd. per curiam 92 F.3d

1176 (4th Cir. 1996).   While we agree that hiring a trainer and

leasing cattle may have been more cost effective, we are not

persuaded that petitioner implemented methods to control his

losses.   See Dodge v. Commissioner, supra.



4
     While petitioner did take on outside horses at the Arkansas
ranch, he did not actively pursue that aspect of his activity.
During 1992 and 1993, petitioner obtained only $150 of net income
from outside horses.
                                   - 21 -

     We find that petitioner did not carry on the activity in a

businesslike manner.

            5.   Expertise of Taxpayer or His Advisors

     “Preparation for the activity by extensive study of its

accepted business, economic, and scientific practices, or

consultation with those who are expert therein, may indicate that

the taxpayer has a profit motive where the taxpayer carries on

the activity in accordance with such practices.”          Sec. 1.183-

2(b)(2), Income Tax Regs.    While petitioner received free and

paid advice from individuals he considered "experts" in the

cutting horse industry, the advice did not focus on the economic

aspects of the activity.    The advice which petitioner received on

profitable bloodlines and which horses to sell is consistent with

a hobbyist's motives.    Taken as a whole, we find this factor to

be neutral.

            6.   Time and Effort

     "The fact that the taxpayer devotes much of his personal

time and effort to carrying on an activity, particularly if the

activity does not have substantial personal or recreational

aspects, may indicate an intention to derive a profit.”          Sec.

1.183-2(b)(3), Income Tax Regs.       During 1992 and 1993, petitioner

spent 15 to 18 hours a week in connection with the Schedule F

activity.    He employed a professional trainer, but he testified

that he also helped with training.          Petitioner managed the
                                - 22 -

Schedule F activity, and he performed manual labor on the

Arkansas ranch.    He attended a number of competitions and

testified:    “I have competed in all the major events, have been

successful, and have been one of the top non-pros in the United

States.”    While we acknowledge petitioner’s substantial

contribution of time to the Schedule F activity during the years

in issue, we believe that petitioner’s success as a

nonprofessional was a source of pride to him, which, although not

inconsistent with an intent to make a profit, serves to explain,

in part, the time and money he poured into a then losing

proposition.

            7.   Expectation of Appreciation

     “The term ‘profit’ encompasses appreciation in the value of

assets, such as land, used in the activity.”    Sec. 1.183-2(b)(4),

Income Tax Regs.    That provision of the regulations also

provides:

     Thus, the taxpayer may intend to derive a profit from
     the operation of the activity, and may also intend
     that, even if no profit from current operations is
     derived, an overall profit will result when
     appreciation in the value of land used in the activity
     is realized since income from the activity together
     with the appreciation of land will exceed expenses of
     operation. * * * [Id.]

Section 1.183-1(d)(1), Income Tax Regs., however, provides:

     If the taxpayer engages in two or more separate
     activities, deductions and income from each separate
     activity are not aggregated either in determining
     whether a particular activity is engaged in for profit
     or in applying section 183. * * * the farming and
                                - 23 -

     holding of the land will be considered a single
     activity only if the income derived from farming
     exceeds the deductions attributable to the farming
     activity which are not directly attributable to the
     holding of the land * * *.

     At the time of trial, the Arkansas ranch was on the market

for $1.5 million.    Petitioners argue the unrealized appreciation

in the Arkansas ranch should be taken into account in determining

the profitability of the Schedule F activity.     We disagree.

Petitioner’s investment in the land encompassing the Arkansas

ranch was an activity separate from the Schedule F activity.       The

Schedule F activity did not produce profits that reduced the net

costs of carrying the land.

          8.     Elements of Personal Pleasure or Recreation

     “The presence of personal motives in * * * carrying on of an

activity may indicate that the activity is not engaged in for

profit, especially where there are recreational or personal

elements involved.”     Sec. 1.183-2(b)(9), Income Tax Regs.

Clearly, petitioner took pride in his competitive abilities and,

we assume, enjoyed the competitions.     Petitioner and his wife

lived on the Arkansas ranch, in a 5,700-square foot house with a

pool.   They moved there prior to his retirement from Wal-Mart.

Depreciation schedules attached to Schedules F for 1988 through

1995 show a substantial investment in physical improvements to

the ranch:     Depreciation is the largest expense item listed on

petitioners’ Schedules F for 9 out of the 10 years, 1986 through
                                 - 24 -

1995.     We believe that petitioners enjoyed the ranch lifestyle,

were wealthy enough to indulge that lifestyle without too much

concern for costs (remember, they did not always open their bank

statements), and, at least during their years on the Arkansas

ranch, viewed the Schedule F activity as an integral part of that

lifestyle (without regard to profitability).

             9.   Success in Similar Activities

        Petitioner did not demonstrate success in carrying on any

similar activity.      See sec. 1.183-(2)(b)(6), Income Tax Regs.

        E.   Conclusion

        During the years in issue, the Schedule F activity was not

an activity engaged in for profit.        Respondent’s determination of

a deficiency based on that determination is sustained.

II.     Section 6662(a) Accuracy-Related Penalties

        Section 6662 provides for an accuracy-related penalty in the

amount of 20 percent of the portion of any underpayment

attributable to, among other things, negligence or intentional

disregard of rules or regulations (hereafter, simply,

negligence).      Respondent determined section 6662 penalties

against petitioners for their negligence in deducting the farm

losses shown on the 1992 and 1993 Schedules F.       Negligence has

been defined as the failure to exercise the due care of a

reasonable and ordinarily prudent person under like

circumstances.      See Neely v. Commissioner, 85 T.C. 934, 947
                              - 25 -

(1985). In the petition, petitioners assign error to respondent’s

determination of section 6662 penalties.    However, petitioners do

not aver any specific facts in support of their assignment of

error.   In their opening brief, petitioners recognize that

respondent determined section 6662 penalties, but they propose no

findings of fact specifically relating to that issue, nor do they

make any argument with respect to the issue.    In response to

respondent’s opening brief, petitioners argue only that they

maintained and produced adequate records of the Schedule F

activity.   Petitioners bear the burden of proving that they were

not negligent or that they had reasonable cause for the

underpayment and that they acted in good faith.    See sec.

6664(c)(1); Rule 142(a).   We assume that, in defense to

respondent’s determination of a penalty, petitioners rely

principally on the assumption that we shall determine no

deficiency on account of our finding that the Schedule F activity

was engaged in for profit.   We have not made that finding and

have sustained respondent’s adjustments with respect to the

Schedule F activity.   Respondent’s determination of a section

6662 penalty is therefore sustained.


                                           Decision will be entered

                                    for respondent.
