                           T.C. Memo. 2000-127



                         UNITED STATES TAX COURT



          HAROLD W. AND JULIA A. KAHLA, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 12318-97.                    Filed April 10, 2000.



     Daniel S. Parks and W. McNab Miller III, for petitioners.

     Roberta L. Shumway, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


     JACOBS,    Judge:     Respondent   determined   deficiencies    in

petitioners’ Federal income taxes as follows:

                      Year              Deficiency

                      1992               $41,815
                      1993                83,435
                      1994                79,173
                                 - 2 -

These deficiencies stem from respondent’s disallowance of certain

deductions and losses attributable to petitioners’ cattle-raising

and deer operations (sometimes referred to as petitioners’ Schedule

F activities)1 conducted during the years in issue.   Petitioners’

Schedule F activities were conducted at two different locations:

Buckview Ranch (the North Ranch), which is located in Leon County,

near Centerville, Texas, and El Squato Ranch (the South Ranch),

which is located in Wells County, near Encinal, Texas.

     The issue for decision is whether petitioners’ Schedule F

activities were activities engaged in for profit.     We hold they

were not.2

     All section references are to the Internal Revenue Code as in

effect for the years in issue.




     1
          The parties stipulated that the cattle-raising and deer
operations constitute one activity.
     2
          During the course of trial preparation, respondent’s
counsel discovered that certain labor and fuel costs claimed on
petitioners’ 1992-94 returns as expenses were capital in nature
and should have been depreciated rather than expensed.
Thereafter, respondent filed an amendment to answer asserting
that if petitioners should prevail in their position that the
cattle-raising and deer operations were activities engaged in for
profit, then deficiencies would still be due, but in lesser
amounts, for the years in issue as a result of petitioners’
misclassification of the labor and fuel costs. Petitioners
apparently do not dispute respondent’s assertion in this regard.
In any event, in view of our holding that petitioners’ Schedule F
activities were not activities engaged in for profit, this matter
goes by the wayside.
                                        - 3 -

                                FINDINGS OF FACT

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

stipulations of facts and the exhibits submitted therewith are

incorporated herein by this reference.

Background

     Petitioners, husband and wife, resided in Tomball, Texas, at

the time they filed their petition.

     Harold Kahla (petitioner) received a bachelor of business

administration degree in marketing and management in 1961; he

subsequently attended law school but did not graduate. Julia Kahla

(Mrs.   Kahla)    received      a    bachelor   of    arts    degree     in   speech

communication; she later earned a master’s degree in education.

     During      the   years    in     issue,   petitioners      were    the    sole

shareholders     of    United       Galvanizing,     Inc.    (United),    a    Texas

corporation. For Federal income tax purposes, United is an S

corporation.      Since its inception in 1970, United has operated at

a profit.    For the years in issue, United’s income was as follows:

                        Year                           Amount

                         1992                         $45,174
                         1993                         235,410
                         1994                         224,221

The North Ranch

     The North Ranch is approximately 100 miles from petitioners’

home in Tomball. It comprises approximately 1,223 acres. The land

was acquired, in substantially undeveloped condition, as follows:
                                       - 4 -

              Date               Acres            Acquisition Price

              5/73              188.070               $52,659.60
              4/75              142.000               117,000.00
              1977                7.000           By adverse possession
              12/77             150.000                67,500.00
              12/78             530.000               198,750.00
              4/83               44.487              By exchange
              9/86              161.380               116,647.93

               Total          1,222.937                 552,557.53

     The ranch has 507 acres of improved coastal Bermuda grass

pastures for hay production and cattle grazing, and approximately

100 acres of open native pasture land.           The balance of the ranch is

dense-to-scattered woods.             The ranch is fenced into separate

pasture areas, allowing for pasture rotation for either cattle

grazing or hay production. When fully operational, the North Ranch

can sustain up to 400 cows at any given time.             Several buildings,

including a 4,792-square-foot home, an equipment shed, and ranch

offices, are located on the property.             The value of the acreage

making   up    the    North   Ranch    during   1992,   1993,   and   1994   was

$1,225,000.     The value of the house and improvements on the North

Ranch during 1992, 1993, and 1994 was $85,000.

     In order to receive cost-sharing payments from the U.S.

Department of Agriculture (USDA), petitioners consulted with the

Soil Conservation Service for technical assistance regarding land

management matters on the North Ranch.              Between 1976 and 1996,

petitioners received payments from USDA totaling approximately

$22,000.
                                     - 5 -

     Petitioners spent a considerable amount of time on the North

Ranch each year.       Besides using the North Ranch for their cattle

ranching, petitioners        regularly     entertained     family      members    on

holiday     occasions,     and   petitioner    frequently       hunted     on    the

property.

The South Ranch

     The South Ranch is located approximately 320 miles from

petitioners’       home.    During   the   years   in    issue,   it     comprised

approximately 3,578 acres.3          The land was acquired as follows:

     Date                         Acres            Acquisition Price

     9/88                    1,073.47                    $354,245.10
     11/88                     648.14                      213,886.20
                                                         1
     2/89                      (31.57)                     (10,418.00)
     4/89                    1,169.54                      409,339.00
     10/89                     500.00                      200,000.00
     12/92                     218.00                       65,400.00
                                                     1
           Total             3,577.58                   1,232,452.30
     1
          Petitioners sold 31.57 acres in February 1989.

     The South Ranch is essentially a large pasture suitable for

cattle grazing and is located in an area that is subject to

drought.     In addition to its large open grazing areas, the South

Ranch contains several buildings and fixtures, including a large

residence and two “outbuildings”.           The residence is often used by

petitioners both as a personal retreat and as lodging for visiting

guests.      The    outbuildings     are   primarily     used   to   house      farm


     3
          An additional 438.66 acres was acquired on Feb. 13,
1997, for $153,673.
                                      - 6 -

equipment and supplies.           The value of the acreage making up the

South Ranch as of May 11, 1992, was $1,270,500.                  The value of the

house and improvements on the South Ranch as of May 11, 1992, was

$70,000.      The value of the acreage making up the South Ranch in

1993   and    1994   was    $1,442,000.   The       value   of    the     house   and

improvements on the South Ranch in 1993 and 1994 was $90,000.

       During the years in issue, petitioners spent a considerable

amount of time on the South Ranch.            They fished and hunted on the

property.     In addition, since 1987, they escorted family members

across the South Ranch on guided hunts.

Petitioners’ Cattle-Raising Operations

       Petitioner had a lifelong interest in cattle ranching. He was

raised on his parents’ cattle ranch, where he gained practical

knowledge in raising and breeding cattle. Petitioner began his own

cattle-ranching activities when he purchased nine cows and one bull

in 1973; by 1994, petitioners owned over 300 head of cattle.

       Petitioners bred and raised cattle.              Cattle deemed surplus

were sold at biannual cattle auctions.              The following numbers and

types of cattle were sold at auction:

       Year                Calves             Cows                Bulls

       1992                  75                 0                   4
       1993                 280                68                   7
       1994                  28                 6                   1
       1995                 119                35                   3
       1996                 255               133                   0
       1997                  98                 6                   0
                                    - 7 -

      Initially, petitioner did most of the chores around the North

Ranch. As their operations grew, petitioners hired contract labor.

In addition, during the years in issue, two employees of United

(Jerry Scott and Perfecto Delgado) worked as caretakers on both

ranches.     Although paid by United, petitioners claimed Messrs.

Scott’s and Delgado’s salaries as Schedule F expenses.

      From   the   inception   of   their      cattle-raising     operations,

petitioners’ Schedule F expenses exceeded income; this result is

expected to continue for the foreseeable future.                 (Petitioners

incur a net loss of approximately $11.85 for every head of cattle

sold.) Petitioners attribute these continued losses to fluctuating

cattle and feed prices due in large part to increased competition

in the industry as well as a prolonged drought.4

Deer Operations

      In 1988, petitioner decided to raise and manage deer so that

he   could   eventually   develop   a   herd    suitable   for   trophy   game

hunting.     For this purpose, petitioners acquired the South Ranch

and enclosed the property with deer-proof fencing.               In addition,

petitioners installed a water and feed system across the South

Ranch in order to ensure a constant supply of food for the deer.

      Although petitioner had an extensive knowledge of deer from

previous hunting trips, he sought advice from the Texas Parks and


      4
          We note that during 1992 through 1994, prolonged
drought conditions did not exist in the areas surrounding the
North and South Ranches.
                                          - 8 -

Wildlife Department on how to manage and feed herds of deer.

Additionally, petitioner had aerial surveys made of roaming deer

herds in order to observe the herds’ development.                     Petitioners’

son, Byron, was employed full time to manage their deer operations;

his salary was paid by United.5

        Petitioner initially planned to conduct guided trophy hunting

expeditions on the South Ranch.                 Petitioner estimated that when

fully operational, these hunts would generate a net income stream

of $38,600 per year.           During the years in issue, petitioner had not

begun conducting these guided hunting expeditions on the South

Ranch       because   of     the   lack   of   trophy   bucks   on   the   property.

According to petitioner, it takes on average 4-1/2 years from the

beginning of a breeding program for a fawn to develop into a mature

trophy buck.

Petitioners’ General Financing and Accounting Practices

        Petitioners’         cattle-raising       and    deer    operations      are

leveraged. At the time of trial, petitioners owed between $130,000

and $150,000 of debt incurred in operating both ranches.

        During the years in issue, petitioners did not maintain


        5
          During the years in issue, Byron Kahla was paid the
following amounts by United:

                      1992                $33,837
                      1993                226,969
                      1994                205,825

Petitioners did not claim Byron Kahla’s salary as a Schedule F
expense.
                                  - 9 -

accounting books and records for their Schedule F activities.   Nor

did they keep formal business plans, forecasts, budgets, or “herd”

books for the cattle-raising or deer operations.

       For purposes of calculating their Schedule F income or loss,

petitioners did not allocate revenue and expenditures between the

two ranches.   Petitioners reported the following Schedule F income

and deductions from their activities conducted at the North and

South Ranches:

Year       Revenues   Sales of Property   Deductions     Gain/Loss

1976           $192        -0-              $33,261       $(33,069)
1977          4,949        -0-               27,448        (22,499)
1978          9,414        -0-               34,419        (25,005)
1979         15,353        -0-               35,139        (19,786)
1980           -0-         -0-               43,393        (43,393)
1981         33,737        -0-               67,398        (33,661)
1982          1,873        -0-               55,116        (53,243)
1983         21,394      $1,337              86,032        (63,301)
1984         40,368        -0-               64,025        (23,657)
1985           -0-         -0-               77,811        (77,811)
1986         41,107        -0-               76,636        (35,529)
1987         53,110      17,538              66,775          3,873
1988         49,462         839              74,973        (24,672)
1989         49,795        -0-              195,063       (145,268)
1990         54,752        -0-              258,441       (203,689)
1991          7,475      16,648             310,548       (286,425)
                                                        1
1992         33,451       3,366             245,319       (210,894)
1993        100,835       4,074             263,289       (158,380)
1994         14,599       3,414             202,550       (184,537)
1995         46,567      13,501             192,036       (131,968)
1996         80,294      15,598             152,295        (56,403)
1997         41,021       2,419              96,807        (53,367)
            699,748      78,734           2,658,774    (1,882,684)
   1
      A computational error was made in determining petitioners’
net loss for 1992.
                                   - 10 -

Petitioners’ 1992-94 Federal Income Tax Returns

     Petitioners timely filed their 1992, 1993, and 1994 Federal

income tax returns.       On their returns, petitioners reported income

from various sources, as follows:

     Year          Compensation     Interest       Schedule C        United

     1992            $97,089        $300,035       $126,500          $45,174
     1993            409,596         162,391          ---            235,410
     1994            387,786           6,007          ---            224,221

Petitioners offset this income with the following Schedule F losses

attributable to their cattle-raising and deer operations:

                   Year             Schedule F Net Loss

                   1992                  $211,868
                   1993                   162,454
                   1994                   187,951

                                   OPINION

     The issue we must decide is one of fact:             whether petitioners

entered into or carried on their Schedule F activities with an

intent to make a profit.       If petitioners did not have the requisite

profit   motive,     as   respondent    maintains,    then    all   deductions

exceeding the revenue attributable to those activities would be

disallowed pursuant to section 183(a).

     Respondent contends that petitioners lacked the requisite

intent   to   make    a   profit   in   carrying    out    their    Schedule   F

activities.   In support of this position, respondent maintains (1)

petitioners failed to carry on the activities in a businesslike

manner, (2) the activities generated substantial losses over an
                                - 11 -

extended period of time (26 years), and (3) there was no realistic

expectation   that   petitioners’   Schedule     F   activities   would   be

profitable.

     On the other hand, petitioners maintain that they entered into

their Schedule F activities with the intent of making a profit.

Petitioners dispute respondent’s assertion that they failed to

execute their Schedule F activities in a businesslike manner.

Further, they assert that despite decades of losses from their

Schedule F activities, these losses represent startup period losses

and were attributable to unforeseen circumstances (i.e., drought

and fluctuating cattle prices).      For the reasons set forth below,

we agree with respondent.

     We   begin   our   analysis    with   the       applicable   statutory

provisions.   Generally,   under    section    183(a),    individuals     are

disallowed deductions attributable to an activity “not engaged in

for profit” except to the extent of any gross income generated by

such activity.    Section 183(c) defines an activity not engaged in

for profit as “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”.           Accordingly, section

183 is considered in pari materia with sections 162 and 212.              See

sec. 1.183-2(a), Income Tax Regs.

     The standard for determining whether an expense is deductible

under sections 162 and 212 (and thus section 183) is identical:             a
                                    - 12 -

taxpayer must show that he or she engaged in or carried on the

activity with an actual and honest objective of making a profit.

See Antonides v. Commissioner, 893 F.2d 656, 659 (4th Cir. 1990),

affg. 91 T.C. 686 (1988); Ronnen v. Commissioner, 90 T.C. 74, 91

(1988); sec. 1.183-2(a), Income Tax Regs.                 Although a reasonable

expectation of profit is not required, the taxpayer’s profit

objective must be bona fide.         See Hulter v. Commissioner, 91 T.C.

371, 393 (1988); Beck v. Commissioner, 85 T.C. 557, 569 (1985).

“Profit” for purposes of section 183(a) means “economic profit,

independent of tax savings”.        Ronnen v. Commissioner, supra at 92;

Hillman v. Commissioner, T.C. Memo. 1999-255.

     Section      1.183-2(b),      Income    Tax        Regs.,   sets   forth   a

nonexclusive list of factors to be considered in determining

whether an activity is engaged in for profit.                These factors are:

(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 other similar

or dissimilar activities; (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 controlling.           No single factor is necessarily
                                      - 13 -

dispositive; rather, the facts and circumstances of the case

ultimately control.          See Keanini v. Commissioner, 94 T.C. 41, 47

(1990).

        We now apply each of these factors to the facts in this case.

        1.    Manner of Carrying on the Activity

        The    fact   that   a   taxpayer    carries   on   an   activity   in   a

businesslike manner and maintains complete and accurate books and

records may indicate that the activity was engaged in for profit.

See Engdahl v. Commissioner, 72 T.C. 659, 666 (1979); sec. 1.183-

2(b)(1), Income Tax Regs.          Adapting new techniques and abandoning

methods that are economically inefficient may also support the

conclusion that the taxpayer possessed the requisite profit motive.

See Allen v. Commissioner, 72 T.C. 28, 35 (1979).

        Here, the record is replete with instances where petitioners

did not conduct their cattle-raising and deer operations in a

businesslike manner. Petitioners had no formal business plan,

budgets, or accounting records.             Petitioners’ records and expense

ledgers consisted primarily of canceled checks, invoices, and Forms

1099.        These records were often inaccurate and incomplete.             For

instance, petitioner often “forgot to put a couple thousand dollars

worth of cattle in his balance sheets”. Moreover, petitioners were

unable to allocate specific costs between their two ranches because

of their practice of aggregating expenses from both ranches.

     Petitioners also failed to keep separate bank accounts; they
                                        - 14 -

intermingled personal funds with those from their Schedule F

activities.       Additionally,         despite       the   industry     custom      of

maintaining yearly “herd books” for cattle, petitioners often

failed to record and maintain accurate documentation of their

inventory.

     Despite experiencing losses in 24 of the first 25 years of

operation (1973-97), there is no convincing evidence in the record

indicating that petitioners undertook substantial action to rectify

this situation.         In fact, petitioner testified that he anticipates

petitioners’ cattle-raising activities will not be profitable for

the foreseeable future.             Even with this stark economic reality

facing    them,       petitioners   have   not    seriously      investigated       the

possibility of changing or abandoning any of their current methods

of operation.          Suffice it to say, we believe that petitioners’

failure to take affirmative measures to mitigate continual and

substantial losses is inconsistent with operating an activity with

a profit motive.

     2.    Expertise of Taxpayer or Advisers

        Preparation and execution of an activity after conducting an

extensive study or consultation with experts regarding the accepted

business practices of the activity may indicate a profit motive

where the taxpayer conducts the activity in accordance with such

study     or   advice.     See   sec.    1.183-2(b)(2),         Income   Tax    Regs.

Conversely,       a    taxpayer’s   failure      to    obtain   expertise      in   the
                                       - 15 -

activity may indicate a lack of profit motive.                      See Burger v.

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

1985-523.

     Petitioner grew up on his parents’ cattle ranch; he learned

firsthand the basics of raising and breeding cattle.                     He spent

considerable       time   consulting    with    the   USDA   Soil    Conservation

Service, as well as State game and wildlife agencies.                In addition,

he is an experienced deer hunter.               Consequently, he possessed a

substantial level of expertise regarding cattle and deer.

     However, the fact that petitioner had knowledge of cattle and

deer, and that technical noneconomic experts were consulted, does

not indicate that petitioners engaged in their cattle-raising and

deer operations for profit.            See Hillman v. Commissioner, supra.

Considering all the years of losses, petitioners did little to

demonstrate an expertise for the economics of these operations.

     3.    Time and Effort Expended in the Activity

     The fact that a taxpayer devotes much of his or her personal

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

activity    does    not   have   substantial      recreational      aspects,   may

indicate a profit motive. See sec. 1.183-2(b)(3), Income Tax Regs.

     Petitioner spent approximately 40 percent of each year on both

ranches; Mrs. Kahla spent approximately 10 percent.                    The record

does not indicate the proportion of time spent on each ranch during

the years in issue or the amount of personal effort each expended
                                   - 16 -

in carrying out the Schedule F activities. However, we are mindful

that initially petitioner performed many of the required chores

around the North Ranch.         At the same time, however, petitioners

used the property for hunting and fishing trips, as well as to

entertain guests during the holiday season.              As a result, we are

unable to draw an inference regarding the existence of a profit

motive solely from how much time and effort petitioners may have

expended working on their Schedule F activities.

     4.   Expectation That Assets May Appreciate

     An   expectation   that     assets     used    in   the   activity     will

appreciate may indicate a profit objective.                   See sec. 1.183-

2(b)(4), Income Tax Regs.         Accordingly, a profit motive may be

inferred where there are no operating profits, so long as the

appreciation   in   value   of    the   activity’s       assets   exceeds   its

operating expenses of the current year and its accumulated losses

from prior years.    See Golanty v. Commissioner, 72 T.C. 411, 427-

228 (1979), affd. 647 F.2d 170 (9th Cir. 1981); Sullivan v.

Commissioner, T.C. Memo. 1998-367, affd. 202 F.3d 264 (5th Cir.

1999); sec. 1.183-2(b)(4), Income Tax Regs.

     Between 1976 and 1997, the amount of accumulated losses from

petitioners’   Schedule     F    activities        exceeded    $1.8   million.

Petitioners anticipate that they will continue to incur operating

losses from these activities in the near future.

     During the years in issue, the value of the North Ranch
                                      - 17 -

exceeded its acquisition costs by $672,443, and the value of the

South Ranch exceeded its acquisition costs by $38,048 in 1992 and

by $209,948 in 1993 and 1994.         However, the appreciation to date in

the North and South Ranches, if and when realized, is substantially

less than the cumulative losses from petitioners’ Schedule F

activities.     Moreover, the parties stipulated that both the North

and South Ranches were not acquired for speculative appreciation.

     5.     Past Success in Other Activities

     We have recognized that a taxpayer’s success in other business

activities     may   indicate     a   profit    motive.   See    Eldridge      v.

Commissioner, T.C. Memo. 1995-384; Hoyle v. Commissioner, T.C.

Memo. 1994-592.      Here, concurrent with the cattle-raising and deer

operations,    petitioners      operated    United,   a   highly      profitable

business.    When asked at trial what he would have done had United

not shown a profit, petitioner candidly responded: “I would have

just fixed it.”      Yet, with respect to the Schedule F activities,

petitioner made little attempt to “fix” the continuation of losses.

Petitioner’s apparent tolerance of losses from his Schedule F

activities is thus contrary to the position he would have permitted

at United and suggests a lack of a profit motive with respect to

his cattle-raising and deer operations.

     6.    History of Income or Losses From the Activity

     A history of losses over an extended period of time may

indicate     the   absence   of   a    profit   objective.      See    Allen   v.
                                 - 18 -

Commissioner, supra at 34.     Although a long history of losses is an

important criterion, it is not necessarily determinative.               See

Engdahl v. Commissioner, 72 T.C. at 669; Allen v. Commissioner,

supra.   For   instance,   a   series   of   startup   losses    or   losses

sustained because of unforeseen circumstances beyond the control of

the taxpayer may not indicate a lack of profit motive.          See Engdahl

v. Commissioner, supra; sec. 1.183-2(b)(6), Income Tax Regs.

     Petitioners were engaged in cattle raising for nearly 20

years, sustaining losses well past the length of time that can be

called the “startup” period.

     Petitioners   maintain      that     severe   drought      and    large

fluctuations in the price of cattle caused most of their losses.

We do not agree with this claim.          On the basis of climate and

meteorological data from the years in issue, it is apparent that no

drought existed in those years.     These losses were not unforeseen.

Even if it were assumed that drought or fluctuations in the market

price of cattle contributed to the losses, petitioner was raised on

a cattle ranch in that region of Texas and on the basis of his

personal experiences, as well as the advice he received from

experts, knew that the region was susceptible to drought and that

the price of beef often fluctuated. Petitioners failed to take

substantial remedial action to compensate for these conditions

which, petitioners apparently claim, existed for nearly 20 years.
                                         - 19 -

Consequently, petitioners’ long stream of losses with regard to

their       cattle-raising   and       deer   operations   militates    against   a

finding of profit motive.6

     7.       The Amount of Occasional Profits Earned, If Any

        If an activity generates only small, infrequent profits and

typically generates large losses, the taxpayer conducting the

activity       may   not   have    a    profit    objective.   See     Golanty    v.

Commissioner, supra at 427; sec. 1.183-2(b)(7), Income Tax Regs.

In this context, profit means economic profit, independent of tax

savings.       See Seaman v. Commissioner, 84 T.C. 564, 588 (1985).

        Petitioners’ cattle-raising and deer operations achieved a

profit only once in more than 20 years.               And the record indicates

that losses from these operations will continue for the foreseeable

future.

        8.    Taxpayer’s Financial Status

        Substantial income from sources other than the activity in

question, particularly if the losses from the activity generate

substantial tax benefits, may indicate that the activity is not

engaged in for profit.            See Hillman v. Commissioner, T.C. Memo.

1999-255; sec. 1.183-2(b)(8), Income Tax Regs.

     For 1992, 1993, and 1994, petitioners had $572,164, $839,000,


        6
          We note that during the years in issue, Byron Kahla’s
salary was paid by United but not deducted on petitioners’
Schedule F. Had Byron Kahla’s salary been deducted as a Schedule
F expense, petitioners’ Schedule F losses would have been
greater.
                                 - 20 -

and $619,611, respectively, in unrelated gross income.        During the

same years, petitioners claimed $211,868, $162,454, and $187,951,

respectively, in Schedule F losses.       Petitioners used these losses

to reduce their gross income by 37 percent for 1992, 19 percent for

1993, and 30 percent for 1994.    These reductions led to substantial

tax savings.7

     9.   Elements of Personal Pleasure or Recreation

     The existence of recreational elements in an activity may

indicate that the activity is not engaged in for profit; on the

other hand, where an activity lacks any appeal other than profit,

a profit motive may be indicated.         See Hillman v. Commissioner,

supra; sec. 1.183-2(b)(9), Income Tax Regs.

     Petitioners’   recreational    objectives    were   a   significant

component of their cattle-raising and deer operations.        Petitioner

grew up on his parents’ cattle ranch, where he often enjoyed the

hunting of deer, a passion he was able to continue on his own

ranches. Moreover, petitioners entertained friends and families on

both ranches during holiday seasons and other special occasions.




     7
          Petitioners’ cattle-raising activities also enabled
them to reduce their State property taxes by as much as 90
percent. According to one of petitioners’ expert witnesses, this
tax benefit was available to taxpayers who made land “look like a
ranch” solely by placing “a few cows [on the property] whether it
is run profitably or not”.
                              - 21 -

Conclusion

     Giving due consideration to the record as a whole, we conclude

that during the years in issue petitioners did not enter into or

carry on their cattle-raising and deer operations with an intent to

make a profit.   Accordingly, we sustain respondent’s disallowance

of petitioners’ Schedule F losses.

     In reaching our conclusions herein, we have considered all

arguments presented and, to the extent not discussed above, find

them to be without merit.

     To reflect the foregoing,



                                                Decision will be

                                          entered for respondent.
