                        T.C. Memo. 1998-454



                      UNITED STATES TAX COURT



            ESTATE OF EDWARD BROCKENBROUGH, DECEASED,
      SHARON BROCKENBROUGH, AND SUNTRUST BANK, COEXECUTORS,
             AND SHARON BROCKENBROUGH, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 22596-95.                Filed December 28, 1998.



     Vivian D. Hoard, David D. Aughtry, and Donald P. Lancaster,

for petitioners.

     Clinton M. Fried, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     COLVIN, Judge:   Respondent determined deficiencies in

petitioners' 1991 and 1992 Federal income tax and an accuracy-

related penalty as follows:
                                    - 2 -

                                                Sec. 6662
                   Year        Deficiency        Penalty
                   1991         $11,611         $2,322.20
                   1992          16,818          3,363.60

       Petitioners owned an antique store during the years in

issue.      Petitioners also owned a 52-acre farm on which they bred

and trained quarter horses and held three rodeos during the years

in issue.     Respondent concedes that petitioners operated the

rodeos for profit.        In 1992, petitioners discontinued the horse

and rodeo undertakings1 and began to operate a craft fair.       After

concessions, the issues for decision are:

       1.    Whether petitioners operated their antique store for

profit in 1991 and 1992.       We hold that they did not.

       2.    Whether petitioners operated the horse and rodeo

undertakings as one activity in 1991 and 1992.       We hold that they

did.

       3.    Whether petitioners operated their horse and rodeo

activity for profit in 1991 and 1992.       We hold that they did.

       4.    Whether petitioners are liable for the accuracy-related

penalty for negligence under section 6662 for 1991 and 1992.         We

hold that they are to the extent discussed below.




       1
       For purposes of sec. 183, two or more "undertakings" may
be one "activity". Sec. 1.183-1(d)(1), Income Tax Regs. We
refer to horse and rodeo "undertakings" because one of the issues
in dispute is whether they were one activity.
                                  - 3 -

     Section references are to the Internal Revenue Code.       Unless

otherwise indicated, Rule references are to the Tax Court Rules

of Practice and Procedure.

                         I.   FINDINGS OF FACT

A.   Petitioners

     Petitioners were married and lived in Gay, Georgia, when

they filed their petition.2     In 1993, the population of Gay was

about 125.

     1.    Edward Brockenbrough

     Petitioner Edward Brockenbrough (Mr. Brockenbrough) was born

in 1935.     His paternal and maternal grandparents operated

dairies.     His parents were airplane pilots.    They owned about 300

acres of land on which they operated an airport and a farm with

cattle, horses, and pigs.     Mr. Brockenbrough milked cows every

day for 7 years when he was a child.       Mr. Brockenbrough took one

agricultural course and was a member of the Future Farmers of

America when he was in high school.       He graduated from college

with a degree in economics.     He left home after he graduated from

college.

     Mr. Brockenbrough began working as a pilot for Delta

Airlines (Delta) when he was 28 years old.       Federal law required

him to retire on August 8, 1995, when he reached the age of 60.

He had worked for Delta 31 years when he retired.       For the 15

     2
       Petitioner Edward Brockenbrough died after the trial was
held in this case.
                                 - 4 -

years before he retired on August 8, 1995, Mr. Brockenbrough flew

international routes to Europe which required him to be away from

home about 12 days a month.   He and his wife vacationed about 1

month each year in Florida, where they had a boat.

     Mr. Brockenbrough's wages from Delta were $228,102 in 1991,

$251,822 in 1992, and $47,612 in 1996, the year after he retired.

Mr. Brockenbrough also received a lump sum distribution in 1995

of about $750,000.

     2.   Sharon Brockenbrough

     Petitioner Sharon Brockenbrough (Mrs. Brockenbrough) was a

flight attendant on Delta's flights to Europe from about 1982 to

the date of trial.   Around the time petitioners started their

antique activity, Mrs. Brockenbrough typically left Atlanta on

Friday nights and returned on Sunday nights.

     3.   Petitioners' Farm

     Petitioners wanted to live in a farming area near Atlanta,

Georgia, and be able to generate some income after they retired

from Delta.   In 1986, they bought a 52-acre farm with a house on

it in Gay, Georgia, about an hour's drive south of Atlanta.   They

paid for the farm by assuming about a $130,000 balance on the

seller’s mortgage.   Petitioners did not buy the farm to speculate

on land values.

B.   Olde Bank Antiques

     There were three or four antique stores in the Gay, Georgia,

area in the mid-1980's.   Mr. Brockenbrough discussed starting an
                               - 5 -

antique store with Joe Rollins (Rollins).   Rollins was

petitioners' certified public accountant from 1979 to 1989.

     Petitioners spoke with antique dealers in the area,

including Mrs. Gay, about operating an antique business.    Mrs.

Gay had been in the antiques and arts and crafts business in Gay

all of her life and petitioners thought she had been successful.

     Petitioners bought a building in the town square from Mrs.

Gay for $7,000 in 1986 or 1987 to house their antique store.     Mr.

Brockenbrough spoke about petitioners' antique store with the

banker who financed the purchase of the building.   The building

adjoined petitioners' farm and was across the street from the

entrance to the Cotton Picking Fair, an arts and crafts fair held

in Gay and attended by about 100,000 people twice a year (see

par. I-D, below).   The building had been a small bank in Gay.     It

had a teller's cage, an old cannonball safe, a glass window, and

bookshelves.   The building was in disrepair.   Petitioners spent

about $30,000 to buy and renovate the building.   Petitioners

expected the building to increase in value.

     Petitioners opened an antique store called Olde Bank

Antiques in the bank building about 1987.   Mrs. Brockenbrough ran

the store.   She likes antiques.   Mrs. Brockenbrough bought some

items on her flights to Europe to sell in her antique store.     Mr.

Brockenbrough helped the business by framing pictures and making

lamps.
                                - 6 -

     Petitioners relied on friends to operate the antique store

when Mrs. Brockenbrough was away.    Initially, Ray Hawkins

(Hawkins) operated the store when Mrs. Brockenbrough was away.

Petitioners did not pay Hawkins.    Later, petitioners hired

Hawkins' wife to help run the business and to be a part-time

bookkeeper.

     Before the years in issue, petitioners advertised their

antique shop in the Meriwether Indicator, the only newspaper in

the county at the time.

     Petitioners' antique business did not do well.     An antique

center opened in Warm Springs, Georgia, south of Gay, drawing

customers away.

     In February 1990, Gay's mayor and four city council members

decided that Gay needed a city hall.     Mr. Brockenbrough offered

to sell them the old bank building.     Petitioners had the building

appraised and submitted the result to the city council.       The city

council did not buy the building.

     By 1990 or 1991,3 petitioners knew that they could not make

a profit from their antique store.      They kept it open part time

(3 to 5 days a week) until they could sell their merchandise.

They also left a sign in the window with their telephone number

and a message that if anyone saw anything that they liked in the

window to call petitioners at home, which was about 100 yards


     3
         The years in issue in this case are 1991 and 1992.
                                  - 7 -

away.     In 1992, petitioners held an auction at which they sold

all of their inventory.     At trial, petitioners did not know how

many antiques they had sold in 1991 and 1992 or what their

inventory was during those years.

     Beginning in 1992, petitioners used the building as an

office for their fair (see par. I-D, below) and a place to keep

their books.      Petitioners sold the building in 1995 for $35,000.

     Olde Bank Antiques had a separate checking account in 1991

and 1992.     Olde Bank Antiques never earned a profit.    On their

1991 return, petitioners reported gross receipts for Olde Bank

Antiques of $1,885, cost of goods sold of $1,802, and expenses of

$11,035.     They did not deduct any wage or advertising expenses

for Olde Bank Antiques.     On their 1992 return, petitioners

reported gross receipts for Olde Bank Antiques of $2,589, cost of

goods sold of $4,743, and expenses of $7,496.

C.   Blue Horse Farms

     1.      Petitioners' Horse Breeding and Training

             a.    Plans and Preparation

     Mr. Brockenbrough decided to breed, raise, and train quarter

horses at petitioners' farm in Gay.        He had no experience in the

business of breeding, raising, or training horses.       Before he

bought any horses, Mr. Brockenbrough investigated the horse

breeding and training business with Earl Bumgarner (Bumgarner),

Bob Roland (Roland), Tommy Cashion (Cashion), Chuck Cole (Cole),

and Max Chase, all of whom were active in the horse business.
                                 - 8 -

Bumgarner was a professional horse trainer who trained quarter

horses, produced rodeos, and was on the Georgia Rodeo Board.     He

was also a chaplain for the Rodeo Cowboys Association of America.

Roland was a quarter horse specialist.     Cashion was familiar with

the quarter horse, cattle, and rodeo businesses.     He rode quarter

horses in rodeos.   At the time of trial, Cashion managed a

business of raising quarter horses and cattle.

     Mr. Brockenbrough thought petitioners could make a profit by

selling quarter horses because quarter horses are preferred by

rodeo riders and barrel racers, and they work well with cattle.

However, he believed that it would be several years before

petitioners could make a profit from quarter horses because of

the time required to breed and train horses.

     In 1991, David Jordan (Jordan), a certified public

accountant, told petitioners how to keep books and records that

they would need to make business decisions and that he would need

to prepare their income tax returns.     Jordan developed a

recordkeeping system for petitioners based on their checking

account.   Petitioners kept detailed financial records as

requested by their accountant.    They had a separate checking

account for their farm activity.    Petitioners called their farm

Blue Horse Farms.   Petitioners gave all of the records relating

to Blue Horse Farms to their accountant and relied on him to

prepare their returns properly.
                                - 9 -

     In 1991, Mr. Brockenbrough built a barn with stalls for

$102,065 and a horse arena with lighting.

          b.    Initial Stock

     Petitioners bought 15 horses in 1991.    Petitioners bought

six quarter horses (five mares and one stud named Sam Skyles)

from Bobby Denton (Denton) in Colorado in February 1991.      A

veterinarian checked the horses before Denton released them to

petitioners.   Petitioners bred many of these mares to Sam Skyles.

They also bought a mare in February 1991 from Cole.

     In August 1991, petitioners bought six quarter horses

(mares) from Denton.    Denton had bred those mares to Invaders

Zorro, a stallion which was a paint horse (a type of quarter

horse), before selling them to petitioners.    Despite this, one of

those mares was not in foal.    Another mare died foaling her colt.

Three mares contracted a virus from fescue grass not found in

Colorado which caused them to abort.

     In October 1991, petitioners bought two riding horses to

train.

      Petitioners joined the American Quarter Horse Association

and registered their quarter horses with it.    Petitioners

reported Sam Skyles' breeding activity in the American Quarter

Horse Association Stallion Breeding Report.

     Petitioner also bought 16 cattle in 1991 to use to train

their quarter horses.
                                - 10 -

          c.    Hiring Bumgarner

     Petitioners hired Bumgarner to manage Blue Horse Farms.

Bumgarner fed the animals, helped keep the barn clean, trained

the foals, showed the horses, and supervised the arena and

weekend roping events.    Petitioners paid Bumgarner about $400 per

week plus a percentage of their income from the horses.    Paying a

manager that amount of salary plus a percentage of income was

customary for a farm like petitioners'.

          d.    Operations

     Petitioners began to operate their horse activity in 1991.

Petitioners reported having six employees for the farm in 1991.

Petitioners' employees provided services including training,

boarding, shoeing horses, and giving riding lessons.    Petitioners

obtained insurance for their horse activity.    Petitioners

expected that their animals would breed and increase in number.

Petitioners expected to train the foals to increase their value,

and then to sell them.

     John Brockenbrough, Mr. Brockenbrough's son, worked at Blue

Horse Farms after he graduated from college.    He overfed a mare

which caused her death.

     Mr. Brockenbrough was not a horse trainer, but he did a lot

of the dirty work relating to the horses, such as putting up hay

and cleaning the stalls.     He gave the animals shots and vitamin

supplements.   He did not ride horses in 1991 and 1992.   Mr.

Brockenbrough told Bumgarner not to contact him while he was on
                                    - 11 -

international flights.     Mrs. Brockenbrough does not like to ride

horses.

     Petitioners advertised their horse business on the radio and

in magazines such as Horse Lovers, Stable Mates, and The Quarter

Horse Association.



                  2.   The Rodeos

     Mr. Brockenbrough wanted to publicize his horses and

generate revenue for Blue Horse Farms to offset losses he

expected initially.     Conducting rodeos can complement breeding

quarter horses.    Quarter horses are used extensively in rodeos

for calf roping, steer wrestling, team pinning, team roping, and

barrel racing.

     Before deciding to hold rodeos at Blue Horse Farms, Mr.

Brockenbrough discussed the rodeo business and how to produce a

rodeo at his farm with members of a southeastern regional rodeo

association, bankers, and accountants.       He attended many rodeos,

but he did not review financial data of those rodeos.

     Petitioners held a total of three rodeos in 1991 and 1992.

Petitioners used the advertising and programs for the rodeos to

advertise their horse operations.

     Petitioners contracted with Charley Lowrey of 4 L Rodeo

Productions (4 L), Summerville, Georgia, to produce their first

rodeo, which was held on October 5 and 6, 1991.      Petitioners

provided all the advertising, advertising books, bleachers,
                               - 12 -

spectator insurance, a forklift to load and unload bucking

chutes, lighting, water for livestock, sewage and water,

electricity, tickets and people to handle tickets, restrooms,

spectator seating, concession stands, a tractor and disk to work

the arena, and an ambulance.    4 L provided animals and personnel

for the events.

     Petitioners hired Cotton Young (Young) to produce their

second rodeo, which was held on May 1 and 2, 1992.    Petitioners

paid Young about $16,000.    Petitioners' responsibilities were

essentially the same as for the first rodeo.

     Mr. Brockenbrough and Bumgarner produced petitioners’ third

rodeo, which was held in the fall of 1992.    They produced the

rodeo themselves in an attempt to minimize expenses and generate

a profit.   They used their horses and cattle and rented a few

steers for that rodeo.

     Cashion saw petitioners' stud, Sam Skyles, while he attended

one of petitioners' rodeos.    He decided to breed Sam Skyles to

one of his mares.

     Petitioners used the same accountant and checking account

for their rodeo and horse undertakings.

     3.     Bumgarner's Dismissal

     By the time they held the third rodeo, petitioners concluded

that Bumgarner had been using petitioners' facilities, feed, and

stud horses without paying petitioners, selling cattle without

giving petitioners the proceeds, and using two of his uninsured
                                - 13 -

friends as riders during the third rodeo against petitioners'

orders.   Petitioners discharged Bumgarner shortly after the third

rodeo.

     4.   Cessation of the Horse and Rodeo Undertakings

     Petitioners could not find anyone to replace Bumgarner, and

they were losing money on their horses and rodeos.      They decided

to discontinue these undertakings.       They sold their animals for

$8,413.20.

D.   Great Gay, Georgia, Marketplace

     Petitioners began looking for a new profit-making activity

immediately after they realized that they could not make a profit

from their rodeos and horses.

     The Cotton Picking Fair, an arts and craft fair, was held in

Gay twice each year, including 1991 and 1992.      It was held across

the road from petitioners' farm.    The Cotton Picking Fair had

been held for about 20 years.    It had about 250 exhibitors, each

of whom had to be accepted by a panel of experts.

     In 1991 and 1992, some vendors who could not participate in

the Cotton Picking Fair asked petitioners if they could rent

space for booths on petitioners' land from which to sell goods

during the fair.   A neighbor who had rented space to vendors

during the fair helped petitioners do the same.      Mrs.

Brockenbrough negotiated with the vendors.      Petitioners charged

up to $100 to rent 10' x 10' spaces to vendors on September 29

and October 4, 1992.   Mrs. Brockenbrough rented space to about 50
                                  - 14 -

vendors.    Because of their success in the fall of 1992,

petitioners decided to hold their own fair, called the Great Gay,

Georgia, Marketplace, twice a year, when the Cotton Picking Fair

is held.

E.     Petitioners' Tax Returns

       Petitioners reported the following gross receipts, losses,

and depreciation for 1991 and 1992:

                Gross         Losses (including
Year           receipts         depreciation)           Depreciation

                               Antiques
1991            $1,885             ($10,952)                $2,594
1992             2,589               (9,830)                 2,443

                           Horses and Rodeos
1991             3,947              (40,746)                 4,426
1992            21,589              (44,600)                 8,146

       Petitioners reported their horse and rodeo undertakings on

the same schedule in 1991 and 1992.        Petitioners had gross

receipts from their fair in 1992 of about $3,020 with no expenses

or depreciation.

                             II.    OPINION

       Respondent concedes that petitioners operated the rodeos for

profit.    We must decide whether petitioners operated their

antique store for profit in 1991 and 1992.        We must also decide

whether petitioners' horse and rodeo undertakings were one

activity, and if so, whether they operated that activity for

profit in 1991 and 1992.    Finally, we must decide whether

petitioners are liable for the accuracy-related penalty for
                               - 15 -

negligence under section 6662 for 1991 and 1992.    The burden of

proof on all issues in dispute in this case is on petitioner.

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

A.     Whether Petitioners Operated Olde Bank Antiques for Profit
       in 1991 and 1992

       Petitioners contend that they operated Olde Bank Antiques

for profit in 1991 and 1992.    An activity is conducted for profit

if it is conducted with an actual and honest profit objective.

Osteen v. Commissioner, 62 F.3d 356, 358 (11th Cir. 1995), affg.

in part and revg. on other issues T.C. Memo. 1993-519; Surloff v.

Commissioner, 81 T.C. 210, 233 (1983); Dreicer v. Commissioner,

78 T.C. 642, 645 (1982), affd. without opinion 702 F.2d 1205

(D.C. Cir. 1983).    In deciding whether petitioners operated the

antique shop and farm for profit, we apply the nine factors

listed in section 1.183-2(b), Income Tax Regs.    The nine factors

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

activity; (2) the expertise of the taxpayer or his or her

advisors; (3) the 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
                               - 16 -

involved.   No single factor controls.    Sec. 1.183-2(b), Income

Tax Regs.   The burden of proof is on petitioners.      Welch v.

Helvering, 290 U.S. 111, 115 (1933).

     Petitioners offered very little to support their contention

that they operated their antique store for profit in 1991 and

1992 or any other year.    Mrs. Brockenbrough operated the store,

but did not testify, although she was present at trial.       We infer

that petitioners have no stronger evidence available to support

their position about the store.    Wichita Terminal Elevator Co. v.

Commissioner, 6 T.C. 1158 (1946), affd. 162 F.2d 513 (10th Cir.

1947).

     1.     Manner in Which the Activity is Conducted

     Conducting an activity in a manner substantially similar to

comparable businesses which are profitable may indicate that a

taxpayer conducted the activity for profit.     Engdahl v.

Commissioner, 72 T.C. 659, 666-667 (1979).

     Petitioners offered little evidence about the business

activity of the store.    There is no evidence that petitioners had

any business plan for the activity.     Petitioners did not

advertise in 1991 or 1992.    At trial, Mr. Brockenbrough did not

know what items petitioners sold or had in inventory during the

years in issue, and he admitted that he knew in 1991 that their

antique business could never be profitable.     In the years in

issue, petitioners opened the store only part time and they left
                              - 17 -

a sign in the window for people to call them if they wanted to

see something in the store.   This factor favors respondent.

     2.   The Expertise of the Taxpayers or Their Advisors

     Preparation for an activity by extensive study of its

accepted business, economic, and scientific practices, and

consultation with experts in the business, may indicate that the

taxpayer entered into the activity for profit.   Sec. 1.183-

2(b)(2), Income Tax Regs.   Petitioners had no experience

operating a retail store.   Petitioners spoke to a couple of

people about operating an antique store, but, the record contains

little detail about the substance of those conversations, and

there is no evidence that petitioners sought any advice about how

to correct the store's losses in the years in issue.   See Engdahl

v. Commissioner, supra at 668 (continuous consultation with

experts showed profit motive).   This factor favors respondent.

     3.   Taxpayer's Time and Effort

     The fact that a taxpayer devotes much time and effort to

conducting an activity may indicate that the taxpayer has a

profit objective.   Sec. 1.183-2(b)(3), Income Tax Regs.    There is

virtually no evidence about how Mrs. Brockenbrough spent her time

at the store.   Petitioners did not operate the store on a full-

time basis after 1990.   This factor favors respondent.
                                - 18 -

     4.     Expectation That the Property Used in the Activity
            Would Appreciate in Value

     The fact that a taxpayer expects assets used in an activity

to appreciate in value may indicate that the taxpayer has a

profit objective.    Sec. 1.183-2(b)(4), Income Tax Regs.    The term

"profit" includes appreciation in the value of assets used in the

activity.    Id.   Petitioners expected the building to appreciate

in value.    This factor favors petitioners.

     5.     Taxpayer's Success in Other Activities

     The fact that a taxpayer has previously engaged in similar

business activities and converted them from unprofitable to

profitable may show that the taxpayer has a profit objective,

even though the activity is presently unprofitable.     Sec. 183-

2(b)(5), Income Tax Regs.    Petitioners had not previously engaged

in similar business activities.    This factor favors respondent.

     6.     Taxpayer's History of Income or Losses

     A history of substantial losses may indicate that a taxpayer

did not conduct an activity for profit.     Golanty v. Commissioner,

72 T.C. 411 (1979), affd. without published opinion 647 F.2d 170

(9th Cir., 1981); sec. 1.183-2(b)(6), Income Tax Regs.      However,

a taxpayer may have a profit objective even when the activity has

a history of losses.     Bessenyey v. Commissioner, 45 T.C. 261, 274

(1965), affd. 379 F.2d 252 (2d Cir. 1967).     A series of losses
                               - 19 -

during the initial stage of an activity does not necessarily

indicate that the activity was not conducted for profit.    Engdahl

v. Commissioner, supra at 669; sec. 1.183-2(b)(6), Income Tax

Regs.

     The antique store was not profitable during any of the 4

years it was open.    Petitioners did little or nothing to sell the

building and inventory during the 2 years after they knew the

business could not be profitable.   They liquidated their

inventory at an auction in 1992.    They did not explain why they

waited that long or show that their inventory was difficult to

liquidate.   During the period of delay, petitioners continued to

depreciate the building and incur expenses for mortgage,

interest, repairs, maintenance, and utilities for the building.

For 1991, they reported gross receipts of $1,885, cost of goods

sold of $1,802, and expenses of $11,035.   For 1992, they reported

gross receipts of $2,589, cost of goods sold of $4,743, and

expenses of $7,496.

     This factor favors respondent.

     7.   Amount of Occasional Profits, if Any

     Small occasional profits with large continuous losses do not

establish that the taxpayer had a profit objective.   Sec. 1.183-

2(b)(7), Income Tax Regs.   This factor generally applies to
                               - 20 -

losses that persist over a long period of time and which are not

due to unforeseen circumstances.    See Phillips v. Commissioner,

T.C. Memo. 1997-128; Briggs v. Commissioner, T.C. Memo. 1994-125;

Leonard v. Commissioner, T.C. Memo. 1993-472.     The antique store

never made a profit.    This factor favors respondent.

     8.     Financial Status of the Taxpayer

     Substantial income from sources other than the activity,

causing the losses to generate large tax benefits, may indicate

that the taxpayer is not conducting the activity for profit.

Sec. 1.183-2(b)(8), Income Tax Regs.    Petitioners' losses

sheltered a large amount of their income in 1991 and 1992.    This

factor favors respondent.

     9.     Elements of Personal Pleasure

     The presence of recreational or personal motives in

conducting an activity may indicate that the taxpayer is not

conducting the activity for profit.     Sec. 1.183-2(b)(9), Income

Tax Regs.    However, a taxpayer's enjoyment of an activity does

not show that the taxpayer lacks a profit objective if the

activity is conducted for profit as shown by other factors.

Jackson v. Commissioner, 59 T.C. 312, 317 (1972); sec. 1.183-

2(b)(9), Income Tax Regs.    Mrs. Brockenbrough likes antiques, and

the record contains little to show she had a profit objective.
                              - 21 -

This factor favors respondent.

     10.   Petitioners' Other Contention

     Petitioners point out that petitioners were audited for

1988, and that respondent's agents who conducted that audit did

not tell petitioners that they thought petitioners lacked a

profit motive for their antique activity.    Petitioners contend

that this shows that they had a profit motive for their antique

activity in 1991 and 1992.   We disagree.   The Commissioner's

failure to raise an issue in a prior audit does not estop the

Commissioner from raising it in an audit for a later year.    See

Knights of Columbus Council No. 3660 v. United States, 783 F.2d

69, 73 (7th Cir. 1986); Hawkins v. Commissioner, 713 F.2d 347,

351-352 (8th Cir. 1983), affg. T.C. Memo. 1982-451.

     11.   Conclusion

     We conclude that petitioners did not conduct their antique

activity for profit in 1991 and 1992.

B.   Whether Petitioners' Horse and Rodeo Undertakings Were One
     Activity

     Respondent contends that petitioners' horse and rodeo

undertakings were two activities.

     The applicable regulations state that, generally, the most

important factors are the degree of organizational and economic

interrelationship of the undertakings, the business purpose
                               - 22 -

served by carrying on the undertakings separately or together,

and the similarity of the undertakings.    Sec. 1.183-1(d)(1),

Income Tax Regs.4    The Commissioner generally accepts a

taxpayer's characterization of two or more undertakings as one

activity unless it is artificial or unreasonable.    Id.




     4
         Sec. 1.183-1(d)(1), Income Tax Regs., provides in part:

          (d) Activity defined--(1) Ascertainment of
     activity. In order to determine whether, and to what
     extent, section 183 and the regulations thereunder
     apply, the activity or activities of the taxpayer must
     be ascertained. For instance, where the taxpayer is
     engaged in several undertakings, each of these may be a
     separate activity, or several undertakings may
     constitute one activity. In ascertaining the activity
     or activities of the taxpayer, all the facts and
     circumstances of the case must be taken into account.
     Generally, the most significant facts and circumstances
     in making this determination are the degree of
     organizational and economic interrelationship of
     various undertakings, the business purpose which is (or
     might be) served by carrying on the various
     undertakings separately or together in a trade or
     business or in an investment setting, and the
     similarity of various undertakings. Generally, the
     Commissioner will accept the characterization by the
     taxpayer of several undertakings either as a single
     activity or as separate activities. The taxpayer's
     characterization will not be accepted, however, when it
     appears that his characterization is artificial and
     cannot be reasonably supported under the facts and
     circumstances of the case. 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. * * *
                              - 23 -

     We have applied various factors in deciding whether a

taxpayer's characterization of several undertakings as one

activity is unreasonable for purposes of section 183, such as:

(a) Whether the undertakings share a close organizational and

economic relationship, (b) whether the undertakings are conducted

at the same place, (c) whether the undertakings were part of a

taxpayer's efforts to find sources of revenue from his or her

land, (d) whether the undertakings were formed as separate

businesses, (e) whether one undertaking benefited from the other,

(f) whether the taxpayer used one undertaking to advertise the

other, (g) the degree to which the undertakings shared

management, (h) the degree to which one caretaker oversaw the

assets of both undertakings, (i) whether the taxpayers used the

same accountant for the undertakings, and (j) the degree to which

the undertakings shared books and records.   Keanini v.

Commissioner, 94 T.C. 41, 46 (1990); Hoyle v. Commissioner, T.C.

Memo. 1994-592; De Mendoza v. Commissioner, T.C. Memo. 1994-314;

Scheidt v. Commissioner, T.C. Memo. 1992-9; Trafficante v.

Commissioner, T.C. Memo. 1990-353; Schlafer v. Commissioner, T.C.

Memo. 1990-66.

     Applying these factors, we conclude that the undertakings at

issue were one activity.   The rodeo and horse undertakings had a
                              - 24 -

close organizational and economic relationship.   Rodeo and horse

undertakings are complementary.   The undertakings were both

conducted at petitioners' farm and were both attempts to make the

farm profitable.   Mr. Brockenbrough and Bumgarner managed the

rodeo and horse undertakings and their assets.    Petitioners held

rodeos in part to boost their horse business.    Petitioners used

some of their horses and cattle, the barn, and arena for both the

farm and rodeos.   Petitioners used the rodeos to advertise and

sell their quarter horses.   Petitioners used the same accountant

for the horse and rodeo undertakings.   Petitioners used the same

checking account for their rodeo and horse undertakings and

reported both undertakings on one schedule for each year in

issue.

     In Hoyle v. Commissioner, supra, the taxpayer bought a farm

and then grew raspberries, soybeans, corn, and grain; guided

hunting; boarded horses; raised horses and cattle; bred game

birds; crabbed; raced thoroughbred horses; and participated in

agricultural set-asides.   According to Hoyle, those undertakings

were one activity for purposes of section 183.    This case is like

Hoyle v. Commissioner, supra, in that petitioners were trying to

find sources of revenue from their farm.   See also Sparre v.

Commissioner, T.C. Memo. 1980-45 (grain farm and gun club were
                               - 25 -

one activity).   It is also similar to cases where we held that

horse breeding and other undertakings involving horses were one

activity.   E.g., Scheidt v. Commissioner, supra (horse farm and

stallion syndication); Mary v. Commissioner, T.C. Memo. 1989-118

(horse farm and horse racing); Yancy v. Commissioner, T.C. Memo.

1984-431 (same).    We conclude that petitioners operated their

horse and rodeo undertakings as one activity under section 183.

C.   Whether Petitioners Operated Their Horse and Rodeo Activity
     for Profit

     We next decide whether petitioners operated their horse and

rodeo activity for profit.    We apply the factors described above

at paragraph II-A.

     1.     Manner in Which the Activity Is Conducted

     Petitioners conducted their horse and rodeo activity in a

businesslike manner.    They hired professional rodeo companies and

a professional trainer.    They advertised their business in trade

journals and in the local media.    Cashion credibly testified that

petitioners established a solid operation by breeding good

working quarter horses.

     Maintenance of complete and accurate records may indicate

that a taxpayer has a profit objective.    Elliott v. Commissioner,

90 T.C. 960, 971-972 (1988), affd. without published opinion 899

F.2d 18 (9th Cir. 1990); sec. 1.183-2(b), Income Tax Regs.
                              - 26 -

Petitioners kept financial records as requested by their

accountant and had a separate checking account for their horse

and rodeo activity.

     A change in operating methods can indicate that a taxpayer

has a profit motive.   Ronnen v. Commissioner, 90 T.C. 74, 93

(1988); sec. 1.183-2(b)(1), Income Tax Regs.    Petitioners changed

their operating methods in response to their circumstances.        They

abandoned their horse and rodeo activity as soon as they were

convinced that it would be unprofitable and began to operate a

fair.5

     Respondent contends that petitioners' decision to abandon

this activity before the end of the second year of operations

shows that they lacked a profit objective.    We disagree.    We

believe that it shows that petitioners adjusted quickly to their

situation.

     Respondent points out that petitioners did not have a

written business plan before starting their horse and rodeo

activity, and contends that this shows that they lacked an intent

to make a profit.   We disagree.   A taxpayer's actions can



     5
       Respondent contends that we should not consider evidence
offered by petitioners relating to their operation of a fair on
their farm after the years at issue. We have not considered that
evidence in deciding this case.
                              - 27 -

constitute a business plan, even if there is no written plan.

See Phillips v. Commissioner, T.C. Memo. 1997-128 (written

financial plan not required for 32 horse farm where business plan

evidenced by action).   Petitioners' business plan was evidenced

by their actions:   Petitioners consulted with experts, built a

barn and arena, hired Bumgarner and professional rodeo producers,

bought mares in foal, registered their horses with the American

Quarter Horse Association, and advertised.   This factor favors

petitioners.

     2.   The Expertise of the Taxpayers or Their Advisors

     Petitioners consulted with many people before beginning

their horse and rodeo activity, including professional rodeo

producers, local cowboys, a quarter horse expert, accountants,

and bankers.   They hired professional rodeo producers and

Bumgarner to serve as a farm manager and trainer.   A taxpayer's

continuous and informal consultation with experts such as

veterinarians, horse trainers, and other horse owners was a

factor that showed that the taxpayers had a profit motive.

Engdahl v. Commissioner, 72 T.C. at 668.

     Respondent points out that petitioners did not pay for the

advice that they received from people in the horse business.    We

do not think that this is unusual for a new business.
                               - 28 -

     Jordan and Mr. Brockenbrough testified that Mr.

Brockenbrough consulted with Jordan about horse breeding and

training, rodeos, and fairs.    Respondent contends that Jordan had

no experience with the horse business or fairs.    We disagree.

Jordan had raised horses, and had prepared several tax returns

for people who participate in the Cotton Picking Fair.     Jordan

also had been associated with the Cotton Picking Fair for 25

years.

     Respondent points out that there is no evidence that

Bumgarner had operated a horse operation for profit.     However,

Bumgarner had a good reputation as a trainer and rodeo operator.

There is no indication that petitioners should have known that

Bumgarner would misuse their property.    Respondent also contends

that Bumgarner's low salary shows that he was not qualified.      We

disagree.   Cashion testified that a manager such as Bumgarner

would typically be paid a salary such as petitioners paid plus a

percentage of income earned in the activity.

     This factor favors petitioners.

     3.     Taxpayer's Time and Effort

     Mr. Brockenbrough spent a lot of time and effort in the

horse and rodeo activity.    He did bookkeeping, horse

registration, and manual labor such as putting up hay and
                               - 29 -

cleaning stalls.    He installed the rodeo bleachers and arenas and

cleaned up after the rodeos.

     Respondent contends that petitioners could not have been

successful because of their work for Delta.    We disagree.

Petitioners relied on Bumgarner when they traveled.    The fact

that a taxpayer devotes a limited amount of time to an activity

does not necessarily indicate that he or she lacks a profit

motive if the taxpayer hired and relied on a qualified manager.

Sec. 1.183-2(b)(3), Income Tax Regs.    This factor favors

petitioners.

     4.   Expectation That the Property Used in the Activity
          Would Appreciate in Value

     Petitioners expected during the years in issue that their

animals would breed and increase in number and value.6   See

Engdahl v. Commissioner, supra at 668-669 (taxpayers expected the

value of their horses to appreciate); Arwood v. Commissioner,

T.C. Memo. 1993-352 (same); Harvey v. Commissioner, T.C. Memo.

1988-13 (same).    This factor favors petitioners.




     6
       We need not decide petitioners' claim that they expected
the value of their farm land to appreciate. Mr. Brockenbrough
testified that he intended to retire on the farm and that he did
not expect the land to appreciate significantly in value when he
bought it.
                               - 30 -

     5.   Taxpayer's Success in Other Activities

     Petitioners had not previously engaged in similar business

activities.   This factor favors respondent.

     6.   Taxpayer's History of Income or Losses

     Petitioners had losses from their horse and rodeo activity

in 1991 and 1992.   However, those were their first 2 years, and

several events occurred beyond their control such as the fescue

virus, untimely death of some of their horses, and Bumgarner's

improper conduct.   Losses sustained because of circumstances

beyond the taxpayer's control do not indicate that the taxpayer

lacked a profit objective.    Sec. 1.183-2(b)(6), Income Tax Regs.

     Respondent contends that the death and illness of some of

petitioners' horses and Bumgarner's bad conduct were due to

petitioners' absences.    We disagree.   Petitioners reasonably

relied on Bumgarner.   Their presence would not have prevented the

fescue problem or the deaths of their horses.     We conclude that

this factor is neutral.

     7.   Amount of Occasional Profits, if Any

     Petitioners discontinued their horse and rodeo activity

after 2 years.   We conclude that this factor is neutral.

     8.   Financial Status of the Taxpayer

     Petitioners' losses sheltered a large amount of their income

in 1991 and 1992.   This factor favors respondent.
                               - 31 -

     9.    Elements of Personal Pleasure

     Petitioners did not conduct their horse and rodeo activity

for their personal pleasure.   Mr. Brockenbrough wanted to live on

a farm after he retired from Delta, but this fact does not show

that petitioners lacked a profit objective.    This factor favors

petitioners.

     10.   Respondent's Other Contention

     Respondent contends that Mr. Brockenbrough's letter to the

Meriwether Cattlemen's Association dated February 23, 1992, in

which he said that he hoped that he would "at least break even

for once" shows that petitioners did not have a profit motive.

We disagree.   We believe respondent is misconstruing Mr.

Brockenbrough's statement in that letter, and that the letter

shows that petitioners wanted to make money.

     11.   Conclusion

     Petitioners conducted their horse and rodeo activity in a

businesslike manner, consulted experts, kept adequate records,

developed expertise in the business, did not own the horses for

personal pleasure, and adjusted their plan in their attempt to

make a profit.   Mr. Brockenbrough spent many hours performing

physical labor and menial chores.   Petitioners abandoned their

horse and rodeo activity because of the death of some of their

horses, difficulties with Bumgarner, and other causes beyond
                                - 32 -

petitioners' control.   We conclude that petitioners had a good

faith intent to make a profit from their horse and rodeo

activity.

D.   Whether Petitioners Are Liable for the Penalty Under Section
     6662 for Negligence

     Respondent determined that petitioners are liable for the

accuracy-related penalty for negligence for 1991 and 1992 under

section 6662.    Taxpayers are liable for a penalty equal to 20

percent of the part of the underpayment to which section 6662

applies.    Sec. 6662(a).   Negligence includes a failure to make a

reasonable attempt to comply with internal revenue laws or to

exercise ordinary and reasonable care in preparing a tax return.

Sec. 6662(c).    The accuracy-related penalty does not apply to any

part of an underpayment to the extent the taxpayer shows that he

or she had reasonable cause and acted in good faith.     Sec.

6664(c)(1).

     Respondent's agents did not question whether petitioners had

a profit objective in conducting their antique activity when they

audited petitioners for 1988.    Respondent's failure to raise this

issue for 1988 does not help them avoid liability for the

accuracy-related penalty for 1991 and 1992.

     Petitioners deducted a substantial amount of losses during

the extended time from when they realized that the antique

activity could never be profitable.      We conclude that petitioners
                             - 33 -

negligently deducted losses attributable to their antique

activity in 1991 and 1992.

     To reflect the foregoing,


                                        Decision will be entered

                                   under Rule 155.
