                         T.C. Memo. 1996-509



                       UNITED STATES TAX COURT



            FREDERICK G. HARRISON, SR. AND ESTATE OF
          CATHERINE HARRISON, DECEASED, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 26617-93.                  Filed November 14, 1996.



     Dermot F. Kennedy, for petitioners.

     James C. Fee, Jr., for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     VASQUEZ, Judge:    Respondent determined a $62,125 deficiency

in petitioners' 1989 Federal income tax and a $12,425 accuracy-

related penalty for that year.
                              - 2 -

     The issues for decision are:   (1) Whether a gold mining and

treasure salvaging activity1 was not engaged in for profit by

petitioner2 and thus, losses claimed in connection with this

activity were not deductible under section 183;3 (2) if the

activity was engaged in for profit, whether the losses constitute

nondeductible passive activity losses under section 469; (3)

whether a loss from rental property was properly disallowed as a

passive activity loss pursuant to section 469; and (4) whether

petitioners are subject to the accuracy-related penalty under

section 6662 due to an underpayment of tax attributable to

negligence or an intentional disregard of rules or regulations,

or a substantial understatement of income tax.   Respondent does

not argue that any of the losses should be disallowed for failure

to substantiate, nor does she argue that petitioner's

expenditures were in effect contributions by petitioner to the

capital of the treasure hunting venture; thus, we will not

consider these issues.




     1
        It was conceded at trial that all of the gold mining and
treasure salvaging (also referred to as treasure hunting)
operations constituted one activity for purposes of sec. 183 and
sec. 469.
     2
        All references to “petitioner” in the singular refer to
Frederick G. Harrison.
     3
        All section references are to the Internal Revenue Code
in effect for the year in issue, and all Rule references are to
the Tax Court Rules of Practice and Procedure.
                                - 3 -

                         FINDINGS OF FACT

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

The stipulation of facts and attached exhibits are incorporated

herein by this reference.   Petitioners, Frederick and Catherine

Harrison, were husband and wife and resided in Marlton, New

Jersey, at the time they filed their petition in the instant

case.   On January 16, 1994, Catherine Harrison died, and her

estate was substituted as a petitioner.

     During 1989, petitioner Frederick G. Harrison owned and

operated three trucking and solid waste removal businesses in

Pennsylvania and New Jersey.    The waste removal business in New

Jersey was a family owned business that petitioner started over

20 years ago.   The waste removal business in Pennsylvania was

also a family business run by petitioner and his son.    The third

business, consisting of trucking and waste disposal, was operated

by Penn Foundry, Inc. (Penn).   Petitioner owned one-third of

Penn.   Petitioner's son was also an owner of Penn.   The trucking

and waste management businesses were considered by Mr. Harrison

to be his “working companies”, and they were generally

profitable.   Mr. Harrison was around 65 years old in 1989.

     Prior to 1989, Mr. Harrison owned a one-quarter interest in

a trash transfer station in Philadelphia, Pennsylvania, known as

LaForge, Inc.   LaForge was sold in 1988 to a public company for

$4.8 million; Mr. Harrison's share of the proceeds was worth

approximately $1.2 million and was paid in stock.
                                - 4 -

     Petitioners owned a home and a farm in Marlton, New Jersey,

which were situated on 44 acres.    Petitioners lived at the farm.

Petitioners also owned a second home in Tucson, Arizona, which

they purchased in 1985.   Petitioners owned the New Jersey farm

and residence and the Arizona residence with no outstanding

mortgages on either property.   Petitioners purchased another

residential property in Atco, New Jersey, which they bought in

1989 to use as a rental property.    They purchased the Atco

property for $80,000 and had a $60,000 mortgage on the property.

     Petitioners reported adjusted gross income on their tax

returns for 1987, 1988, and 1989 in the respective amounts of

$56,692, $247,041, and $133,235.    Petitioners' adjusted gross

income for 1989, without regard to losses claimed for treasure

hunting and gold mining, would have been $334,764.

     Mr. Harrison first developed an interest in gold mining

through a company called Christine Enterprises in 1985.

Christine Enterprises conducted its mining operation in the

Sonora section of Mexico.   Christine Enterprises conducted this

gold mining activity with an individual named Thomas Daley.     Mr.

Daley was an engineer who had studied mining and geology at

Tucson University.   Mr. Harrison sought Mr. Daley's assistance in

an attempt to find gold nuggets by placed mining.4   Mr. Harrison

did not find any gold with Christine Enterprises.    In addition to

     4
        Placed mining is a form of panning for gold flakes and
nuggets in streams and rivers after the winter thaw.
                                 - 5 -

his activities with Christine Enterprises and Thomas Daley, Mr.

Harrison panned for gold from 1985 to 1989 with Alex Saldivar.

Mr. Harrison did not recover any discernible amounts of gold from

his mining activities from 1985 to 1989.

     During 1989, petitioners frequently visited Las Vegas,

Nevada.   Mr. Harrison first became interested in treasure hunting

during one of his trips to Las Vegas in early 1989.    Sometime

during the first quarter of 1989, Mr. Harrison met two gentlemen,

Patrick Payne and Hans Kruse, at the Hilton Hotel in Las Vegas,

Nevada.   These individuals introduced Mr. Harrison to the idea of

searching for sunken Spanish galleons.    Mr. Harrison had no

experience in treasure hunting prior to that time.    Shortly after

this initial meeting in Las Vegas, as part of his investigation,

Mr. Harrison traveled to San Diego, California, to meet other

individuals associated with Patrick Payne.    The other individuals

were Jerry James, Larry Haimson, and Glenn Tillman.    Jerry James,

Patrick Payne, and Larry Haimson were associated with

International Recoveries, Inc.    International Recoveries was

formed to seek treasures.

     While in San Diego, petitioner also met with Glenn Tillman.

Glenn Tillman was the operation manager of the various survey

operations conducted by International Recoveries, though he was

not an owner of International Recoveries.    Petitioner met with

several of the members of International Recoveries, as well as

Mr. Tillman, and did some investigation or independent research
                               - 6 -

concerning the backgrounds of these individuals.    Petitioner

received Glenn Tillman's resume during his San Diego meeting in

the early part of 1989.   Petitioner relied upon this resume in

making his decision to enter into a joint venture to hunt for

gold and treasure with International Recoveries.    As part of his

investigation into Mr. Tillman's qualifications and expertise,

petitioner contacted the Mel Fisher organization,5 a prior

employer of Mr. Tillman, in order to verify his expertise.    Mr.

Tillman was given a favorable report.   Mr. Tillman's

qualifications encouraged petitioner to participate in this

venture.

     Mr. Harrison did not see or rely on any information that

showed any prior salvage operations conducted by International

Recoveries or its owners.   With respect to the salvage operation

contemplated by International Recoveries, petitioner was shown

papers and reports of its prospective activities.    He saw no

financial data about International Recoveries before becoming

involved with that company or its principals.   Petitioner entered


     5
        The Mel Fisher organization was a very successful
treasure hunting group. His group spent millions of dollars
searching for the Atocha, a Spanish galleon. In 1980, Fisher
found the Margarita, another galleon, whose treasure yielded $20
million, which was insignificant compared with the expected yield
of the Atocha. In 1985, Fisher discovered the Atocha. The
treasure that was discovered included nearly 40 tons of silver
bars, over 2,300 natural, uncut gems with some weighing up to 77
karats, gold chains as much as 50 feet long, and other items such
as weapons and personal items. Mr. Tillman was not with this
group at the time of the Atocha discovery.
                               - 7 -

into a joint venture with International Recoveries, Inc., based

on business plans and maps that were shown to him as well as his

evaluation of the other investors and Mr. Tillman's expertise in

the area.

     When assessing potential transactions for his trucking and

waste management businesses, Mr. Harrison generally sought legal

assistance.   Mr. Harrison did not seek legal assistance with

respect to his dealings with International Recoveries.

     Petitioner went to libraries and read books and other

publications regarding treasure hunting.   The materials

petitioner referred to did not discuss the cost of treasure

salvaging or how to make a treasure hunt economically feasible.

     Petitioner set no specific budget with respect to his gold

mining and treasure hunting activity.   Mr. Harrison was invited

to join International Recoveries in its ongoing exploration for

sunken treasures for an investment of $50,000.    For this

investment, petitioner was to share in any recovery.    Petitioner

did not agree to the first offer to join International Recoveries

and negotiated a better deal than that originally presented.

     During 1989, the International Recoveries group participated

in three primary expeditions with petitioner.    The group was

involved in operations off the Florida Keys, off the coast of

Louisiana near the base of the Mississippi River, and on a farm

in Goliad, Texas.
                                - 8 -

     With respect to the Florida venture, Mr. Harrison traveled

to the Florida Keys 1-1/2 to 2 days with members of the

International Recoveries group.    Petitioner did not participate

in the group's exploration at sea beyond observing the boats

while they were docked.    This operation was in progress when

petitioner decided to invest; petitioner therefore went to

Florida only to observe the operations and speak with the other

members of International Recoveries.    No treasure or anything of

value was recovered as part of the Florida venture.    After the

unsuccessful Florida operation, petitioner had questions

regarding the profitability of this business.    Petitioner decided

to continue with this venture after discussions with Mr. Tillman.

     The International Recoveries group next traveled to

Louisiana to search for a sunken galleon called the Palamar.

Petitioner invited Mr. Saldivar to join the venture in its

search.    Mr. Saldivar owned an equipment company in Tucson,

Arizona.    Petitioner telephoned Mr. Saldivar and asked him to go

along on the Louisiana trip in 1989, and Mr. Saldivar agreed to

join the expedition.    Mr. Saldivar was recruited for this trip

because he had the ability to make cages that would protect

divers against sharks and other underwater dangers.    These metal

cages containing the divers would be lowered by crane from the

ship.   The cost of construction would be paid by petitioner who

agreed to reimburse Mr. Saldivar for any expenses incurred in

this project.    Mr. Saldivar also made an air lift.   The air lift
                                - 9 -

worked like a vacuum cleaner to lift materials from the bottom of

the ocean floor onto the deck of the ship.    This ship was fully

equipped for salvage operations.    It was equipped with cranes,

hydraulic devices, and diving equipment, as well as other heavy

equipment.    This ship was obtained from North Sea Underwater

Services, Inc. (North Sea), on the recommendation of Mr. Tillman.

Petitioner negotiated directly with North Sea's president and

attorney in order to procure the ship for the Louisiana

operation.

     Petitioner knew little about the Palamar beyond its general

description as a sunken Spanish galleon.    The members of

International Recoveries showed petitioner maps showing

approximately 10 to 12 sites where galleons had sunk.    Petitioner

read several books and magazine articles dealing with Spanish

galleons.

     Petitioner spent only a day and a half on the Louisiana

expedition.    He was unexpectedly forced to return to Tucson to

accompany his wife who had become seriously ill.    However, during

the expedition, petitioner remained in contact with the group by

calling Mr. Saldivar for progress reports one to three times each

week.   Petitioner also frequently contacted the captain of the

ship and Mr. Tillman to determine the progress of the operation.

This salvage operation lasted approximately 1 month.    No treasure

or anything of value was recovered during the Louisiana

expedition.
                               - 10 -

     Finally, the International Recoveries group conducted an

operation in Goliad, Texas, in the summer of 1989.    Petitioner

visited Goliad twice to plan the operation prior to any work

being commenced.     During these planning visits, petitioner

discussed the feasibility of the plan with Mr. Tillman.

Petitioner went to the Goliad courthouse to examine the title of

the property which they wanted to excavate.    Subsequently,

petitioner met with the owner of the Goliad property to negotiate

a contract to obtain permission to enter the land for this

operation.

     The operation at Goliad took place near the San Antonio

River.   The excavation lasted approximately 35 to 40 days.

Petitioner remained in Goliad throughout the operation.    During

this time period, petitioner spent 12 hours a night, 3 nights a

week, manning the pumps that were being used.    Separating the

exploration site from the San Antonio River was a bank about

20-feet wide.   The exploration site was approximately 300-feet

long and 200-feet wide and needed to be excavated to a depth of

about 100 feet.    In order to pump water out of the excavation

site, heavy equipment such as cranes and pumps were used.      It

took 3 days of running the pumps 24 hours a day to remove all of

the water.   Once the water was removed, a backhoe was used to

remove mud from the hole, then the mud was spread out with a

bulldozer to search for artifacts and gold.    There were no

recreational activities during the business operations.    Nothing
                              - 11 -

of monetary significance was recovered during the Goliad

expedition.   The few coins that were found by the group were kept

by the owner of the land where the dig took place.   Petitioner

maintained contemporaneous handwritten notes of the expenditures

made during the Goliad operation.

     In order to get the necessary equipment to and from the work

site, petitioner drove a truck round trip, twice, from Tucson,

Arizona, to Goliad, Texas.   Each trip took approximately 23-1/2

hours each way.

     During the remainder of 1989, petitioner and Mr. Saldivar

went on occasional treasure hunting trips in Arizona.

     Petitioner had wages from his working companies in the

amounts of $50,000, $55,000, and $55,000 for 1987, 1988, and 1989

respectively.   Even when he was away from home, petitioner stayed

in touch with his businesses every day by telephone.

     Petitioners claimed losses totaling $201,529 in connection

with gold mining and treasure hunting in 1989.   Of this amount,

$64,877 was claimed on Schedule E in the form of a distributive

share of a loss of a partnership called the Kruse Group.   In

fact, the Kruse Group did not exist as a partnership, and the

loss was reported on Schedule E as the result of an error and was

meant to be placed on Schedule C.6


     6
         Respondent agreed at trial that all of the losses from
                                                    (continued...)
                              - 12 -

                              OPINION

Was the Activity Engaged in for Profit?

     The first issue to be decided is whether petitioner's

treasure hunting activity was an activity engaged in for profit

within the meaning of section 183.     This is a factual inquiry

requiring a weighing of the evidence in the record.

     Respondent asserts that petitioner's treasure hunting

activity was not engaged in with the objective of making a profit

and that section 183(a) applies.   Thus, respondent argues that no

deductions attributable to this activity are allowed, except as

provided in section 183(b).   Petitioners contend that petitioner

entered into and carried on the treasure hunting activity with

the requisite profit objective and that, as a result, the

deductions are allowed under section 162 or section 212.

     Section 183(a) provides generally that, if an activity is

not engaged in for profit, no deduction attributable to such

activity shall be allowed except as provided in section 183.

Section 183(b) allows deductions in situations not applicable to

the instant case.

     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


     6
      (...continued)
this activity should have been reported on Schedule C.
                                - 13 -

[trade or business] or under paragraph (1) or (2) of section 212

[expenses for the production of income]".    For a deduction to be

allowed under section 162 or section 212(1) or (2), taxpayers

must establish that they engaged in the activity with an actual

and honest objective of making an economic profit independent of

tax savings.   Antonides v. Commissioner, 91 T.C. 686, 693-694

(1988), affd. 893 F.2d 656 (4th Cir. 1990); Dreicer v.

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

702 F.2d 1205 (D.C. Cir. 1983).    Their expectation of profit need

not have been reasonable; however, they must have entered into

the activity, or continued it, with the objective of making a

profit.   Hulter v. Commissioner, 91 T.C. 371, 393 (1988); sec.

1.183-2(a), Income Tax Regs.

     The burden is on petitioners to show error in respondent's

determination that the treasure hunting activity was not engaged

in for profit.   Rule 142(a).   Whether the requisite profit

objective exists is determined by looking to all the surrounding

facts and circumstances.   Keanini v. Commissioner, 94 T.C. 41, 46

(1990); sec. 1.183-2(b), Income Tax Regs.    Greater weight is

given to objective facts than to a taxpayer's mere statement of

intent.   Thomas v. Commissioner, 84 T.C. 1244, 1269 (1985); sec.

1.183-2(a), Income Tax Regs.

     Section 1.183-2(b), Income Tax Regs., provides a list of

factors to be considered in the evaluation of a taxpayer's profit
                                - 14 -

objective:    (1) The manner in which the taxpayer carries on the

activity; (2) the expertise of the taxpayer or his advisors; (3)

the time and effort expended 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 from the activity; (7) the amount of occasional

profits, if any, from the activity; (8) the financial status of

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

recreation.   The number of factors for or against the taxpayer is

not necessarily determinative, but rather all facts and

circumstances must be taken into account, and more weight may be

given to some factors than to others.    Cf. Dunn v. Commissioner,

70 T.C. 715, 720 (1978), affd. 615 F.2d 578 (2d Cir. 1980).    This

list is nonexclusive, and no single factor or even a majority of

factors necessarily controls.    Abramson v. Commissioner, 86 T.C.

360, 371 (1986); sec. 1.183-2(b), Income Tax Regs.

     After weighing all of the objective factors coupled with

petitioner's statements of intent, we conclude that petitioner

was engaged in the treasure hunting activity for profit.   A

number of factors indicate that petitioner did have the requisite

profit objective.

     Respondent places great emphasis on the fact that petitioner

did not keep business records for the treasure hunting
                                - 15 -

operations.    Respondent contends that petitioner did, in

contrast, maintain thorough business records for his other

businesses and that this contrast reveals a lack of a profit

motive in the treasure hunting operations.     We agree that

petitioner's recordkeeping left something to be desired; we do

not, however, find that this negates petitioner's profit motive.

The treasure hunting activity was different from petitioner's

other businesses.    Different recordkeeping methods are therefore

expected, and lack of recordkeeping is not determinative of

intent.   Treasure hunting is not the type of business where

thorough records of gains and losses are necessary to a

successful operation.    Cf. Farrell v. Commissioner, T.C. Memo.

1983-542.     This type of activity is likely to generate only

expenditures with no income until a find is made at which time

the income will come in one lump sum.     Therefore, we find that

petitioner's contemporaneous handwritten lists of expenses were

sufficient records for this type of activity.

     More indicative of a profit motive is that petitioner did

not simply accept the first deal presented to him by

International Recoveries.     Petitioner testified that the original

offer to join this venture was unsatisfactory and that he

negotiated for a higher percentage of any treasure that might be

recovered in addition to first being reimbursed for his expenses.

If petitioner had no expectation of profit, there would have been
                                - 16 -

no need for him to negotiate a higher percentage of profits plus

insist on reimbursement of out-of-pocket expenses before

distribution of profits.   Petitioner's negotiations indicate a

profit motive.   See Gefen v. Commissioner, 87 T.C. 1471, 1498

(1986) (partner negotiating terms of partnership's transactions

to partnership's best advantage was a factor in deciding that

partnership was engaged in activity with the intention of making

a profit).

     Petitioner was admittedly not an expert in the gold mining

and treasure hunting business.    However, we find that petitioner

did ally himself with experts sufficient to give this venture an

opportunity to be successful.    Although there were some

inconsistencies between petitioner's testimony regarding Mr.

Tillman's experience and the summary sheet of Mr. Tillman's

experience, we are convinced that petitioner was aware of Mr.

Tillman's credentials when making his decision to join

International Recoveries in this joint venture.       Both petitioner

and Mr. Saldivar credibly testified that Mr. Tillman was in

charge of the operations, and we are convinced that petitioner

reasonably believed that Mr. Tillman was an expert in salvage

operations.

     Careful investigation of a potential business to insure the

best chance for profitability strongly indicates an objective to

engage in the activity for profit.       Sec. 1.183-2(b)(2), Income
                              - 17 -

Tax Regs.   While a formal market study is not required, a basic

investigation of the factors that would affect profit generally

is.   Underwood v. Commissioner, T.C. Memo. 1989-625.    Respondent

contends that petitioner did no background investigation to

determine if this venture could be profitable or if any of his

co-venturers had ever been successful in this type of activity.

Petitioner did investigate this venture by meeting with the other

investors, investigating Mr. Tillman's credentials, and reading

books on treasure hunting.   It is clear from the record that

petitioner did not enter this activity with the hope that regular

finds of treasure would provide a return of his expenditures plus

a small profit.   Instead, petitioner entered this activity with

the belief that if treasure were found the return would be so

great that all of his expenses would be recouped and a

substantial profit would be realized.   This belief indicates that

petitioner was engaged in this activity with a profit motive.

Cf. sec. 1.183-2(c) Example (6), Income Tax Regs. (wildcat oil

driller engaged in activity for profit when there is a small

chance to make a large profit).   Thus, the fact that petitioner's

co-venturers had not shown a record of profits does not indicate

that they did not expect to find gold or treasure in the future.

      The factors that most strongly indicate a profit motive are

the time and effort spent in conducting the gold mining and

treasure hunting as well as the lack of personal enjoyment in
                               - 18 -

conducting these activities.    Petitioner spent a significant

amount of time with the gold mining and treasure hunting

activity.    He was not merely an investor who made an occasional

inquiry into the operations; petitioner participated in the daily

operations at the Goliad dig, negotiated contracts, arranged

equipment rentals, and transported equipment.    Additionally, many

of the duties performed by petitioner were not activities that

would provide personal pleasure or recreation.    For the Goliad

dig, petitioner drove a truck carrying heavy equipment from

Tucson, Arizona, to Goliad, Texas, back and forth twice.

Further, petitioner spent 35 to 40 days working long hours each

night in Goliad in the middle of the summer watching pumping

equipment.   Activities of this nature could hardly be called

pleasurable.   Petitioner performed a sufficient level of hard,

tedious labor to convince this Court that his primary objective

was to make a profit and that any personal pleasure or recreation

was secondary.

     A record of substantial losses over several years may be

indicative of the absence of a profit motive.     Golanty v.

Commissioner, 72 T.C. 411, 426 (1979), affd. without opinion 647

F.2d 170 (9th Cir. 1981).    Respondent argues that because

petitioner never recovered anything of value from mining and

salvaging, this weighs against a profit motive.    We find this

reasoning unpersuasive.    If petitioner had engaged in this
                               - 19 -

activity for a number of years and never recovered anything, then

respondent's argument might be more persuasive.    A series of

losses, if not explainable, may be indicative that the activity

is not being engaged in for profit.     Sec. 1.183-2(b)(6), Income

Tax Regs.    However, in the instant case, petitioner entered into

the gold mining and treasure hunting activity for 1 year and

after not recovering anything of value terminated his

relationship with International Recoveries.    Petitioner was not

willing to continue to suffer substantial losses in a venture

that could not be successful; this indicates a profit motive.

       Furthermore, while petitioner did have substantial income

and net worth, we do not find that this factor indicates that

this activity was not engaged in for profit.    This activity was

not a tax shelter.    Cf. Dastgir v. Commissioner, T.C. Memo. 1996-

169.    Petitioner was able to use the full amount of the losses to

offset other income; however, this was clearly not the motivating

factor behind this investment.    It is unconvincing to argue that

petitioner would spend $1 with the objective of saving a portion

of that dollar on taxes.    “As long as tax rates are less than 100

percent, there is no 'benefit' in losing money.”     Engdahl v.

Commissioner, 72 T.C. 659, 670 (1979).     Petitioner in this case

incurred losses the old fashioned way--he spent money.

       After review of the entire record, we conclude that the

treasure hunting activity was not designed to generate tax
                               - 20 -

benefits nor was it an activity from which petitioner primarily

received significant personal pleasure or recreational benefits.

We find that it was engaged in for profit within the meaning of

section 183.

Passive Loss Limitations

     Respondent alternatively argues that even if the activity

were engaged in for profit, the losses should be disallowed

pursuant to the passive activity loss limitations of section 469.

The passive loss rules of section 469 place limitations on the

deduction of losses relating to passive activities; namely, from

activities in which a taxpayer does not materially participate.

Sec. 469(a)(1) and (2), (c)(1), (d)(1).

     As a general rule, a taxpayer will be regarded as not

materially participating in an activity if the taxpayer is not

involved in the operation of the activity on a basis which is

regular, continuous, and substantial.   Sec. 469(h)(1); sec.

1.469-5T(a), Temporary Income Tax Regs., 53 Fed. Reg. 5726 (Feb.

25, 1988).

     The temporary regulations under section 469 contain seven

tests, the qualification under any one of which will result in a

taxpayer's being treated as materially participating in the

activity.    Sec. 1.469-5T(a), Temporary Income Tax Regs., supra.

Of the seven tests, petitioners presented evidence and made

general arguments that are applicable only to the tests found in
                              - 21 -

section 1.469-5T(a)(1), (7), Temporary Income Tax Regs., supra,

which provide that a taxpayer shall be treated as materially

participating in an activity if he participates in the activity

for more than 500 hours during such year, or if, based on all the

facts and circumstances, the taxpayer participates in the

activity on a regular, continuous, and substantial basis during

the taxable year.

     A taxpayer may establish the extent of his or her

participation in a particular activity by any reasonable means.

Sec. 1.469-5T(f)(4), Temporary Income Tax Regs., 53 Fed. Reg.

5727 (Feb. 25, 1988).   The taxpayer has the burden of proving

material participation in the activity.   Rule 142(a).   Petitioner

and Mr. Saldivar credibly testified to petitioner's significant

level of participation in the treasure hunting and gold mining

activity.   Petitioner transported heavy equipment twice from

Tucson, Arizona, to Goliad, Texas, round trip, which accounts for

almost 100 hours.   He also operated the tractor and manned the

pumps during the night shift throughout the Goliad operation

which accounts for approximately 200 hours of participation.

Additionally, petitioner negotiated contracts for the venture and

purchased equipment to be used in the various operations

conducted by the venture.   These miscellaneous activities when

combined account for, at a minimum, the remaining 200 hours.

Although this Court has not always accepted a post-event
                              - 22 -

narrative of participation, see Speer v. Commissioner, T.C. Memo.

1996-323; Goshorn v. Commissioner, T.C. Memo. 1993-578, we find

petitioner's description of his participation, when combined with

Mr. Saldivar's testimony and the objective evidence in the

record, to be credible, and we therefore conclude that petitioner

did materially participate in this activity by participating for

over 500 hours during the year.7

Rental Loss

     Respondent disallowed a loss from petitioners' rental

property of $1,978.   Except as otherwise provided by statute or

by Rule of this Court, the burden of proof is on petitioner to

demonstrate that respondent's determination was in error.    Rule

142(a).   Petitioners have not argued or presented any evidence to

dispute respondent's determination with regard to this amount,

and therefore petitioners are deemed to have abandoned the issue

of whether they are entitled to deduct rental losses of $1,978 in

1989.

Accuracy-Related Penalty

     Section 6662 imposes a penalty in an amount equal to 20

percent of any underpayment attributable to, inter alia,


     7
        Petitioners argue that Mr. Harrison participated in the
treasure hunting and gold mining activity for over 1,200 hours.
While we accept petitioner's testimony regarding what he did at
each of the sites, we did not include all of his activities in
determining that petitioner participated for over 500 hours. For
example, we did not consider petitioner's walks on the beach
during the Florida operation to contribute toward material
participation.
                              - 23 -

negligence or disregard of rules or regulations.    Petitioners

have not presented any explanation for their failure to comply

with the Code and regulations regarding their rental loss.    The

burden rests with petitioner to prove that respondent's

determination was in error.   Rule 142(a).   We therefore sustain

respondent's determination of the accuracy-related penalty with

respect to any underpayment of tax resulting from the

disallowance of petitioners' rental loss.    To reflect the

foregoing,


                                         Decision will be entered

                                    under Rule 155.
