                        T.C. Memo. 2006-145



                      UNITED STATES TAX COURT



   AUSTIN L. MITCHELL AND REBECCA A. MITCHELL, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 18129-04.                Filed July 6, 2006.



     Austin L. Mitchell and Priscilla J. Lim (specially

recognized), for petitioners.

     Thomas C. Pliske, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     KROUPA, Judge:   Respondent determined deficiencies in

petitioners’ Federal income taxes and that petitioners were
                                   - 2 -

liable for accuracy-related penalties under section 6662(a)1 for

1998, 1999, and 2000 (the years at issue).         For 1998, respondent

determined a $1,060 deficiency and $212 accuracy-related penalty.

For 1999, respondent determined a $946 deficiency and $189

accuracy-related penalty.       For 2000, respondent determined a

$1,346 deficiency and $284 accuracy-related penalty.

       There are two issues for decision.       The first is whether

petitioner Austin L. Mitchell (petitioner)2 conducted his farming

activity for profit during the years at issue.         We hold he did

not.       The second issue is whether petitioners are liable for the

accuracy-related penalty for their underpayments of tax in the

years at issue.       We hold they are liable.

                             FINDINGS OF FACT

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

The stipulation of facts and the accompanying exhibits are

incorporated by this reference.       Petitioners resided in Salem,

Missouri, at the time they filed the petition.

Petitioner

       Petitioner’s family owned and operated a farm (the family

farm) in the Salem area for more than 100 years.         Petitioner grew


       1
      All section references are to the Internal Revenue Code in
effect for the years at issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure, unless otherwise
indicated.
       2
        References to petitioner’s wife are to Mrs. Mitchell.
                                - 3 -

up on the family farm and worked on it during his childhood

through his college years.   Petitioner assumed greater

responsibility for maintaining the family farm during his

adolescence because of his father’s declining health.     Petitioner

worked with livestock and row crops.    The family farm was

“running 100 bushel of corn to the acre” under petitioner’s

stewardship, a prodigious result.

     Since 1977, petitioner has worked as an attorney and CPA in

the Salem area.   Many of petitioner’s clients are farmers.

Petitioner is a hard-working individual and has been financially

successful as an attorney and CPA, his chosen professions, which

he enjoys.    Petitioner worked approximately 2,800 to 3,100 hours

per year in those professional occupations in each of the years

at issue.

The Family Farm

     Petitioner’s mother owned the family farm until her death in

April 1992.    The family farm consisted of approximately 38 acres

of tillable bottom land, 35 to 40 acres of pasture, a 20-acre

timber stand, and a dwelling.   The timber stand consisted

primarily of black walnut and white oak trees at different stages

of maturity.   Both types of trees can produce revenue for a

landowner.    Premature trees can be thinned and sold as pulpwood,

and mature trees can be harvested for board wood (lumber).     From

the time a sapling is planted, it will be 50 years before the
                                - 4 -

tree reaches maturity.    Black walnut trees also produce edible

nuts that may be sold.

     Glen B. Harris (Harris) has been planting, harvesting, and

baling hay on the family farm since 1971.    Harris is petitioner’s

brother-in-law, resides near the family farm, and is an

experienced farmer.   Harris worked on the family farm as a result

of a two-part arrangement he had with petitioner’s mother.

First, petitioner’s mother hired Harris to perform work on the

farm, including haying.    Second, Harris rented the pastures from

petitioner’s mother to graze his cattle.

     Petitioners moved into the house on the family farm in

November 1991 to care for petitioner’s elderly mother.    Shortly

thereafter, in April 1992, petitioner’s mother passed away, and

petitioner inherited the family farm.    Petitioner and Harris

adopted a two-part barter arrangement with respect to Harris’s

farming activities on the family farm after the inheritance.

Harris could continue to hay on the family farm at his own

expense and could keep all the hay harvested in exchange for

taking general care of the land.    Also, Harris could graze his

cattle on the family farm pasture land in exchange for liming and

fertilizing the hayfields.

     Petitioner and Harris changed these arrangements in 1999.

Petitioner and Harris changed the haying arrangement to “custom

baling on the shares.”    Custom baling on the shares is a common
                               - 5 -

arrangement where one party does all the haying work on another’s

land and each keeps 50 percent of the hay.   Petitioner and Harris

also changed the pasturing arrangement in 1999.    Petitioner

agreed to pay Harris to lime, fertilize, and maintain fencing and

Harris agreed to pay pasture land rental fees to petitioner.     The

fees petitioner paid Harris for his services exactly offset the

pasture land rental fees Harris paid petitioner.

     During October 1999, petitioner selectively harvested his

existing timber stand.   This resulted in 62,000 board feet of

non-white oak lumber and 8,193 feet of white oak lumber, which

generated $7,500 of revenue.   Petitioner consulted a logging

expert to advise him which trees to cut.

     Petitioner also spent significant time from 1992 through the

years at issue working on the family farm.   Each year, he spent

evenings and weekends from mid-April to September performing two

kinds of tasks.   Petitioner worked at converting 10 acres of

uphill pasture to timber by planting numerous white oak and black

walnut seedlings.   Petitioner also worked at weed control in

various ways.   He cleared multiflora rose and native thistle from

the pasture land and bottom land, and mowed in the converted

timber stand to facilitate tree growth.    In general, petitioner

enjoyed the hard physical labor he performed on the family farm

and believed he might derive health benefits from it as well.
                               - 6 -

Petitioner consulted with neighboring farmers since moving to the

family farm.

     Petitioner did not have a written business plan for his

farming activity.   Nor did petitioner maintain a cash receipts

book, a general ledger, or a separate checking account for the

farming activity.   The family farm, however, is quite important

to petitioner.   Petitioner intended to build the farm and make it

productive before leaving the farm to his children.   To date,

petitioner has lost approximately $80,000 to $90,000 as a result

of conducting the farming activity.

Petitioners’ Income Tax Returns and the Deficiency Notice

     Petitioners filed joint income tax returns for the years at

issue on Forms 1040, U.S. Individual Income Tax Return, which

petitioner himself prepared.   Petitioner reported net losses on

Schedules F, Profit or Loss From Farming, of $2,352 for 1998,

$2,140 for 1999, and $4,679 for 2000.   In 1998, petitioner

reported no income from the farm and expenses of $2,352.    In

1999, petitioner reported $4,155 of income from the farm and

expenses of $6,295.   Also in 1999, petitioner reported $7,500 of

income from the sale of timber on Schedule D, Capital Gains and

Losses.   In 2000, petitioner reported $1,690 of income from the

farm and expenses of $6,369.   Petitioner deducted the net losses

from the farming activity against other income reported on the

tax returns for the years at issue.
                               - 7 -

     Respondent increased petitioner’s gross income by the amount

of petitioner’s farm expenses in each of the years at issue in a

deficiency notice dated June 25, 2004 (the deficiency notice).

Respondent determined that petitioner did not conduct the farming

activity with the intent to earn a profit under section 183(a).

Respondent also determined that petitioner’s various undertakings

on the family farm were not one activity for purposes of the

section 183 analysis.   Finally, respondent determined that

petitioners were liable for the accuracy-related penalty because

petitioners’ underpayments of taxes were due to negligence or

disregard of rules or regulations.     Petitioners timely filed a

petition seeking a redetermination of respondent’s determinations

in the deficiency notice.

                              OPINION

     This is the third time that we have been asked to decide

whether petitioner conducted the farming activity for profit.       We

held petitioner did not conduct the farming activity for profit

in 1992 and 1993.   Mitchell v. Commissioner, T.C. Summary Opinion

1998-200.   We similarly held that petitioner did not conduct the

farming activity for profit in 1995, 1996, and 1997.     Mitchell v.

Commissioner, T.C. Memo. 2001-269.

A.   Section 183 Generally

     Section 183(a) provides generally that if an individual

engages in an activity and “if such activity is not engaged in
                               - 8 -

for profit, no deduction attributable to such activity shall be

allowed under this chapter except as provided in this section.”

Deductions that would be allowable without regard to whether the

activity is engaged in for profit shall be allowed under section

183(b)(1), and deductions that would be allowable only if the

activity is engaged in for profit shall be allowed under section

183(b)(2), but only to the extent that the gross income from the

activity exceeds the deductions allowable under section

183(b)(1).

     We begin with the burden of proof.   In general, the

Commissioner’s determinations in the deficiency notice are

presumed correct, and the taxpayer bears the burden of proving

that the Commissioner’s determinations are in error.    Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).     Petitioner

did not assert that the burden shifted to respondent under

section 7491.   We therefore treat petitioner as having conceded

this issue and find that the burden remains with petitioner.

     We follow the Court of Appeals opinion squarely on point

when appeal from our decision would lie to that court absent

stipulation by the parties to the contrary.   Golsen v.

Commissioner, 54 T.C. 742 (1970), affd. 445 F.2d 985 (10th Cir.

1971).   A taxpayer residing in the Eighth Circuit, such as

petitioner, must prove he or she conducted the activity with an

actual and honest objective of making a profit.   See Evans v.
                                - 9 -

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

1988-468; Antonides v. Commissioner, 91 T.C. 686, 693-694 (1988),

affd. 893 F.2d 656 (4th Cir. 1990); Dreicer v. Commissioner, 78

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

Cir. 1983).

     The expectation of profit need not have been reasonable.

The taxpayer must have entered into the activity or continued it,

however, with the profit motive.    Hulter v. Commissioner, 91 T.C.

371, 393 (1988); sec. 1.183-2(a), Income Tax Regs.   Whether a

taxpayer has the requisite profit motive is determined on the

basis of all surrounding facts and circumstances.    Dreicer v.

Commissioner, supra at 645; sec. 1.183-2(b), Income Tax Regs.

We give greater weight to objective facts than to a taxpayer’s

statements of intent.   Dreicer v. Commissioner, supra at 645;

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

     Before we address whether petitioner had the requisite

profit motive based on the facts and circumstances, we first must

address two threshold issues.   First, whether petitioner’s tree

planting, mature timber harvesting, and haying undertakings may

be treated as one activity.   Second, whether petitioner is

entitled to the presumption of a profit motive.
                               - 10 -

     1.   Whether the Undertakings May Be Treated as One Activity

Respondent argues that we may not aggregate petitioner’s tree-

planting, mature timber harvesting, and haying undertakings as

one activity.   We disagree.

     Multiple undertakings of a taxpayer may be treated as one

activity if the undertakings are sufficiently interconnected.

Sec. 1.183-1(d)(1), Income Tax Regs.    The most important factors

in making this determination are the degree of organizational and

economic interrelationship of the undertakings, the business

purpose served by carrying on the undertakings separately or

together, and the similarity of the undertakings.     Id.   The

Commissioner generally accepts the taxpayer’s characterization of

two or more undertakings as one activity unless the

characterization is artificial or unreasonable.     Id.

     We have considered these and other factors in determining

whether the taxpayer’s characterization is unreasonable.     The

factors so considered include:   (a) Whether the undertakings are

conducted at the same place; (b) whether the undertakings were

part of the taxpayer’s efforts to find sources of revenue from

his or her land; (c) whether the undertakings were formed as

separate businesses; (d) whether one undertaking benefited from

the other; (e) whether the taxpayer used one undertaking to

advertise the other; (f) the degree to which the undertakings

shared management; (g) the degree to which one caretaker oversaw
                                - 11 -

the assets of both undertakings; (h) whether the taxpayer used

the same accountant for the undertakings; and (i) the degree to

which the undertakings shared books and records.   See Keanini v.

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

Memo. 1999-328; Estate of Brockenbrough v. Commissioner, T.C.

Memo. 1998-454; 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.

     We find it is appropriate to treat petitioner’s various

farming undertakings as one activity.    The undertakings are all

agricultural and were performed at the family farm.    The

undertakings all demonstrate petitioner’s efforts to generate

revenue from the family farm.    The mature timber harvesting and

the haying generated current revenue while the tree-planting may

generate future revenue.   The undertakings were not formed as

separate businesses.   The tree-planting undertaking benefited

from the mature timber harvesting undertaking as mature timber

harvesting made additional land available for tree-planting.

Petitioner managed all the undertakings.   Petitioner himself was

the accountant for all the undertakings.   Finally, petitioner

used one checking account to pay the expenses of and to deposit

the revenues from the various undertakings.

     After reviewing these factors and the facts and

circumstances of this case, we find that petitioner’s tree-
                                - 12 -

planting, mature timber harvesting, and haying undertakings may

be treated as one activity.    We therefore reject respondent’s

determination in the deficiency notice.    By treating the

undertakings as one activity, we note that petitioner reported

$7,500 from the sale of timber, $4,155 from the sale of hay, and

claimed farm expenses of $6,295 in 1999.    Accordingly, petitioner

had a net profit from the farming activity in 1999, and we

therefore do not sustain respondent’s disallowance of the claimed

farm expenses as to 1999.     Furthermore, we shall consider all

petitioner’s farming undertakings as one activity in analyzing

whether petitioner conducted the farming activity with an actual

and honest objective of making a profit during 1998 and 2000.

     2.     Whether the Section 183(d) Presumption Applies

     We next address whether petitioner is entitled to the

section 183(d) presumption of a profit motive.    Petitioner

contends that he qualifies for the profit motive presumption

under section 183(d) for 1998 and 2000 by arguing that the gross

income derived from the farming activity exceeded the deductions

attributable to the activity in 1999, 2001, 2003, and 2004.    We

disagree.    Section 183(d) presumes an activity is conducted for

profit if the gross income exceeds the attributable deductions

for 33 out of 5 consecutive years (the gross income test).4    The

     3
      We note that sec. 1.183-1(c)(1), Income Tax Regs., has not
been amended to conform to the statutory changes made in 1986.
                                                   (continued...)
                               - 13 -

presumption applies only after the third profit year.    Sec.

183(d).    Because petitioner did not report gross income in excess

of attributable deductions from the farming activities in three

or more of the years 1994 to 1999, petitioner is not entitled to

the section 183(d) presumption for either 1998 or 2000.

B.   Whether Petitioner Conducted the Farming Activity for
     Profit During 1998 and 2000

     We now address whether petitioner engaged in the farming

activity with an actual and honest objective of making a profit

considering all the pertinent facts and circumstances.    We

structure our analysis around nine nonexclusive factors in

determining whether petitioner had an actual and honest objective

of making a profit from the farming activity during 1998 and

2000.    See 1.183-2(b), Income Tax Regs.

     The nine factors are:    (1) The manner in which the taxpayer

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

or her advisers; (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


     3
      (...continued)
See Tax Reform Act of 1986, Pub. L. 99-514, sec. 143(a)(1) and
(2), 100 Stat. 2120.
     4
      A different gross income test applies for an activity that
consists of the breeding, training, showing, or racing of horses.
Sec. 183(d) (second sentence).
                                - 14 -

activities; (6) the taxpayer’s history of income or loss with

respect to the activity; (7) the amount of occasional profits, if

any, which are earned; (8) the financial status of the taxpayer;

and (9) whether elements of personal pleasure or recreation are

involved.    Id.

     No one factor or set of factors is controlling, nor is the

existence of a majority of factors favoring or disfavoring a

profit motive necessarily controlling.     Hendricks v.

Commissioner, 32 F.3d 94, 98 (4th Cir. 1994), affg. T.C. Memo.

1993-396; Brannen v. Commissioner, 722 F.2d 695, 704 (11th Cir.

1984), affg. 78 T.C. 471 (1982); sec. 1.183-2(b), Income Tax

Regs.     The individual facts and circumstances of each case are

the primary test.     Keanini v. Commissioner, supra at 46; Allen v.

Commissioner, 72 T.C. 28, 34 (1979); sec. 1.183-2(b), Income Tax

Regs.

C.   Application of the Factors

     1.     The Manner in Which the Taxpayer Conducts the
            Activity

     We begin by examining the manner in which petitioner carried

on the farming activity.    Carrying on an activity in a

businesslike manner may indicate a profit objective.      Sec. 1.183-

2(b)(1), Income Tax Regs.    In determining whether a taxpayer

conducted an activity in a businesslike manner, we consider

whether the taxpayer maintained complete and accurate books and

records and also whether changes were attempted in an effort to
                               - 15 -

earn a profit.   Engdahl v. Commissioner, 72 T.C. 659, 666-667

(1979); sec. 1.183-2(b)(1), Income Tax Regs.

     Petitioner did not present any documentary evidence to prove

the existence of complete and accurate books and records for the

farming activity.   Petitioner did not maintain a separate bank

account for the farming activity.   Instead, he used one account

for personal use, the farming activity, and for his legal

practice.

     Petitioner asserts that because he did not maintain a

separate bank account for his law practice, which petitioner

operated with a profit motive, we should infer a profit motive

from petitioner’s lacking a separate bank account for the farming

activity.   We disagree.   The lack of a separate bank account for

petitioner’s farming activity, coupled with the lack of complete

and accurate books and records, tends to show that petitioner did

not carry on the farming activity in a businesslike manner.    Cf.

Kahle v. Commissioner, T.C. Memo. 1991-203.

     Petitioner also had no written business plan, nor offered

any documentary evidence showing he contemplated, before

beginning the farming activity, how to make it profitable.

Petitioner did not advertise the farming activity in an attempt

to increase its profitability.    These facts lead us to conclude

that petitioner did not carry on the farming activity in a

businesslike manner.   Sec. 1.183-2(b)(1), Income Tax Regs.
                                - 16 -

     Nor has petitioner attempted to make the farming activity

profitable by changing his conduct over the years.      Rather, we

find it remarkable how little petitioner has changed the farming

activity despite years of operating losses.    Petitioner primarily

relies on the changes in his arrangement with Harris made in 1999

as demonstrating his attempt to earn a profit.    We find that the

change in the pasture land arrangement was just a change in form

but not substance because the amounts of money exchanged offset

each other.    We find, however, that the change in the haying

arrangement with Harris in 1999 was substantive because

petitioner received half the hay after the change while before he

received none of the hay.    This enabled petitioner to sell hay to

generate revenues, which he did.

     We find that this one change does not outweigh the lack of

complete and accurate books and records and the absence of other

indicia that petitioner conducted the farming activity in a

businesslike manner.    This factor favors respondent.

     2.     Expertise of the Taxpayer or His Advisers

     We next consider petitioner’s expertise and that of his

advisers.     Preparing for an activity by extensive study on one’s

own or by consulting with experts and conducting the activity in

accordance with what has been learned indicates that the taxpayer

had an actual and honest profit objective.    Sec. 1.183-2(b)(2),

Income Tax Regs.
                                - 17 -

     Petitioner contends that he had the necessary expertise in

farming to operate a farm for profit.     He was born and raised on

the family farm.     He had previous experience producing row crops,

hay, and livestock.     He had conversations with other farmers in

the area.5    Additionally, he consulted with two expert advisers,

Harris and a sawyer.

     The record does not show, however, that petitioner knew how

or intended to make a profit from his current farming

undertakings.     He did not seek expert advice on how to operate

his farm profitably.     He discussed farming with his farmer

clients and farmer neighbors, but there is no evidence that they

gave him advice about farming for profit.     This factor favors

respondent.

     3.      The Taxpayer’s Time and Effort

     We next consider the time and effort petitioner expended in

conducting the farming activity.     A taxpayer’s devotion of much

time and effort to conducting an activity, particularly if the

activity does not have substantial personal or recreational

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

1.183-2(b)(3), Income Tax Regs.




     5
      Petitioner also testified that he consulted experts after
2000. Stating the obvious, petitioner could not possibly have
carried on the farming activity during 1998 and 2000 in
accordance with expertise garnered later. This testimony is
therefore irrelevant.
                                - 18 -

     During the years at issue, petitioners resided at the family

farm.     They derived personal and recreational benefits from the

situs of the farming activity.     Petitioner devoted regular and

substantial time and effort to the farming activity, although he

continued to work an average of more than 50 hours per week as a

lawyer and accountant.     Petitioner did not explain how the work

he performed on the family farm related to making it profitable.

This factor favors respondent.

     4.      The Expectation That the Assets Used in the Activity
             May Appreciate in Value

        We next examine the expectation that the assets used in

conducting the activity may appreciate in value.      A taxpayer may

intend, despite the lack of profits from current operations, that

an overall profit will result when appreciation in the value of

assets used in the activity is realized.       Bessenyey v.

Commissioner, 45 T.C. 261, 274 (1965), affd. 379 F.2d 252 (2d

Cir. 1967); sec. 1.183-2(b)(4), Income Tax Regs.      Petitioner

intends to give the family farm to his sons, not sell it.       Thus,

petitioner is not relying on the appreciation of the family

farm’s assets to offset the losses sustained from his farming

activity.     This factor favors respondent.

        5.   Success in Similar or Dissimilar Activities

        We next examine the success of petitioner in carrying on

other similar or dissimilar activities.     If a taxpayer has

previously engaged in similar activities and made them
                                - 19 -

profitable, this success may show that the taxpayer has a profit

motive for the activity at issue, even though the activity is

presently unprofitable.    Sec. 1.183-2(b)(5), Income Tax Regs.      A

taxpayer’s success in dissimilar activities may also indicate a

profit motive.     See Daugherty v. Commissioner, T.C. Memo. 1983-

188.

       Petitioner argued that his previous work on the family farm

as a teenager indicates that he was previously successful in a

similar activity.     Petitioner did describe in detail how much

corn was cropped due to his efforts, but he did not prove that

the family farm was financially successful during those years.

Accordingly, petitioner’s prior work on the family farm does not

support a finding for petitioner.

       Petitioner is a licensed CPA and has a legal practice.   We

find that petitioner is hard-working and dedicated to his

professional pursuits.     Petitioner’s success in a CPA and legal

practice, however, does not equate with petitioner conducting the

farming activity with an honest and actual objective of making a

profit.     This factor favors respondent.

       6.    Taxpayer’s History of Income or Losses

       We next examine petitioner’s history of income or loss with

respect to the farming activity.     A history of substantial losses

may indicate that the taxpayer did not conduct the activity for

profit.     Golanty v. Commissioner, 72 T.C. 411, 427 (1979), affd.
                                - 20 -

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

1.183-2(b)(6), Income Tax Regs.

     Petitioner generated revenue from the farming activity in

1999 and 2000, resulting in a net profit in 1999, but he incurred

a net loss in 1998 and 2000.    Despite the 1999 net profit,

petitioner has claimed losses between $80,000 and $90,000 from

conducting the farming activity since 1991.    This factor favors

respondent.

     7.     Amount of Occasional Profits, If Any

     We next consider the amount of occasional profits, if any,

that petitioner earned through 2000.     Occasional profits the

taxpayer earned from the activity, in relation to the amount of

losses incurred, the amount of the taxpayer’s investment, and the

value of the assets used in the activity may provide useful

criteria in determining the taxpayer’s intent.     Sec. 1.183-

2(b)(7), Income Tax Regs.    We consider the increasing size,

width, volume, and value of the taxpayer’s harvestable timber

when we apply this factor to a tree-farming activity.     Kurzet v.

Commissioner, T.C. Memo. 1997-54, affd. in part, revd. and

remanded on other grounds 222 F.3d 830 (10th Cir. 2000).

     Petitioner earned a profit from the farming activity in

1999.     Respondent contends that we should give little weight to

the 1999 profit because it was partially due to selling mature

timber that petitioner could have sold in other years.     We
                               - 21 -

disagree.    Petitioner received $7,500 in exchange for mature

timber harvested from the family farm in 1999.    If petitioner had

sold the timber in some other year, he possibly would have had a

net profit then from which we would have drawn the same favorable

inference.    Petitioner’s net profit in 1999 is not diminished

because he could have realized it in another year.

     Petitioner also contends that this factor should favor him

because he showed a net profit in 2001, 2003, and 2004.       We place

no weight on events that arose after 2000.    This factor is

neutral.

     8.     The Taxpayer’s Financial Status

     We next examine petitioner’s financial status.    If a

taxpayer does not have substantial income or capital from sources

other than the activity in question, it may indicate that the

taxpayer engages in the activity for profit.     Sec. 1.183-2(b)(8),

Income Tax Regs.    Conversely, substantial income from sources

other than the activity, especially if the losses from the

activity generate large tax benefits, may indicate that the

taxpayer is not conducting the activity for profit.     Id.

Substantial income is, in this analysis, income well in excess of

that which is needed by the average taxpayer to meet ordinary

living expenses.    See Bessenyey v. Commissioner, 45 T.C. at 274.

Taxpayers with substantial income from other sources have a
                                  - 22 -

greater tax incentive to incur large expenditures in a hobby type

of activity.       Jackson v. Commissioner, 59 T.C. 312, 317 (1972).

     Although petitioner was successful as an attorney and CPA,

petitioner did not earn income from these pursuits substantial

enough to motivate him to incur losses from the farming activity.

Cf. Jackson v. Commissioner, supra; Bessenyey v. Commissioner,

supra.    The size of the farming activity losses claimed during

1998 and 2000 was small in whole dollar amounts given

petitioners’ marginal income tax bracket.      This factor favors

petitioner.

     9.      Elements of Personal Pleasure or Recreation

     We finally consider whether elements of personal pleasure or

recreation were involved in petitioner’s farming activity.      The

presence of personal motives for, or recreational elements

associated with, conducting the activity may indicate that the

taxpayer does not have a profit motive.       Jackson v. Commissioner,

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

     Petitioner grew up on the family farm and inherited it in

1992.     While farming does involve hard manual labor, petitioner

enjoyed doing the work.      Petitioners have resided on the family

farm since 1991, an additional personal motive for engaging in

the farming activity.      This factor is neutral.

             10.    Conclusion

     The nine nonexclusive factors and the facts and

circumstances of this case lead us to conclude that petitioner
                                - 23 -

did not conduct the farming activity with an actual and honest

objective of making a profit in 1998 or 2000.     The net losses

petitioner sustained conducting the farming activity are

therefore not deductible from gross income.     Accordingly, we

sustain respondent’s determinations in the deficiency notice for

1998 and 2000.

D.   Whether Petitioners Are Liable for the Accuracy-Related
     Penalty

     We next consider whether petitioners are liable for the

accuracy-related penalty under section 6662(a).       Respondent

asserts that all or part of the underpayment of tax for the years

at issue is due to negligence or disregard of rules or

regulations.     We have found that there is no underpayment of tax

for 1999.   Accordingly, petitioners are not liable for the

accuracy-related penalty for 1999.

     A penalty applies to the portion of an underpayment of

income tax attributable to negligence or disregard of rules or

regulations.     Sec. 6662(a) and (b)(1).   Negligence is defined as

“any failure to make a reasonable attempt to comply with the

provisions of * * * [the Code].”     Sec. 6662(c).    Negligence is

the lack of due care or the failure to do what a reasonable and

prudent person would do under the circumstances.       Neely v.

Commissioner, 85 T.C. 934, 937 (1985).      Disregard encompasses any

“careless, reckless or intentional disregard.”       Sec. 6662(c).

     Respondent has the burden of production regarding penalties

and must come forward with sufficient evidence that it is
                              - 24 -

appropriate to impose the penalty.     See sec. 7491(c); Higbee v.

Commissioner, 116 T.C. 438, 446-447 (2001).    Respondent relies on

the two prior decisions this Court issued holding that petitioner

did not conduct the farming activity for a profit.     Mitchell v.

Commissioner, T.C. Memo. 2001-269;6 Mitchell v. Commissioner,

T.C. Summary Opinion 1998-200.7   Respondent argues, and we agree,

that, absent substantial changes in its operation, the farming

activity was not conducted for profit pursuant to section 183.

We find that respondent has met his burden of production

regarding 1998 and 2000.

     The accuracy-related penalty does not apply to any portion

of an underpayment, however, if the taxpayer shows that there was

reasonable cause for, and that the taxpayer acted in good faith

with respect to, that portion.    Sec. 6664(c)(1); sec. 1.6664-

4(b), Income Tax Regs.   Petitioners have the burden of proving

that the accuracy-related penalty does not apply because of this

exception.   See Higbee v. Commissioner, supra at 446.

     The determination of whether the taxpayer acted with

reasonable cause and in good faith depends upon the pertinent

facts and circumstances.   We emphasize the taxpayer’s efforts to

     6
      We note that Mitchell v. Commissioner, T.C. Memo. 2001-269,
was not issued until Oct. 4, 2001, which is after the due date
for filing a return for 2000.
     7
      Summary opinions should not be cited as authority. Sec.
7463. We consider it here for the limited purpose of deciding
whether respondent met his burden of production as to the
accuracy-related penalty for 1998 and 2000.
                                - 25 -

assess the proper tax liability, considering the experience,

knowledge, and education of the taxpayer.    Sec. 1.6664-4(b)(1),

Income Tax Regs.

     Petitioner is an accountant and lawyer.   He represents

clients before the IRS and is a member of this Court’s bar.    He

is conversant with section 183 and the regulations.   Despite all

this, petitioners deducted farm losses even though petitioner

still had not manifested an actual and honest objective of making

a profit from the farm during 1998 and 2000.   We find that

petitioners did not act in good faith in claiming Schedule F

farming losses and their underpayments were not due to reasonable

cause.   Petitioners disregarded rules or regulations by deducting

the net losses from the farm.    We conclude that petitioners are

liable for the accuracy-related penalty under section 6662(a) for

the underpayments of tax in 1998 and 2000.

     To reflect the foregoing,


                                          Decision will be entered

                                     for respondent for 1998 and

                                     2000, and for petitioners for

                                     1999.
