                        T.C. Memo. 2003-285



                      UNITED STATES TAX COURT



         GEORGE R. AND BARBARA H. BURRUS, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 14709-99.              Filed October 3, 2003.



     John A. Beam III and Eric E. Rogers, for petitioners.

     John E. Glover, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     GALE, Judge:   Respondent determined the following

deficiencies, addition to tax, and accuracy-related penalties

with respect to petitioners’ Federal income taxes:
                               - 2 -

                               Addition to Tax and Penalties
     Year      Deficiency      Sec. 6651(a)(1)     Sec. 6662


     1990      $48,003.74           $2,399.77      $9,600.75
     1991       61,322.84               --         12,264.57
     1992       72,370.56               --         14,474.11
     1993      104,589.15               --         20,917.83
     1994       42,916.12               --          8,583.22
     1995       25,817.51               --          5,163.50


     After concessions, the issues for decision are:   (1) Whether

petitioners’ activity relating to cattle breeding was an activity

not engaged in for profit within the meaning of section 183 for

the years in issue, (2) whether petitioners are liable for an

addition to tax under section 6651(a)(1) in 1990, and (3) whether

petitioners are liable for accuracy-related penalties under

section 6662(a) for the years in issue.

     Unless otherwise noted, all section references are to the

Internal Revenue Code in effect for the years in issue, and all

Rule references are to the Tax Court Rules of Practice and

Procedure.

                         FINDINGS OF FACT

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

incorporate by this reference the stipulation of facts,

supplemental, second, and third supplemental stipulations of

facts, and the attached exhibits.

     At the time of filing the petition, petitioners resided in

Nashville, Tennessee.   Petitioners filed joint returns for the
                                - 3 -

years in issue.    Petitioners’ 1990 return was due, including

extensions, on October 15, 1991, and was received on October 28,

1991.   Petitioners’ returns for the remaining years in issue were

timely filed.

     Petitioner George R. Burrus (Dr. Burrus) is a licensed

physician.   Petitioner Barbara H. Burrus (Mrs. Burrus) reported

an occupation of “real estate manager” on the returns for the

years in issue.

     Dr. Burrus has been involved with farming, cattle, and other

agricultural activities since his childhood.    He had check-

writing authority for his father’s farm, starting as a teenager,

and his active involvement continued on weekends and during the

summer while attending college.    Dr. Burrus has no formal

education or training in animal husbandry, farming, or similar

agricultural activity.

     During the years in issue, Dr. Burrus maintained a

successful medical practice and was chief of his department at a

local hospital where he also served as the chief perfusionist.

He often worked as many as 7 days a week, for as many as 10 to 12

hours per day.    During the years in issue Dr. Burrus reported

income from his medical practice in amounts ranging from $233,749

to $691,281.

     From 1969 to 1971, Dr. Burrus served as a missionary doctor
                               - 4 -

in Africa, during which time he established a small missionary

hospital that remains in operation today.   Petitioners return to

Africa to work at the hospital twice a year, for a month each in

the spring and fall.

     In 1978, Dr. Burrus entered into a partnership, the Foreman-

Burrus Hereford Ranch (FBHR), with a fellow physician, Howard

Foreman (Dr. Foreman), to breed purebred horned Hereford cattle.

Initially, Drs. Burrus and Foreman shared FBHR’s profits and

losses equally.

     In 1980, FBHR acquired 505 acres of property in Cheatham

County, Tennessee (Cheatham Property), comprising three separate

tracts of land.   The Cheatham Property was purchased at $1,200

per acre for a total purchase price of $606,000.   Drs. Burrus and

Foreman chose this property for FBHR because of its proximity to

Nashville and their medical practices.

     At most times, FBHR was operated by five ranch hands and

maintained up to approximately 250 animals.   Cattle were bred by

FBHR by means of an “embryo transfer” method, which at the time

was a technique of surgically implanting embryos in cows.1    After

FBHR incurred losses for the first 5 or 6 years of its existence,

Dr. Burrus became concerned that the operation could not be run



     1
       Embryo transfer was subsequently perfected as a less
expensive, nonsurgical technique.
                               - 5 -

profitably using the embryo transfer technique, so he convinced

Dr. Foreman that they should adjust their profit and loss sharing

ratios.   As a consequence, Dr. Burrus reduced his share of the

profits and losses of FBHR to 20 percent while Dr. Foreman took

an 80-percent share therein.   Dr. Burrus retained his 50-percent

interest in the Cheatham Property, however.

     After losses continued for several more years, Dr. Burrus

became convinced that a cattle breeding venture that utilized the

embryo transfer technique could not be run profitably, and as a

consequence sought to terminate FBHR.   On December 26, 1989, Drs.

Burrus and Foreman executed an agreement dissolving FBHR, under

which the animals and equipment were distributed to the partners

in the same ratio that profits and losses were shared: 80 percent

to Dr. Foreman and 20 percent to Dr. Burrus.   With respect to the

Cheatham Property, Dr. Burrus obtained sole ownership by paying

$818,053 to Dr. Foreman for his 50-percent interest.   The

partners had agreed that ownership of the Cheatham Property would

be resolved by Dr. Foreman’s proposing a price for a 50-percent

interest based on an appraisal, and Dr. Burrus’s having the

option either to purchase Dr. Foreman’s interest, or sell his own

interest to Dr. Foreman, at that price.   Dr. Burrus chose to

purchase Dr. Foreman’s interest.

     Dr. Burrus then commenced (in 1990) a purebred horned
                                 - 6 -

Hereford cattle breeding undertaking principally at the Cheatham

Property and at certain other real property owned or controlled

by petitioners, referred to as the Maple Row Hereford Ranch

(Maple Row).     It is this undertaking that is at issue in this

case.    During the years in issue, the undertaking consisted

primarily of breeding and selling registered horned Hereford

cattle.2    Dr. Burrus employed “natural selection” in the cattle

breeding operations at Maple Row rather than the embryo transfer

technique employed by FBHR, because he believed the former was

more cost effective.

     As noted, the Cheatham Property was the principal location

for the Maple Row cattle undertaking.     Petitioners also used two

additional properties in Maple Row’s operations, in that cattle

were transported to those properties to graze during the years in

issue.     One such property was located in or near the town of

White House, in Robertson County, Tennessee (Robertson Property),

and the other was located in or near the town of Hendersonville,

in Sumner County, Tennessee (Sumner Property).3    The Robertson


     2
       Petitioners also purchased steer for fattening during
certain years, sold bull semen, and received income from leasing
the tobacco allotments for the Maple Row land.
     3
       From 1979 through 1989, petitioners undertook farming
operations on the Robertson and the Sumner Properties that
included running steer to eat the grass, selling crops, and
leasing tobacco allotments. Petitioners also generated income by
                                                   (continued...)
                               - 7 -

Property contained approximately 274 acres, comprising three

tracts acquired by petitioners between 1966 and 1977.   Two houses

were located on the Robertson Property for which petitioners

received rental income during the years in issue.   The Cheatham

Property also had a house from which petitioners received rental

income.   The Sumner Property consisted of two tracts, acquired

from Dr. Burrus’s mother between 1975 and 1983: an approximately

51-acre tract held by the Cardiovascular Surgery Associates, P.C.

Money Purchase Pension Trust4 and an approximately 10-acre tract

held by petitioners personally.   Petitioners’ residence during

the years in issue was located in Nashville, although there was a

one-bedroom apartment affixed to a barn on the Cheatham Property

where petitioners or family members occasionally stayed

overnight.

     The Cheatham Property was purchased by FBHR in 1980 for

$606,000, and sold to Dr. Burrus in late 1989 for an effective

price of $1,636,106.   Appraisals obtained by petitioners for

purposes of trial estimated the Robertson Property’s value at


     3
      (...continued)
leasing houses on the Robertson Property. On their returns,
petitioners reported the results of these activities separately
from the results of FBHR. Petitioners reported net losses from
the farming and rental activities undertaken on these properties
in those years.
     4
       At some point in time, petitioners apparently transferred
this tract to Dr. Burrus’s sec. 401(k) plan.
                                 - 8 -

$200,000 in 1990 and $400,000 in 1995, and the Sumner Property’s

value at $316,000 in 1990 and $700,000 in 1995.

     Petitioners employed Charles Gruen, who had worked for FBHR

before its dissolution, as the sole ranch hand at Maple Row from

1990 until he retired in 2000.    Mr. Gruen, who had experience

working with cattle for about 20 years before joining FBHR, was

placed in charge of Maple Row’s day-to-day operations.       Dr.

Burrus and Mr. Gruen communicated frequently, often daily,

regarding operations at Maple Row.       Mr. Gruen resided with his

wife at the Cheatham Property.

     Rather than selling cattle on location at the Cheatham

Property, as was done by FBHR, Maple Row’s livestock sales,

principally purebred Hereford bulls, were made at “absolute”

auctions in Montgomery, Alabama, and Orlando, Florida.       Dr.

Burrus did not advertise regarding Maple Row’s livestock during

the years in issue.

     Petitioners’ herd inventory records were maintained by Mr.

Gruen and consisted of two parts.        The first was the “Office

Copy of Breeding and Calving Record”, which contained information

regarding the cattle in the Maple Row herd including their

parentage, birth date, birth weight, and identification number

that was submitted to the American Hereford Association (AHA).

The second record was the “Herd Performance Enrollment”, which
                                   - 9 -

listed the Maple Row cattle that were registered with the AHA and

their registration numbers.   Based on the herd inventory records,

Maple Row’s cows produced the following offspring in the years

indicated:

               Year      Heifers           Bulls       Total

               1990           13             6          19
               1991           10             7          17
               1992           15            15          30
               1993           17            20          37
               1994           27            24          51
               1995           30            23          53

In 1998, two of the cows in the Maple Row herd received “Dam of

Distinction” awards from the AHA for exceeding certain calf

production standards as measured against other cows in the herd.

One cow had produced nine calves and the other six.

     Although petitioners did not have a written business plan

for Maple Row, Dr. Burrus anticipated that the cattle operation

would begin to show a profit once his herd reached 100

“productive”–-i.e., calf-bearing-–cows.            Dr. Burrus anticipated

selling the male offspring at the age of 2 for approximately

$2,000 each, as well as a small number of culled females while

retaining the remaining females to build the herd.

     The primary financial record maintained in connection with

Maple Row was a ledger used to record the activity occurring in

the three bank accounts petitioners maintained for the purpose of
                              - 10 -

conducting Maple Row’s operations.     Mrs. Burrus, who was

responsible for writing checks and preparing the ledger, would

generally obtain information necessary for this purpose from Dr.

Burrus and Mr. Gruen.   The ledger recorded the expenditures of

the Maple Row operations, as well as its income, such as from

sales of cattle,5 from the rental of the houses on the Maple Row

properties, and from tobacco allotments.     The ledgers also

recorded as “income” certain cash transfers from other bank

accounts controlled by petitioners, including accounts used for

Dr. Burrus’s medical practice and a shopping center owned by

petitioners.   At the end of each year, Mrs. Burrus gave the

ledger and checks to petitioners’ accountant.     Petitioners’

accountant prepared petitioners’ returns for each of the years in

issue.   The accountant would check the ledger against the checks,

and make inquiries of Mrs. Burrus to prepare the returns.       During

the years in issue, petitioners did not have financial statements

prepared for Maple Row, nor did they seek advice from any outside

management or agricultural consultant regarding Maple Row.

Petitioners’ accountant did not advise petitioners regarding



     5
       The entries for cattle sales sometimes specified the
number and gender of the animals sold and sometimes did not.
Where specified, the ledgers in evidence recorded bull sales
ranging from $1,847 to $2,100 per bull, and heifer sales at $850
per heifer.
                              - 11 -

Maple Row’s operations.

     In addition to their cattle undertaking, petitioners used

the Cheatham Property for recreation.    The apartment previously

noted allowed for overnight visits.    There were four or five

horses on the property that were ridden occasionally by

petitioners and members of their family, but they were not used

in Maple Row’s operations.   Petitioners conducted an annual dove

hunt and barbecue for about 50 to 75 guests.    Petitioners’

children and grandchildren visited the Cheatham Property during

the years in issue at intervals ranging from once per month to

once per year depending on their proximity.    Petitioners’

grandchildren would often canoe and fish on a pond located at the

Cheatham Property.   Since 1997, petitioners have conducted “Camp

Papa” for a week each year during which petitioners’

grandchildren engage in work and recreational activities around

the Cheatham Property.

     During the years in issue, Dr. Burrus attended two

conventions of the American Hereford Association and showed bulls

there.   He attended annual meetings of the Western Stock Breeders

Convention in Denver, Colorado.   He also was a member of the

Tennessee Hereford Association during the years in issue and,

prior to the years in issue but not during, had shown Hereford

cattle at fairs.
                                            - 12 -

     For the years in issue, amounts reported6 by petitioners on

Schedules F, Profit or Loss From Farming, of their returns are

summarized below:

     Year             Income1               Expenses2              Profit (Loss)

     1990            $10,647                 $140,111                 ($129,464)
     1991             35,459                  180,563                  (145,104)
     1992             27,301                  258,088                  (230,787)
     1993             44,607                  304,966                  (260,359)
     1994             50,792                  272,622                  (221,830)
     1995             32,158                  188,205                  (156,047)
     1
       In addition to livestock sales, includes tobacco allotment income and income
     from the rental of houses located on the Maple Row properties. The latter income
     was reported on the “Other income” line of the Schedules F for the years in issue
     as follows:

                     Year              “Other income” - Schedule F

                     1990                         $6,910
                     1991                         10,165
                     1992                          9,596
                     1993                          9,720
                     1994                          9,878
                     1995                          9,448

     2
       Includes amounts reported by petitioners on Schedules F for the years in issue
     (except as modified by examination adjustments for 1990 and 1991) as mortgage
     interest, taxes, depreciation, and conservation expenses as follows:


                            Mortgage                                 Conservation
              Year          Interest     Taxes      Depreciation       Expenses

              1990          $45,712      $6,908       $29,228           $6,198
              1991           66,148      16,392        24,970            9,852
              1992          121,254      11,317        29,803             --
              1993          147,636       9,621        24,579            9,011
              1994          143,809       8,431        25,489             --
              1995           58,370      11,011        27,339             –-


For 1996 to 1999, petitioners reported the following amounts on

Schedules F of their returns or amended returns:



     6
       The expense amounts described as “reported” for 1990 and
1991 reflect examination adjustments (agreed to or not contested
by petitioners) that reduced reported expenses (and resulting
losses) in 1990 and 1991 by $300,066 and $161,049, respectively.
                                            - 13 -

     Year             Income1                Expenses2           Profit (Loss)

     1996            $29,967                 $190,053             ($160,086)
     1997             46,890                  193,053              (146,163)
     1998             61,698                  220,154              (158,456)
     1999             44,621                  210,005              (165,384)
     1
       In addition to livestock sales, includes tobacco allotment income and income
     from the rental of houses located on the Maple Row properties. The latter income
     was reported on the “Other income” line of the Schedules F for 1996 to 1999 as
     follows:

                     Year           Other Income - Schedule F

                     1996                     $8,506
                     1997                      6,903
                     1998                      9,906
                     1999                      9,720

     2
       Includes amounts reported by petitioners on Schedules F for 1996 to 1999 as
     mortgage interest, taxes, depreciation, and conservation expenses as follows:

                       Mortgage                                 Conservation
              Year     Interest     Taxes      Depreciation       Expenses

              1996     $56,627     $15,982       $25,233             –-
              1997      61,413      11,537        22,939             –-
              1998      57,454      12,309        25,860             --
              1999      54,861      12,172        27,318           $8,061


     Petitioners also owned and operated a shopping center in

Sumner County, Tennessee, called “Maple Row Center” (MRC) during

the years in issue.          MRC’s several retail spaces were leased to

tenants, and day-to-day operations were managed by a property

manager.    MRC was nearly breaking even when petitioners purchased

it in 1987, and it was operating at a slight profit by the time

of trial.

     In the notice of deficiency, respondent determined that the

farming activities reflected on petitioners’ Schedules F for the

years in issue were not activities engaged in for profit and that

the reported farm losses therefrom should be disallowed under
                                  - 14 -

section 183.   Respondent further determined that petitioners were

liable for an addition to tax for untimely filing their 1990

return, and that they were liable for negligence penalties for

all the years in issue.

                                  OPINION

I.   Section 183

      We must decide whether petitioners’ undertakings reported on

Schedules F during the years in issue constituted an activity not

engaged in for profit within the meaning of section 183, as

determined by respondent.    As a general rule, individuals are

allowed to deduct expenses attributable to an “activity not

engaged in for profit" only to the extent permitted by section

183(b).    Sec. 183(a) and (b).    Petitioners contend that the

farming activity they reported on Schedules F, consisting

primarily of the cattle breeding and sales conducted as Maple

Row, was conducted with a profit motive and is not subject to

section 183.

      A.   Single Activity Issue

      Determining whether an activity falls within the

restrictions of section 183 requires an initial determination of

the activity’s scope.     Respondent has issued regulations on this

point, the validity of which petitioners have not challenged.

See sec. 1.183-1(d), Income Tax Regs.       A taxpayer may be engaged
                              - 15 -

in several undertakings, each of which constitutes a separate

activity for purposes of section 183, or several undertakings may

constitute a single activity for this purpose.   Id.   The

regulations further state:

          (d) Activity defined. (1) Ascertainment of
     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. * * * Where land
     is purchased or held primarily with the intent to
     profit from increase in its value, and the taxpayer
     also engages in farming on such land, the farming and
     the holding of the land will ordinarily be considered a
     single activity only if the farming activity reduces
     the net cost of carrying the land for its appreciation
     in value. * * * [Sec. 1.183-1(d)(1), Income Tax
     Regs.; emphasis added.]

The regulations thus provide for delineating activities under

section 183 with a general rule drawing on all facts and

circumstances, and a special rule in the case of land acquired or

held primarily for its appreciation on which farming is also

conducted.   In the latter circumstance, the regulations provide

that the holding of the land and the farming will be considered a

single activity only if the farming activity reduces the net cost
                               - 16 -

of carrying the land.    Determining whether the special rule in

the regulations is applicable requires a finding of the primary

purpose for acquiring or holding the land.    Engdahl v.

Commissioner, 72 T.C. 659, 668 n.4 (1979); Perry v. Commissioner,

T.C. Memo. 1997-417; Hoyle v. Commissioner, T.C. Memo. 1994-592.

     Based largely on Dr. Burrus’ own testimony and also on the

objective evidence, we are persuaded that petitioners held the

Maple Row land (i.e., the Cheatham, Robertson, and Sumner

Properties) during the years in issue primarily with the intent

to profit from the increase in the land’s value.   Dr. Burrus

testified that “if I was going to make a profit related to this

[i.e., Maple Row], it was because of the land rather than the

herd, the cattle.”   Further, Dr. Burrus testified specifically to

his interest in land as an investment:

     I’m not really into asset-buying, other than buying
     land. * * * I’m sort of like stocks like I am land.
     If I buy them, I just let them sit, so I - I don’t sell
     them unless there’s some reason.

With respect to the Maple Row land, Dr. Burrus testified that he

“was pretty sure it was going up in price” during the years in

issue, and appraisals obtained by petitioners support the view

that the properties were appreciating substantially.   Moreover,

Mrs. Burrus reported her occupation for the years in issue as

“real estate manager”.
                              - 17 -

     That Dr. Burrus’s primary profit motive during the years in

issue was based on land appreciation rather than the cattle

operation is also reflected in his actions with respect to FBHR.

Although Dr. Burrus’s disenchantment with FBHR’s cattle breeding

operations caused him to seek to reduce his share of the

partnership’s profits and losses from 50 percent to 20 percent,

he nonetheless was careful to retain his 50-percent interest in

the partnership’s land.   At the dissolution of FBHR, the partners

agreed that Dr. Burrus would receive only 20 percent of the

cattle and other assets except the land.   With respect to the

land, Dr. Burrus had the option of either selling his half

interest or buying Dr. Foreman’s, based on Dr. Foreman’s

appraisal.   Dr. Burrus opted to buy, even though a half interest

in the Cheatham Property had nearly tripled in value during the

partnership’s ownership, from approximately $300,000 to over

$800,000.

     Dr. Burrus’s own statement of his profit expectations

regarding the Maple Row land and the significance of the cattle

herd thereto, his expressed interest in land as an investment,

his wife’s description of her occupation as “real estate

manager”, and his actions with respect to the FBHR partnership

all point convincingly to the conclusion that he held the land

utilized in Maple Row’s operations primarily with the intent to
                               - 18 -

profit from its appreciation rather than for purposes of

conducting the cattle activity.   It follows that the land was

“held primarily with the intent to profit from increase in its

value” during the years in issue, within the meaning of the

regulations.   Sec. 1.183-1(d)(1), Income Tax Regs.7

     Since petitioners held the Maple Row land primarily with the

intent to profit from its appreciation, the holding of the land

and the farming activities are considered a single activity under

the regulations only if the farming activity reduces the cost of

holding the land.   Id.   The regulations further provide:

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


     7
       While there is evidence in the record that the Cheatham
Property was originally acquired by FBHR primarily for a cattle
activity (because of its proximity to Drs. Foreman’s and Burrus’s
medical practices), the regulations provide for separate activity
treatment of landholding and farming whenever the land “is
purchased or held” primarily for its appreciation. Sec. 1.183-
1(d)(1), Income Tax Regs. (Emphasis added.) We are persuaded by
his testimony and actions that by 1990 and the remaining years in
issue, Dr. Burrus was holding the Cheatham Property primarily for
its appreciation. With respect to the Robertson and Sumner
Properties, the record contains no evidence of Dr. Burrus’s
intentions at the time of the acquisition of those properties,
although farming activities on the properties were reported on
certain of petitioners’ returns before the years in issue.
However, Dr. Burrus’s testimony concerning his intentions during
the years in issue was directed at all three properties utilized
in the Maple Row operations, and persuades us that the Robertson
and Sumner Properties were likewise held primarily for their
appreciation potential during the years in issue.
                             - 19 -

     the holding of the land (that is, deductions other than
     those directly attributable to the holding of the land
     such as interest on a mortgage secured by the land,
     annual property taxes attributable to the land and
     improvements, and depreciation of the improvements to
     the land). [Id.]

     Applying the foregoing regulation in this case, we conclude

that the “income derived from farming” includes all income

reported by petitioners on their Schedules F except the amount

listed on the “Other income” line, which the testimony of both

Dr. and Mrs. Burrus confirms is income petitioners received from

renting three houses located on the Maple Row land.   Such income

is more appropriately allocable to the holding of land.   As for

deductions “directly attributable to the holding of the land”

that should be excluded from farming deductions, we conclude,

based in part on the parties’ agreement,8 that the amounts

reported on the Schedules F for mortgage interest, taxes, and


     8
       Petitioners offered into evidence a table indicating, and
further argued on brief, that the Schedule F, Profit or Loss From
Farming, entries reported for mortgage interest, taxes,
depreciation, and conservation expenses are properly allocable to
the holding of land, while respondent concedes on brief that all
of the foregoing items except conservation expenses are so
allocable. Given respondent’s concession regarding depreciation,
we do not consider whether the record supports any allocation of
some portion of the depreciation (e.g., for equipment) to the
farming activity.
     Respondent further concedes on brief that the expenses
treated as directly attributable to the holding of the land for
purposes of sec. 1.183-1(d)(1), Income Tax Regs., are deductible
by petitioners, subject, in the case of the mortgage interest, to
the restrictions of sec. 163(d).
                              - 20 -

depreciation are directly attributable to the holding of the land

and therefore should be excluded when determining whether the

income from farming exceeds the deductions therefrom.   The

parties disagree regarding the treatment of the conservation

expenses reported on the Schedules F, petitioner and respondent

contending that they are attributable to landholding and farming,

respectively.   Since a precondition for the current deduction of

a conservation expenditure is that the taxpayer be engaged in the

business of farming, see sec. 175(a), we agree with respondent

and conclude that the conservation expenses are not directly

allocable to the land for purposes of section 1.183-1(d)(1),

Income Tax Regs.

     Excluding the Schedule F “Other income” from income and the

Schedule F deductions that are “directly attributable to the

holding of the land”, petitioners’ “income derived from farming”

and “deductions attributable to * * * farming” within the meaning

of section 1.183-1(d)(1), Income Tax Regs., during the years in

issue are as follows:
                                - 21 -

                                 Deductions
              Income Derived    Attributable
  Year         From Farming      To Farming    Net Gain (Loss)

   1990           $3,737         $58,263           ($54,526)
   1991           25,294          73,053            (47,759)
   1992           17,705          95,714            (78,009)
   1993           34,887         123,130            (88,243)
   1994           40,914          94,893            (53,979)
   1995           22,710          91,485            (68,775)

Since petitioners’ income derived from farming did not exceed the

deductions attributable thereto in any of the years in issue,

their farming activity--i.e., the Maple Row cattle activity--must

be treated as a separate activity from the holding of land, in

accordance with section 1.183-1(d)(1), Income Tax Regs.

       Respondent concedes that petitioners’ separate activity of

holding land was an investment activity for which the allocable

expenses are deductible.     (See supra note 8.)   It therefore

remains for us to decide whether petitioners’ separate activity

of farming (i.e., as disaggregated under section 1.183-1(d)(1),

Income Tax Regs., from the activity of holding land) was an

activity not engaged in for profit within the meaning of section

183.

       B.   Application of Section 183 to Cattle Activity

       Section 183(c) defines an activity not engaged in for profit

as “any activity other than one with respect to which deductions

are allowable for the taxable year under section 162 or under
                                - 22 -

paragraph (1) or (2) of section 212."      In general, deductions are

allowable under sections 162 or 212 for activities in which the

taxpayer engaged with the primary purpose and dominant hope and

intent of realizing a profit.     Commissioner v. Groetzinger, 480

U.S. 23, 35 (1987); Hayden v. Commissioner, 889 F.2d 1548, 1552

(6th Cir. 1989), affg. T.C. Memo. 1988-310; Novak v.

Commissioner, T.C. Memo. 2000-234.       "An activity is engaged in

for profit if the taxpayer entertained an actual and honest, even

though unreasonable or unrealistic, profit objective in engaging

in the activity."   Campbell v. Commissioner, 868 F.2d 833, 836

(6th Cir. 1989), affg. in part, revg. in part and remanding T.C.

Memo. 1986-569; Keanini v. Commissioner, 94 T.C. 41, 46 (1990);

Dreicer v. Commissioner, 78 T.C. 642, 644-645 (1982), affd.

without published opinion 702 F.2d 1205 (D.C. Cir. 1983); sec.

1.183-2(a), Income Tax Regs.

     Whether the taxpayer engaged in an activity with the

requisite profit objective is a question of fact to be determined

by examining all the facts and circumstances, giving greater

weight to objective facts than to the taxpayer's mere statement

of intent.   Engdahl v. Commissioner, 72 T.C. at 666; sec. 1.183-

2(a), Income Tax Regs.   The taxpayer bears the burden of proving

the requisite profit objective.    See Rule 142(a); Hayden v.

Commissioner, supra at 1552; Golanty v. Commissioner, 72 T.C.
                              - 23 -

411, 426 (1979), affd. without published opinion 647 F.2d 170

(9th Cir. 1981).9

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

nonexclusive list of factors to be considered in determining

whether an activity is engaged in for profit.      Campbell v.

Commissioner, supra at 836.   These factors are:    (1) The manner

in which the taxpayer carried on the activity; (2) the expertise

of the taxpayer or his advisers; (3) the time and effort expended

by the taxpayer in carrying on the activity; (4) the expectation

that assets used in the activity may appreciate in value; (5) the

success of the taxpayer in carrying on other similar or

dissimilar activities; (6) the taxpayer's history of income or

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.   As no single factor is controlling, the

facts and circumstances of the case taken as whole are

determinative.   Abramson v. Commissioner, 86 T.C. 360, 371

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

     As a threshold matter, we must consider Dr. Burrus’s



     9
       Sec. 7491 is inapplicable in these proceedings; the
parties conceded at trial that the examinations in this case
commenced before July 22, 1998, the statute’s effective date.
                              - 24 -

previously quoted testimony to the effect that any profit he

expected to make from Maple Row “was because of the land rather

than the herd”.   Taken in context, we do not interpret Dr.

Burrus’s statement as a concession that he had no profit intent

with respect to the cattle activity.   Dr. Burrus’s observations

were directed at Maple Row as a whole-–that is, both the

landholding and the cattle activity as an integrated undertaking.

In this context, Dr. Burrus’s statement reflected his judgment

that any profits from the cattle operation would never be

sufficient to cover the cost of holding the land.   As he stated

in the same context:

     I wasn’t worrying about making a profit from selling
     the cows in the magnitude of [$]230,000 [the 1992 loss,
     including land costs] * * * [Neither] Dr. Foreman nor I
     ever made any profit [from cattle] that would
     counteract the cost of the land.

Thus, we understand Dr. Burrus as expressing the view that,

because his land costs would dwarf what he considered to be the

realistic profit potential of the cattle operation, any overall

gain from the integrated undertaking would come from land

appreciation.   However, where, as here, the landholding and

cattle breeding activities must be analyzed separately under

section 183, we do not consider Dr. Burrus’s comments directed at

the combined results of landholding and cattle breeding

activities as a concession that petitioners lacked a profit
                                 - 25 -

motive with respect to the cattle breeding activity considered

separately.

     We accordingly proceed to consider whether petitioners had

an actual and honest intent to profit from the cattle activity,

based on the factors enumerated in the regulations.

            1.   Manner in Which Activity Conducted

     The fact that a taxpayer carries on an activity in a

businesslike manner and maintains complete and accurate books and

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

See sec. 1.183-2(b)(1), Income Tax Regs.     Also, a profit motive

may be indicated by the conduct of the activity in a manner

substantially similar to other activities of the same nature

which are profitable.     Id.   Both parties proffered expert

witnesses on cattle breeding to evaluate the conduct of Maple

Row’s cattle operations.10


     10
          With regard to the parties’ cattle breeding experts:

     We have broad discretion to evaluate “‘the overall
     cogency of each expert’s analysis.’” We are not bound
     by the formulae and opinions proffered by an expert,
     especially when they are contrary to our own judgment.
     Instead, we may reach a decision based on our own
     analysis of all the evidence in the record. The
     persuasiveness of an expert’s opinion depends largely
     upon the disclosed facts on which it is based. While
     we may accept the opinion of an expert in its entirety,
     we may be selective in the use of any portion of such
     an opinion. We also may reject the opinion of an
                                                   (continued...)
                              - 26 -

Petitioners did not have a written business plan, nor did they

prepare income or budget projections with respect to the

activity.   However, petitioners contend that Dr. Burrus believed

the cattle activity would begin to show a profit once the herd

reached approximately 100 purebred productive cows and that he

was endeavoring towards that goal.     Respondent disputes

petitioners’ contention that they were endeavoring to achieve a

herd of 100 cows, citing among other things the absence of

records documenting the size of petitioners’ herd for the years

in issue.

     We agree with respondent that it is not possible to

determine the size of petitioners’ herd during the years in issue

from the herd inventory records in evidence.11    This is so


     10
      (...continued)
     expert witness in its entirety. [Alumax, Inc. v.
     Commissioner, 109 T.C. 133, 171-172 (1997), affd. 165
     F.3d 822 (11th Cir. 1999); citations omitted.]

     As best we can ascertain from their reports, the parties’
cattle breeding experts were provided data on petitioners’ cattle
operation that was more limited than what has been introduced as
evidence in these proceedings. In a few instances, the experts
appear to have been provided information that is not in the
record. In any event, their failure to analyze certain of the
years in issue detracts significantly from the usefulness of
their testimony. As a result, to the extent we have not
specifically mentioned their testimony, we have found it
unhelpful, unpersuasive, or both.
     11
       The parties’ cattle experts provided herd figures for
certain years in their reports, apparently based in part on
                                                   (continued...)
                                 - 27 -

because these records document births, but not sales,12 deaths or

other dispositions.      Nonetheless, petitioners’ herd inventory

records do show, and the parties agree, that petitioners’ cattle

produced the following purebred Hereford offspring during the

years in issue:

                  Year       Heifers   Bulls     Total

                  1990          13         6      19
                  1991          10         7      17
                  1992          15        15      30
                  1993          17        20      37
                  1994          27        24      51
                  1995          30        23      53


Thus, the number of offspring produced by petitioners’ herd

nearly doubled in the first 4 years of operation and nearly



     11
      (...continued)
information that was not offered into evidence. Our review of
those figures indicates that they are either incomplete or
unreliable.
     Petitioners’ expert provided figures only for 1990 through
1992. Respondent’s expert covered 1990 through 1992, and 1994,
but not 1993 or 1995. Respondent’s expert’s figure for
productive cows in 1994 is highly suspect, however; he puts it at
49, based on records made available to him, whereas the parties
have agreed that births registered in 1994 totaled 51. The
registration of 51 newborn calves in 1994 indicates that there
were almost certainly more than 49 productive cows in that year,
as it is undisputed that the “drop” rate (i.e., calving rate) for
such cows was between 80 and 90 percent. We therefore conclude
that respondent’s expert’s herd figures are unreliable.

     12
       The financial ledgers maintained by Mrs. Burrus for Maple
Row record the proceeds from cattle sales but generally do not
record the number or type of cattle sold.
                              - 28 -

tripled by the end of the sixth year.    It is also undisputed that

the “drop” rate-–i.e., calving rate-–for petitioners’ cows was

generally between 80 and 90 percent.13   Consequently, the number

of productive cows was clearly growing, suggesting the retention

of female offspring for this purpose.    Accordingly, petitioners’

claim that they were building a herd during the years in issue

finds substantial corroboration in the herd inventory records

they maintained.   In addition, Dr. Burrus’s claim that he

anticipated being able to sell purebred horned Hereford bulls for

approximately $2,000 is substantiated in the financial ledgers,

which record sales of bulls at prices in this range.

     In short, the business plan claimed by petitioners is

corroborated in the records they maintained.   The herd

inventories were also adequate to document the herd’s

productivity, to an extent sufficient to earn recognition from

the AHA.   Two of petitioners’ cows earned AHA awards based on

productivity in 1998; since the awards were based on the cows’

production of nine and six calves respectively, it is clear that

petitioners’ records extending back into the years in issue were

considered reliable and accurate by the AHA.   Cf. Stonecipher v.

Commissioner, T.C. Memo. 2000-378 (section 183 applicable to



     13
       Both Dr. Burrus and respondent’s expert testified that
calving rates in this range were the norm.
                              - 29 -

cattle breeding activity where no cattle inventory records kept).

     Similarly, with respect to the financial ledgers for Maple

Row maintained by Mrs. Burrus, we find that these records, though

not flawless, represented a reasonably accurate attempt to record

the activity’s financial results.   Moreover, petitioners

maintained separate bank accounts for the purpose of conducting

Maple Row’s affairs.   When cash was transferred from personal or

other accounts to Maple Row’s accounts, the transfer was recorded

in the ledgers.   Cf. id. (no separate bank account for cattle

activity).

     Respondent’s expert postulated several criteria to which he

believed a profit-oriented purebred cattle breeding operation

would adhere, and found Maple Row’s practices at variance with

those criteria.   To the extent the expert’s testimony was

intended to show that petitioners conducted their cattle breeding

activity in a manner not substantially similar to like activities

conducted for profit, we are unpersuaded.    Respondent’s expert

cited the need for genetically superior stock, but then opined

merely that he was unable to determine from the records provided

him whether petitioners had such stock.   In this regard, it is

worth noting that the expert cited in his report petitioners’

documentation to the effect that Maple Row had received the

designation “1998 Top Recorders in Tennessee” for having
                                - 30 -

registered 62 Hereford cattle.    However, respondent’s expert does

not further discuss this reference, suggesting to us that his

report lacked either thoroughness or objectivity.   Respondent’s

expert further testified that embryo transfer would have been

used in a profitable operation, whereas petitioner’s expert

testified that a switch from embryo transfer to natural selection

in 1990 would have been a valid business decision at the time,

given the then high cost of embryo transfer.   Finally,

respondent’s expert postulated that for-profit purebred cattle

breeding operations would be conducted at a well maintained,

aesthetically pleasing farm site that would conform to the

expectations of customers visiting the site for on-site

purchases.   The expert found Maple Row’s facilities deficient in

this respect and also believed that a for-profit operation would

engage in advertising to attract such on-site customers.   In

fact, Maple Row sold its cattle by means of off-site auctions,

obviating the need for advertising, and the prices petitioners

obtained at auction were in line with what respondent’s expert

indicated were market prices.    In sum, we are not persuaded that

Maple Row’s variances from the model cattle operation postulated

by respondent’s expert suggest a lack of profit motive.

     Overall, we are persuaded that petitioners conducted their

cattle breeding activity in a businesslike manner and maintained
                                - 31 -

adequate records, which in accordance with section 1.183-2(b)(1),

Income Tax Regs., tends to indicate the existence of an intent to

make a profit.

          2.     Expertise of Taxpayer and Advisers

     Preparation for an activity by extensive study or

consultation with experts may indicate a profit objective where

the taxpayer conducts the activity in accordance with such study

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

need not make a formal market study before engaging in an

activity but should undertake a basic investigation of the

factors that would affect profit.     Westbrook v. Commissioner,

T.C. Memo. 1993-634, affd. 68 F.3d 868 (5th Cir. 1995).

Expertise with respect to the mechanics of an activity can be

distinguished from expertise in the economics of such activity,

and the taxpayer's failure to obtain expertise in the economics

of the activity in question may indicate a lack of profit

objective.     Burger v. Commissioner, 809 F.2d 355, 359 (7th Cir.

1987), affg. T.C. Memo. 1985-523.

     Between the two of them, Dr. Burrus and Mr. Gruen possessed

substantial experience with respect to breeding and caring for

cattle.   While neither Dr. Burrus nor Mr. Gruen had formal

training regarding the economics of operating a profitable cattle

breeding business, both of them had been around cattle breeding
                                  - 32 -

operations for the better part of their lives.      We are persuaded

that Dr. Burrus’s near lifelong experience with farming,

including livestock, gave him knowledge of both the mechanics and

economics of livestock.      In accordance with section 1.183-

2(b)(2), Income Tax Regs., the expertise possessed by Dr. Burrus

and his hired help tends to indicate the existence of a profit

intent.

            3.     Time and Effort Expended

     The fact that the taxpayer devotes much of his or her

personal time and effort to carrying on an activity, particularly

if the activity does not have substantial personal or

recreational aspects, may indicate a profit objective.      Sec.

1.183-2(b)(3), Income Tax Regs.      The fact that the taxpayer

devotes a limited amount of time to an activity does not

necessarily indicate a lack of profit motive where the taxpayer

employs competent and qualified persons to carry on such

activity.    Id.

     Dr. Burrus often worked 7 days a week for 10 to 12 hours per

day during the years in issue, and petitioners traveled to Africa

to work at the mission hospital for approximately 2 months of

each year, thereby limiting the amount of time they were able to

personally devote to the cattle activity.      Nonetheless, they

hired Mr. Gruen, whose experience and competence have been
                               - 33 -

previously noted, full time to oversee the operations of the

cattle activity.    The record establishes that Dr. Burrus devoted

significant time to consulting with Mr. Gruen in connection with

decisionmaking for Maple Row, notwithstanding the demands of his

medical practice.   When one adds to the foregoing the fact that

raising cattle generally lacks significant recreational

aspects,14 the application of section 1.183-2(b)(3), Income Tax

Regs., tends to suggest the existence of a profit objective.

          4.   Expectation That Assets May Appreciate

     An expectation that assets used in the activity will

appreciate in value may indicate a profit objective.    Golanty v.

Commissioner, 72 T.C. at 427-428; Bessenyey v. Commissioner, 45

T.C. 261, 274 (1965), affd. 379 F.2d 252 (2d Cir. 1967); Hillman

v. Commissioner, T.C. Memo. 1999-255; Dodge v. Commissioner, T.C.

Memo. 1998-89, affd. 188 F.3d 507 (6th Cir. 1999); sec. 1.183-

2(b)(4), Income Tax Regs.    We have held at respondent’s behest

that petitioners’ landholding and cattle activities must be

treated as separate activities under section 1.183-1(d)(1),

Income Tax Regs., for purposes of section 183.



     14
       As more fully discussed in connection with the
“recreation” factor, the recreational aspects of the Cheatham
Property that find support in the record are more closely
associated with petitioners’ landholding activity than with their
cattle activity.
                                - 34 -

     As a consequence, any anticipated appreciation in the Maple

Row land is not considered in ascertaining the existence of an

intent to profit from the cattle activity.     See Roberts v.

Commissioner, T.C. Memo. 1987-404; Hambleton v. Commissioner,

T.C. Memo. 1982-234.    With respect to the livestock, we have

previously found that petitioners’ purebred herd was growing

during the years in issue, and that they were breeding bulls that

sold for approximately $2,000 each.      These factors indicate that

petitioners had an expectation that the herd would appreciate;

under section 1.183-2(b)(4), Income Tax Regs., this expectation

tends to indicate the existence of an intent to profit.

            5.   Past Success in Similar or Dissimilar Activities

     A taxpayer's past success in similar or dissimilar

activities may indicate that his engagement in a presently

unprofitable activity is for profit.     Sec. 1.183-2(b)(5), Income

Tax Regs.    Petitioners have enjoyed at least moderate success

with MRC, Dr. Burrus has been successful in his medical practice,

and the missionary hospital he established in Africa is still

operating.    Petitioners’ prior experience with cattle breeding at

FBHR was unsuccessful, at least if the appreciation in the value

of the Cheatham Property during that period is disregarded.      If

the more than doubling in value of the Cheatham Property during

the period it was held by the FBHR partnership is taken into
                                - 35 -

account, Dr. Burrus’s actions involving the partnership--reducing

his exposure to the operational losses while holding onto his

full interest in the land--appear financially astute.     On

balance, given the generally positive track record of Dr.

Burrus’s various entrepreneurial undertakings, we believe that

the application of section 1.183-2(b)(5), Income Tax Regs.,

provides support for the existence of an intent to profit.

            6.   Activity’s History of Income or Losses

     An activity's history of income or loss may reflect whether

the taxpayer has a profit objective.     Sec. 1.183-2(b)(6), Income

Tax Regs.    Unless explained by unforeseen or fortuitous

circumstances beyond the taxpayer's control, a record of

continuous losses beyond the period customarily required to

obtain profitability may indicate that the activity is not

engaged in for profit.     Golanty v. Commissioner, supra at 426;

Bessenyey v. Commissioner, supra at 274; Hillman v. Commissioner,

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

     As earlier calculated for purposes of determining whether

petitioners’ farming activity should be treated as a separate

activity from the holding of land, the results from petitioners’

Maple Row cattle activity for the years in issue are as follows:
                                - 36 -

                                 Deductions
            Income Derived      Attributable
   Year      From Farming        To Farming      Net Gain (Loss)

   1990        $3,737            $58,264             ($54,527)
   1991        25,294             73,053              (47,759)
   1992        17,705             95,715              (78,010)
   1993        34,887            123,130              (88,243)
   1994        40,914             94,893              (53,979)
   1995        22,710             91,484              (68,774)

For the 4 years immediately following the years in issue, if the

same adjustments are made to show the results of the Maple Row

cattle activity as a separate activity, those results are as

follows:

                                  Deductions
               Income Derived    Attributable
     Year       From Farming      To Farming    Net Gain (Loss)

     1996         $21,461          $92,211       ($70,750)
     1997          39,987           97,164        (57,177)
     1998          51,792          124,531        (72,739)
     1999          34,901          115,654        (80,753)

Thus, petitioners have shown losses for the first 6 years of

Maple Row’s operations (the years in issue), as well as the next

4 years.

     Petitioners point out that courts have recognized a startup

period with respect to breeding activities that is longer than

the period associated with other activities, and argue that their

losses have been incurred during a startup period.    See, e.g.,

Engdahl v. Commissioner, 72 T.C. at 669 (startup phase between 5

to 10 years for horse-breeding activity); Fields v. Commissioner,
                             - 37 -

T.C. Memo. 1981-550 (losses in third, fourth, and fifth years of

cattle breeding operation found to occur during startup phase).

     Petitioners’ losses throughout the first 6 years of Maple

Row’s operations are consistent with Dr. Burrus’s stated business

plan of expanding his herd of productive cows to 100, and not

expecting to cover his losses until that time.   As previously

discussed, petitioners’ records and other evidence corroborate

that they were building a herd during the years at issue.

Indeed, the herd’s annual production of registered purebred

offspring nearly tripled during the period.   Although petitioners

incurred losses during all 6 years in issue, we are persuaded

that these years constituted a reasonable startup period.    As a

result, the continuous losses do not indicate the absence of an

intent to profit, under section 1.183-2(b)(6), Income Tax Regs.

While petitioners also incurred losses for the next 4 years

(1996-99), the issue we must decide is whether they had an actual

and honest intent to profit during the years in issue, given

their herd growth and other factors extant at the time;

petitioners’ intentions and expectations for the years in issue

were not informed by the experience of subsequent years.15


     15
       We express no opinion herein whether petitioners were
engaged in their cattle activity for profit during 1996 through
1999, given the facts and circumstances known to them in those
                                                   (continued...)
                                 - 38 -

             7.   Occasional Profits

     The amount of any occasional profits, if large in relation

to losses incurred or the taxpayer's investment, may indicate a

profit objective.     Sec. 1.183-2(b)(7), Income Tax Regs.    The

possibility of a substantial profit in a highly speculative

venture may indicate a profit objective even where profits are

occasional and small or nonexistent.        Id.

     As petitioners have shown no profit during any year of the

Maple Row cattle activity, this factor is neutral.

             8.   Taxpayer’s Financial Status

     Substantial income from sources other than the activity

(particularly if the losses from the activity generate

substantial tax benefits) may indicate that the activity is not

engaged in for profit, especially if there are personal or

recreational elements involved.        Sec. 1.183-2(b)(8), Income Tax

Regs.

     During each of the years in issue, Dr. Burrus earned

substantial income from his medical practice, which obviously

made it possible for petitioners to bear the losses incurred in

connection with the cattle activity.       However, recreational

elements, which “especially” suggest the absence of a profit


     15
          (...continued)
years.
                                - 39 -

motive where substantial other income is available, were

insignificant with respect to petitioners’ cattle activity.16     On

balance, we do not believe this factor carries much weight in the

instant case.

            9.   Personal Pleasure or Recreation

     The existence of recreational or personal elements in an

activity may indicate that the activity is not engaged in for

profit.    Sec. 1.183-2(b)(9), Income Tax Regs.    On the other hand,

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

objective may be indicated.     Id.   Respondent cites several

examples of recreational activities petitioners undertook on the

Cheatham Property including, inter alia, fishing in the ponds,

horseback riding, the annual dove hunt, and Camp Papa, to argue

that Maple Row’s recreational elements were significant and

should evidence a lack of profit motive.     The recreational

elements respondent cites are more appropriately allocable to the

landholding activity than the cattle activity, in our view.

Moreover, petitioners did not maintain a residence at any of the

Maple Row properties, and any personal or recreational aspect of

the apartment available for their use at the Cheatham Property is

likewise allocable to the landholding.     While Dr. Burrus had an



     16
          See discussion of the “recreation” factor, infra.
                               - 40 -

avocational interest in Hereford breeding, as evidenced by his

attendance, and occasional showing of animals, at livestock

conventions and fairs, we believe any recreational component of

these activities was minor.    Cf. Sullivan v. Commissioner, T.C.

Memo. 1998-367 (taxpayer’s regular participation as

nonprofessional rider in cutting horse competitions constitutes

recreation indicative of lack of profit motive), affd. without

published opinion 202 F.3d 264 (5th Cir. 1999).    Because

petitioners’ cattle activity lacked significant recreational

appeal, a profit intent is indicated under section 1.183-2(b)(9),

Income Tax Regs.

     C.   Conclusion

     Petitioners’ purebred Hereford herd grew significantly

during the first 6 years of Maple Row’s operation, the years at

issue herein.    Their herd inventory records document this herd

building process.    While losses were incurred in all 6 years,

such losses are consistent with a startup period inherent in herd

building and therefore do not necessarily indicate a lack of

profit motive.    Given the growth in petitioners’ herd as of 1995,

the demonstrated market value of purebred Hereford bulls, their

record keeping practices, and the absence of significant

recreational elements in cattle raising, we are persuaded that

petitioners had an actual and honest intent to profit from their
                               - 41 -

cattle activity during the years in issue.   Accordingly,

respondent’s determination to disallow the losses attributable to

petitioners’ cattle activity under section 183 is not sustained.

II.   Addition to Tax for Failure To File Timely Under Section
      6651 and Accuracy-Related Penalties Under Section 6662

      Respondent determined that petitioners are liable for the

section 6651(a) addition to tax for failing to file a timely

return for 1990.   This addition to tax does not apply if the

taxpayer proves that the failure to file timely was:    (1) Due to

reasonable cause, and (2) not due to willful neglect.    Sec.

6651(a)(1); Rule 142(a)(1); United States v. Boyle, 469 U.S. 241

245 (1985); Peacock v. Commissioner, T.C. Memo. 2002-122.

      There is no dispute that the due date for petitioners’ 1990

return was October 15, 1991, and that it was received on October

28, 1991.   Petitioners argue that they had reasonable cause for

untimely filing because they relied on their accountant to file

their return.   Reliance on an agent, however, does not constitute

reasonable cause for a late filing under section 6651(a)(1).

United States v. Boyle, supra at 252; Stolz v. Commissioner, T.C.

Memo. 1999-404.    In the absence of any other argument or evidence

establishing reasonable cause, we sustain respondent’s

determination under section 6651(a)(1) for 1990; petitioners

conceded various adjustments for that year which would result in

a deficiency, in addition to any deficiency resulting from our
                                - 42 -

holdings herein.    See sec. 6665(b)(1).

     Respondent also determined that, for each of the years in

issue, petitioners are liable for the section 6662(a) accuracy-

related penalty due to their negligence or intentional disregard

of rules or regulations.    For this purpose, negligence includes

any failure to make a reasonable attempt to comply with the

provisions of the Internal Revenue Code, and disregard includes

any careless, reckless, or intentional disregard of rules or

regulations.    Sec. 6662(c); sec. 1.6662-3(b), Income Tax Regs.

The accuracy-related penalty does not apply to any portion of an

underpayment to the extent the taxpayer shows there was

reasonable cause for such portion and that the taxpayer acted in

good faith.    Sec. 6664(c)(1); secs. 1.6662-3(a), 1.6664-4(a),

Income Tax Regs.    The decision as to whether a taxpayer acted

with reasonable cause and in good faith depends on all the facts

and circumstances relevant to the case with the most important

factor being the taxpayer’s efforts to assess the proper tax

liability.     Jorgenson v. Commissioner, T.C. Memo. 2000-38; sec.

1.6664-4(b)(1), Income Tax Regs.

     Petitioners treated the entire Maple Row cattle undertaking

as one activity.    Portions of the underpayments that may remain

for the years in issue may be attributable to petitioners’

failure to treat as a separate activity the holding of the land
                               - 43 -

on which they conducted their cattle activity.17   With respect to

those portions, we find that petitioners had reasonable cause for

the underpayment.   We have found that petitioners conducted their

cattle activity with the requisite profit motive to avoid the

restrictions of section 183.   In these circumstances, their

failure to adhere to the precise requirements of the regulations

requiring the treatment of farming and landholding as separate

activities does not, in our view, reflect a lack of effort to

assess their proper tax liability.

     As for any remaining portions of the underpayments for the

years in issue, such as those attributable to petitioners’

failure to substantiate claimed deductions, petitioners have not

addressed the issue, and we accordingly sustain respondent’s

determinations.

     In light of the parties’ concessions and the foregoing,



                                         Decision will be entered

                                     under Rule 155.




     17
       For example, underpayments may exist as a result of the
limitations imposed by sec. 163(d) on the mortgage interest
deductions claimed by petitioners on Schedules F.
