UNPUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

THOMAS B. DRUMMOND,
Petitioner-Appellant,

v.                                                                      No. 97-2106

COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellee.

Appeal from the United States Tax Court.
(Tax Ct. No. 94-16958)

Argued: April 7, 1998

Decided: July 15, 1998

Before WIDENER and LUTTIG, Circuit Judges, and
CHAMBERS, United States District Judge for the
Southern District of West Virginia, sitting by designation.

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Affirmed in part and reversed in part by unpublished per curiam opin-
ion.

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COUNSEL

ARGUED: Karen Mary Kennedy, JAMES P. CAMPBELL & ASSO-
CIATES, P.C., Leesburg, Virginia, for Appellant. Annette Marie
Wietecha, Tax Division, UNITED STATES DEPARTMENT OF
JUSTICE, Washington, D.C., for Appellee. ON BRIEF: Mark E.
Kellogg, KELLOGG, KREBS & MORAN, Fairfax, Virginia, for
Appellant. Loretta C. Argrett, Assistant Attorney General, Gilbert S.
Rothenberg, Tax Division, UNITED STATES DEPARTMENT OF
JUSTICE, Washington, D.C., for Appellee.
Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).

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OPINION

PER CURIAM:

Petitioner-appellant Thomas Drummond appeals a decision of the
United States Tax Court upholding the Internal Revenue Service's
assessment of income tax deficiencies and accuracy-related penalties
on his tax returns for 1989, 1990, and 1991. For the reasons stated
herein, we affirm in part and reverse in part.

Beginning in 1988, Drummond purchased a series of thoroughbred
horses to train for dressage and jumping, cross country riding, or both.
Drummond's stated goal was to train and sell accomplished show
horses. Although Drummond practiced psychology, he adjusted his
work schedule to allow him to spend between 15 and 18 hours a week
with his horses, and engaged the assistance of professionals to assist
with the horses' training. Drummond experienced numerous setbacks,
however, and had, at the time of this appeal, been unable to sell any
of the horses he had trained.1

In addition to his involvement with horses, Drummond purchased
a small herd of cattle in 1990. Drummond's stated purpose was to
expand the herd and use it to manage his horses' pasture, see J.A. at
165, though, at the time of this appeal, he had not yet done so. Drum-
mond has, however, sold the calves produced by the herd each year
for modest amounts.

On his tax returns, Drummond has treated his horse and cattle oper-
ations as a single enterprise, motivated by the desire for profit.
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1 Subsequent to the tax years at issue in this case, Drummond did suc-
ceed in selling a horse for $30,000 that he had purchased, one month ear-
lier, for $10,000. The profit realized by Drummond in this venture,
however, appears unrelated to any training given the horse by Drum-
mond.

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Although he has made some money, primarily from the cattle, his
losses have in every year exceeded his profits. In determining his net
income each year, Drummond has deducted the net losses from his
horse and cattle operations from income received from other sources.

The instant litigation arose when the IRS determined deficiencies
for Drummond's 1989, 1990, and 1991 tax returns, and also assessed
certain accuracy-related penalties against him. Although the deficien-
cies included a variety of matters no longer at issue in this case, the
heart of the matter, for purposes of this appeal, was that the IRS con-
sidered Drummond's horse and cattle operations to constitute only
hobbies, rather than activities engaged in for profit. Because hobby
losses can be offset only against income derived from the same activ-
ity, the IRS maintained that Drummond erred in deducting the net
losses from the horse and cattle operations from his other income. The
IRS also insisted that Drummond's horse and cattle operations were
separate activities, and that the losses from the horse operations there-
fore could not be deducted even to the extent of the profits from the
cattle operations. Finally, the IRS assessed penalties against Drum-
mond for negligence and for substantial underpayment of his income
taxes.

Drummond challenged these determinations in tax court. The tax
court found, inter alia, that the horse and cattle operations constituted
separate activities, that Drummond had engaged in neither out of a
desire for profit, and that the IRS had properly assessed certain penal-
ties against him for substantially understating his income. In finding
that Drummond's activities were not conducted for profit, the tax
court relied primarily on (1) Drummond's lack of formal training, (2)
his failure to keep careful records or otherwise to conduct the activi-
ties in a business-like manner, and (3) the consistent losses Drum-
mond incurred, and was apparently able to afford because of the
income available to him from other sources. In upholding the penal-
ties, the tax court rejected Drummond's defense of good faith, reason-
able reliance on professional advice, on the grounds that Drummond
had failed to prove that he had fully disclosed all of the information
to his tax advisor necessary for the advisor to render competent pro-
fessional advice, and therefore had failed to prove that his reliance on
the advisor's advice was reasonable.

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We have carefully reviewed the tax court's opinion, the parties'
submissions in this court, and the relevant legal authorities, and have
had the benefit of oral argument. Although we believe it is a close
question, we cannot conclude that the tax court's findings as to the
nature of, and the relationship between, Drummond's horse and cattle
activities were clearly erroneous, and accordingly we affirm this part
of the tax court's decision.

We reverse, however, that court's rejection of Drummond's
defense of good-faith, reasonable reliance on professional advice. The
uncontroverted testimony of Drummond's tax advisor established,
inter alia, that he knew about Drummond's activities and discussed
them with Drummond regularly, J.A. at 73, that he was impressed
with the amount of resources -- especially time-- that Drummond
spent on his horses, J.A. at 83-84, that he knew of the payments made
to, and the reputations of, those with whom Drummond was dealing,
J.A. at 85, and that he concurred in the judgment that the activity
could properly be reported as one engaged in for profit, J.A. at 95.
Neither the tax court nor the Internal Revenue Service has cited any
evidence establishing that Drummond did not fully disclose the nature
of his horse and cattle operations to the tax advisor, or that the
accountant did not have adequate information upon which to base his
professional judgment. Accordingly, we hold the tax court's finding
that Drummond failed to establish reasonable reliance clearly
erroneous.2
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2 Drummond also appeals the tax court's decision upholding accuracy-
related penalties relating to his characterization of a gain he realized
from the sale of a drawing, and for excessive deductions taken for Drum-
mond's contributions to his pension plan. As to both issues the tax court
rejected Drummond's defense of good faith, reasonable reliance on pro-
fessional advice. As for the characterization of the gain from the sale of
the drawing, we affirm the decision of the tax court. Drummond's tax
advisor testified that he told Drummond that he could not claim the gain
as income from business unless he continued to buy and sell drawings,
see J.A. at 88-90. Despite this advice, Drummond so reported the gain
but did not continue to buy and sell drawings. Accordingly, the tax
court's rejection of Drummond's defense of good faith reliance was not
clearly erroneous.

As for the question of the deductions attributable to the pension contri-
butions, we reverse the decision of the tax court. Although that court

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For the foregoing reasons, the judgment of the tax court is affirmed
in part and reversed in part.

AFFIRMED IN PART, REVERSED IN PART
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found that Drummond failed to prove he had fully described the nature
of his pension plan to his tax advisor, this finding cannot be reconciled
with the record. Although the advisor testified that he did not initially
know what kind of pension plan Drummond had, J.A. at 78, he also testi-
fied that he later jointly determined with Drummond that Drummond's
pension plan supported the deduction that was taken, J.A. at 81.

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