                         T.C. Memo. 2000-378



                       UNITED STATES TAX COURT



             HARLAND AND SHIRLEY STONECIPHER, Petitioners
           v. COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 8599-98.                   Filed December 14, 2000.



     Linda J. Van Arkel-Greubel, Donald M. Bingham, and Joseph P.

Lennart, for petitioners.

     Edith F. Moates, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


     THORNTON, Judge:    Respondent determined deficiencies in

petitioners’ Federal income taxes for 1993, 1994, and 1995 as

follows:
                                  -2-

                     Year               Deficiency

                     1993                 $37,804
                     1994                  44,796
                     1995                  49,306


     After settlement of some issues, the primary issue remaining

for decision is whether petitioners’ cattle ranch activity

qualifies as a for-profit activity.

     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

     The parties have stipulated some of the facts, which are so

found.   When they filed their petition, petitioners resided in

Centrahoma, Oklahoma.

     A sharecropper’s son, Harland Stonecipher (petitioner) grew

up on a family ranch in Oklahoma.       As a youth, petitioner was

responsible for various chores on the ranch, helping to maintain

and manage it and to care for the few head of cattle raised

there.

     Petitioner received a college degree with a major in

education.   His first job out of college was as an insurance

agent.
                                -3-

     In 1972, petitioner founded Pre-Paid Legal, Inc. (Pre-Paid

Legal), as a corporation to provide prepaid legal services to the

public.   During 1976, Pre-Paid Legal went public with a listing

on the NASDAQ Exchange.   In 1986, Pre-Paid Legal stock was traded

on the American Stock Exchange, and as of the time of trial,

Pre-Paid Legal stock was traded on the New York Stock Exchange.

Since 1986, Pre-Paid Legal has been profitable.   As of the time

of trial, Pre-Paid Legal had accumulated $50 million in cash and

investment assets.

     During most of the years since 1976 and specifically during

the years in issue, petitioner has worked as a full-time officer

and employee of Pre-Paid Legal with such positions as chairman of

the board of directors, president, and chief executive officer.

     In 1975, petitioners paid $40,000 for 40 acres of property

in Coal County, Oklahoma (the 40 acres).   Over the years since

1975, petitioners’ immediate family has occupied the residence on

the 40 acres.   Petitioners have improved the residence by adding

three rooms, a bath, a sunroom, a three-car garage, and a carport

at a total cost of $233,000.   Petitioners have also improved the

property immediately surrounding the residence by constructing

hound kennels at a cost of $90,000 and a well house, two storage

buildings, and a hay shed at a cost of $36,000.   The cumulative

cost of the 40 acres, the residence, and improvements described

above was $399,000.
                               -4-

     From 1981 through 1997, petitioners purchased additional

unimproved property adjacent to or near the 40 acres, as follows:

                                         Petitioners’ Cumulative
  Year    Acres Purchased    Cost       Total Acreage At Yearend
                                                    1
  1981           50         $10,000                  90
  1982          160          38,750                 250
  1985          220          66,000                 470
  1986          220          55,000                 690
  1992          300          75,000                 990
  1993          220           6,000               1,210
  1995           60          18,000               1,270
  1995            5           6,000               1,275
  1996          320          96,000               1,595
  1996          200          40,000               1,795
  1997           40          10,000               1,835
     1
       The 90 acres comprises the original 40 acres purchased in
1975 plus the 50 acres purchased in 1981.

     Petitioners generally paid from $200 to $350 an acre for the

property described above, much of which was wooded or partly

wooded.

     Also, during 1993, 1994, and 1995, petitioners leased 2,680

additional acres located near the above property.

     By 1999, petitioners owned approximately 2,000 acres and

leased an additional 2,680 acres.    Petitioners’ fee ownership and

leasehold interest in the above property apparently did not

include the right to mineral interests in the property.

     Since 1982, when petitioners first purchased cattle to raise

on their property, petitioners have made improvements to the

property, in addition to those improvements previously mentioned,
                                   -5-

related to raising cattle, at a cost to petitioners, where

indicated in the record, as follows:

               Improvement                 Cost
            Barn                         $40,000
            Cabin                         40,000
            2-1/4 mile fence              30,000
            3 ponds                         --
            Horse/cattle shed               --

     During 1993, 1994, and 1995, petitioners’ property was also

the site of a tenant house and a mobile home, occupied for a

period by petitioners’ son.

     Petitioners may be regarded as first-generation cattle

ranchers in the sense that they did not receive or inherit any

cattle from their parents.      Instead, petitioners had to purchase

their initial head of cattle.     From 1982 through 1992 or 1993,

petitioners sold the cattle that they raised each year, including

all the male and female calves.     After market prices fell in

1992, petitioner began retaining most of the female calves, until

1998, when he began selling them again.

     Petitioners’ cattle ranch may accurately be described as a

no-frills cattle operation.     Petitioners’ improvements to the

ranch property were not extravagant.      Neither petitioners nor

other members of petitioners’ family, some of whom also lived on

the property, made significant recreational use of the ranch

property.    There was no swimming pool, golf course, tennis court,

Jacuzzi, or other significant recreational amenity.      Petitioners
                                -6-

did not construct on the ranch any fancy or showy fences or make

other improvements that would be indicative of a dude ranch.

     The cattle petitioners purchased and raised on the property

were Brahman crossbreed cattle suited to that part of Oklahoma

because of their ability to tolerate rough grazing conditions,

because of their thin hides that enabled them to tolerate the

Oklahoma heat better than other cattle, and because of their high

tolerance for insects and parasites.   Also, Brahman crossbreed

cattle have smaller calves, making calving easier.    Petitioners’

cattle were not shown at cattle shows.

     Generally, petitioner worked only a limited number of hours

on the ranch each week-–an hour or two on weekday evenings and a

number of hours on Sundays.   Occasionally, petitioner himself

would participate in bulldozing the land and in worming,

dehorning, castrating, branding, and vaccinating the cattle.

     Since 1987, petitioner has employed on the ranch either one

of his sons or another full-time hired hand.   On weekday

evenings, petitioner occasionally would talk to his employed son

or to the hired hand about management of the ranch.

Occasionally, petitioner pulled calves out of the cows at calving

and brush-hogged (cleared brush from) the land.

     The ranch land was fertilized and sprayed for weeds.

Rotational grazing of the cattle generally was not done in this

part of Oklahoma, and it was not done on petitioners’ ranch.
                                  -7-

     Over the years, petitioners undertook a number of changes or

improvements to their cattle raising activity.   They cleared,

bulldozed, and brush-hogged portions of the property to make dirt

roads and to improve the pasture for the cattle.    As previously

indicated, they built some fencing and three ponds.    They planted

Bermuda and Lespedeza grasses on some of the property.

     Petitioners were thrifty and frequently looked for bargains

in managing their cattle ranch.    For example, at one point,

petitioners made a bargain purchase of 26 tons of feed pellets.

To store the feed, they poured all 26 tons of it through a

chimney and into an unoccupied old ranch house on the property.

For many years, they fed their cattle from old used bathtubs,

which they purchased for this purpose, rather than spend $300

each for cattle feeders.   In 1993, so that they could buy feed in

bulk and thereby save on feed costs and related labor,

petitioners purchased a bulk feed bin for $3,500.    Also in 1993,

to save on labor, petitioners changed from using square bales of

hay to rolled bales.

     During the years in issue, on condition that they be allowed

to keep the hay for no charge, petitioners made a deal with the

State of Oklahoma to cut and bale hay on a nearby State highway

right-of-way.

     Petitioners bought used trucks and equipment, including two

junk trucks for parts.
                                  -8-

     Petitioners did not hire any ranch consultants to assist in

managing the cattle ranch.   Petitioners did not belong to a

cattlemen’s association.

     During the years in issue and in prior years, petitioners

maintained no formal books and records relating to the cattle

ranch, no records of the cattle inventory, and no ledgers,

written business plans, or written cost analyses.    Petitioners

maintained no records of which cows were bred, nor of which cows

were calved and sold.

     Petitioner did make some miscellaneous handwritten notes

about the cattle on scratch pads, which he generally kept on the

dashboard of his truck for a while before discarding.

     During 1993, petitioners maintained no separate bank account

relating to the ranch activity.    Rather, financial matters

relating to petitioners’ personal and family activities and to

the ranch activity were handled through the same bank account.

During 1994 and 1995, petitioners did maintain a separate bank

account for financial activity relating to the cattle ranch.

     For the years in issue, petitioners retained receipts

relating to expenses incurred in connection with the cattle ranch

activity.

     Petitioners estimate that as of 1999 the property and

improvements on the ranch had a market value of approximately
                                -9-

$750,000 and that the equipment, vehicles, and bulldozer on the

ranch had a market value of approximately $335,000.

     Petitioners have never realized a profit from their cattle

ranch activity.   On their joint Federal income tax returns for

1993, 1994, and 1995, petitioners claimed ordinary expense

deductions relating to the cattle ranch activity, and they

claimed depreciation deductions relating to a house, a cabin, a

mobile home, and other improvements and equipment located and

used on the ranch.   The schedule below reflects the gross

receipts, expenses, depreciation, and net losses relating to

petitioners’ cattle ranch activity that were reported on

petitioners’ joint Federal income tax returns for 1983 through

1997:
                                   -10-



                         Expenses
             Gross      (Excluding
Year        Receipts   Depreciation)      Depreciation   Net Loss
                                                         1
1983            --       $25,793             $15,834      $41,627
                                                          2
1984         $3,621       34,195              24,680        55,254
1985           3,200      20,414              26,092        43,306
1986           6,213      39,016              32,419        65,222
1987           2,745      26,096              45,084        68,435
1988             361      57,128              44,968      101,735
1989           1,013      50,905              32,915        82,807
1990         23,174       72,540              25,935        75,301
1991         20,021       70,169              16,853        67,001
1992           7,240      74,345              25,645        92,750
1993         17,162       87,921              32,637      103,396
             2
1994           8,528      71,605              48,690      111,767
1995         14,268       72,903              53,408      112,043
1996           6,746     Unknown             Unknown      111,291
1997         16,618      Unknown             Unknown        97,463
        1
        Includes losses from a coon dog activity.
        2
        For 1994, petitioners also reported a capital gain
of $41 relating to the cattle activity.

       For all years in issue (and apparently for all of the other

years indicated above), on petitioners’ joint Federal income tax

returns, the reported net losses from petitioners’ cattle ranch

activity offset and reduced petitioner’s substantial taxable

income from Pre-Paid Legal.

       On audit, respondent determined that petitioners’ cattle

ranch activity was not operated for profit and disallowed their

claimed net losses relating thereto.


                                OPINION

       Under section 183(b)(2), if an activity engaged in by an

individual is not engaged in for profit, deductions relating
                                -11-

thereto are allowable only to the extent gross income derived

from the activity exceeds deductions allowable under section

183(b)(1) without regard to whether the activity constitutes a

for-profit activity.    See Allen v. Commissioner, 72 T.C. 28, 33

(1979).

     For purposes of section 183, an activity is not considered

engaged in for profit unless it is conducted by the taxpayer with

an actual and honest objective of making a profit.     See

Hildebrand v. Commissioner, 28 F.3d 1024, 1027 (10th Cir. 1994),

affg. Krause v. Commissioner, 99 T.C. 132 (1992); Antonides v.

Commissioner, 91 T.C. 686, 693-694, 696-697 (1988), affd. 893

F.2d 656 (4th Cir. 1990); Dreicer v. Commissioner, 78 T.C. 642,

645-646 (1982), affd. without opinion 702 F.2d 1205 (D.C. Cir.

1983).    Petitioners have the burden of proof.   See Rule 142(a);

Cannon v. Commissioner, 949 F.2d 345, 348-349 (10th Cir. 1991),

affg. T.C. Memo. 1990-148.

     The regulations under section 183 provide a nonexclusive

list of factors to be considered in determining whether an

activity is engaged in for profit.     The factors include:   (1) The

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

expertise of the taxpayer or his advisors; (3) the time and

effort the taxpayer expended in carrying on the activity; (4) the

expectation that assets used in the activity may appreciate in

value; (5) the taxpayer’s success in carrying on other
                               -12-

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

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

any, which are earned; (8) the taxpayer’s financial status; and

(9) whether elements of personal pleasure or recreation are

involved.   See sec. 1.183-2(b), Income Tax Regs.; see also Cannon

v. Commissioner, supra at 348-349.

     The taxpayer's expectation of profit need not be reasonable

but must be in good faith.   See Golanty v. Commissioner, 72 T.C.

411, 425-426 (1979), affd. without published opinion 647 F.2d 170

(9th Cir. 1981); Allen v. Commissioner, supra at 33; sec.

1.183-2(a), Income Tax Regs.   In determining whether an activity

is engaged in for profit, greater weight is given to objective

factors than to a taxpayer's mere statement of intent.   See

Anderson v. Commissioner, 62 F.3d 1266, 1274 n.16 (10th Cir.

1995), affg. T.C. Memo. 1993-607; Cannon v. Commissioner, supra

at 351 n.8; sec. 1.183-2(a), Income Tax Regs.

     Although no one factor is conclusive, see sec. 1.183-2(b),

Income Tax Regs., a record of substantial losses over many years

and the unlikelihood of achieving a profit are indicative that an

activity is not engaged in for profit, see Hildebrand v.

Commissioner, supra at 1027; Cannon v. Commissioner, supra at

352; Golanty v. Commissioner, supra at 426; sec. 1.183-2(b)(6),

Income Tax Regs.
                              -13-

     Before, during, and after the years in issue, the limited

time petitioner spent working in the cattle ranch activity is

inconsistent with a legitimate for-profit objective.    The lack of

formal books and records, of a ledger, of a budget, and of a

meaningful business plan for the ranch indicates that

petitioners’ ranch activity was not carried on in a businesslike

manner.

     Petitioners used the ranch for a personal residence and

apparently intended to retire there.   Petitioners’ ranch activity

realized losses every year, and from 1983 through 1997 it

accumulated, before depreciation, approximately $700,000 in total

losses.

     Petitioner acknowledges that he had no expectation of

realizing income from the ranch in any of the early years.

Petitioner states that his intention for the ranch was, over the

course of 15 years, to retain female calves born each year and,

by breeding the cows, to build up the cattle herd to 500 mature

cows and to build up the total ranch acreage to 2,000 acres.     At

that point, by the sale of female calves that would be born each

year, petitioner claims that he expected the cattle ranch to

provide comfortable retirement income for him and his wife.

     Petitioner’s assertions as to his long-term strategy with

regard to the ranch are undermined by the lack of breeding and

calving records and by petitioners’ sale each year (at least
                                -14-

through 1992 and possibly through 1993) of all their female

calves.1   These circumstances speak loudly to the nonprofit

nature of petitioners’ cattle ranch activity, particularly where

the buildup of the cattle herd and the profit were to be based on

the successful breeding of the cows.

     Petitioners claim that the for-profit nature of the cattle

ranch is indicated by, among other things, the no-frills nature

of the property, the lack of recreational use of the property,

and the alleged long-range plan or purpose to use income from the

ranch to support petitioners in their retirement.   With regard

specifically to the alleged long-range plan, petitioners offered

into evidence a calendar for 1983 on which were entered a few

brief words as follows:


                      Retire age 60 — 1998
                      2500 acres paid
                      500 mama cows paid


     We do not believe that this brief calendar entry adequately

corroborates the existence of a long-range business or profit

plan for the ranch.   Rather, we regard the calendar entry as

reflecting, at most, a general goal or desire.   The credible



     1
       The parties have stipulated that “During the years 1982
through 1993, petitioners sold the cattle raised each year.”
Petitioner testified, on the other hand, that he temporarily
stopped selling heifers after a 1992 price drop. To the extent
there is a discrepancy, we do not view it as material to our
analysis or to the result reached herein.
                               -15-

testimony and other evidence in the record do not support

petitioner’s claim that he established a meaningful business plan

for the ranch.   Contrary to petitioner’s testimony that his

business plan (during the years before us and in prior years) was

to retain female calves and to sell only male calves, in many

years petitioners sold the female calves along with the male

calves.

     Acknowledging that he maintained no formal books and records

for the ranch activity, petitioner emphasizes that he did keep

all expense receipts and was able to substantiate, to

respondent’s satisfaction, the ranch-related expenses claimed on

petitioners’ tax returns.   We believe, however, that these

circumstances are more indicative of good tax planning than

operation of a for-profit business.

     The credible evidence does not establish that petitioners’

cattle ranch was operated for profit.   The ranch never came close

to making a profit.   Petitioner testified that he did not believe

he would ever achieve profitability as long as he was buying

land, but thereafter he could “revive” it.   Petitioner testified:


     I don’t know that you can ever become profitable in
     this business if you’re first generation [raising
     cattle]. * * * if you start at ground level zero, you
     don’t own an acre of land, you don’t own a cow, you
     have got to buy the land and improve it and put the
     cattle on it, I don’t know if you would ever reach
     profitability that way.
                               -16-

     Petitioner’s statement reveals that he viewed the ranch

activity as having no profit potential for the years in issue,

during which petitioners were continuing to acquire significant

acreage, improve it, and put cattle on it.   Rather, it appears

that petitioner actually anticipated incurring losses from the

ranch activity over a long period, including the years in issue

and thereafter.   Petitioner’s anticipation of these ongoing

losses as being practically inevitable, rather than the result of

unpredictable events, signals the absence of an actual and honest

profit objective with respect to the ranch activity during the

years in issue.   See Mattfeld v. Commissioner, T.C. Memo. 1992-

273, affd. without published opinion 15 F.3d 1087 (9th Cir.

1994).   We are not persuaded that these losses are attributable

merely to a startup period, of a kind which is customarily

necessary to bring such an activity to profitable status,

especially since petitioner’s annual selling off of female calves

during the first 10 years of operation was inconsistent with his

own asserted business plan.

     Petitioners’ witnesses gave vague testimony based on general

observations and not supported by a professional and thorough

appraisal of petitioners’ cattle ranch activity.

     On the basis of all the evidence, we conclude that

petitioners have failed to establish that they engaged in the
                                 -17-

ranch activity with an actual and honest objective to make a

profit within the meaning of section 183.

     To reflect the foregoing,


                                        Decision will be entered

                                 under Rule 155.
