                         T.C. Memo. 2001-68



                       UNITED STATES TAX COURT



       ANDRIS ZARINS AND ZIGRIDA A. ZARINS, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 15570-98.                     Filed March 21, 2001.



     Andris Zarins, pro se.

     Linda R. Averbeck, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


     COLVIN, Judge:    Respondent determined deficiencies in

petitioners’ Federal income taxes of $7,952 for 1994 and $4,788

for 1995.

     The issues for decision are:

     1.     Whether petitioners operated their tree farm activity

for profit in 1994 and 1995.   We hold that they did not.
                                - 2 -

     2.     Whether the limitation on the time to assess tax for

1994 or 1995 expired before respondent issued the notice of

deficiency.    We hold that it did not.

     References to petitioner are to Andris Zarins.      Section

references are to the Internal Revenue Code in effect during the

years in issue.    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.

A.   Petitioners

     Petitioners were married and filed joint returns for 1994

and 1995.    They lived in Ostrander, Ohio, during the years in

issue and when they filed their petition.

     Petitioners’ parents owned a farm on which they raised

cattle.   They also grew trees, of which they sold about 100-200

per year for 3 or 4 years.    Petitioner worked on the farm when he

was young, and he attended several farm seminars with his father

over the years.    Petitioner took business and economics courses

in college and received an engineering degree before the years in

issue.

     Petitioners worked for the State of Ohio during the years in

issue.    Petitioner was an engineer and his wife, Zigrida Zarins,

was a computer manager.    Petitioner retired in 1997.
                                - 3 -

B.   Petitioners’ Tree Farm

     1.    Starting the Tree Farm

     Sometime before 1979, petitioners bought an 85-acre farm for

$78,300.   Much of the farm was covered with trees, including

hawthorns, walnuts, and oaks.    Petitioners lived in a trailer

while they built a house on the farm.    They began living in the

house around 1984.   Petitioner removed large amounts of brush and

thorns and cultivated about 40 acres of the land by himself.

     Around 1990, petitioners began to plant evergreen trees on

their land.    Petitioner had planted about 2,000 seedlings by the

end of 1993.   He planted about 1,000 trees in 1993, but most of

them died in a severe drought that year.

     Petitioner spent about 15 to 20 hours per week on this

activity in 1994 and 1995.    He spent most of that time in 1994

building an irrigation pond and dam, for which he paid

contractors $10,403 in 1994.    The pond provided water for a

pumping system that could reach about 1,000 feet from the pond.

He did not plant many trees in 1994 because he built the

irrigation pond.   He was involved in time-consuming litigation

over the pond with the Ohio Department of Natural Resources and a

neighboring hunting club in 1995 and 1996.

     In 1994 and 1995, petitioner bought gravel to build an

access road on the farm.   Petitioners used their own equipment to

build the road.    Petitioner bought equipment such as a compressor
                                 - 4 -

and pump, mulch sweeper, generator, and chain saw in 1994 and

1995.   However, petitioners had no equipment to ball the roots of

and remove large trees.

     Petitioners did not sell many trees in 1994 and 1995.

Petitioners promoted tree sales in 1994 and 1995 by word of

mouth, mostly to their relatives.     In 1994 and 1995, petitioners

sold trees to relatives (who helped dig the trees) and to three

other customers for $20 per tree.     In 1997, petitioners sold a

number of trees not specified in the record for which they

received payment in 1998.     Petitioners’ farm was visible from the

road, but they did not have a sign for it.

     Petitioner had planted about 3,000 to 3,500 trees by the end

of 1995, and about 5,000 by March 2000.     He did not keep records

of the number of trees he planted.

     2.    Petitioners’ Business Records and Business Plan

     Petitioners did not have a separate bank account for their

tree farm.     Petitioner kept records of expenses and income for

income tax purposes.     He put expense receipts in separate files

by category.    He did not maintain any other books and records for

their tree farm during the years in issue.    Petitioners did not

have a budget, did not make income or profit projections, and did

not prepare a cost analysis for the tree farm.    At a time not

specified in the record, petitioners projected that they would

sell 200 to 300 trees per year by around 1998 or 1999.
                                - 5 -

     Petitioner did not seek expert advice about how to operate a

tree farm for profit.   Sometime before 1990, he asked neighbors

who had botany degrees for advice on how to grow trees.

Petitioner attended several agricultural seminars:   a fish

raising seminar in 1992, evergreen seminars in 1995 and 1997, a

tree pruning seminar in 1997, and a nursery short course at Ohio

State University in 1998.

     Petitioners earned an unspecified amount of income from 1984

or 1985 to 1990 by allowing people to use their land to hunt and

to practice for competitions with their dogs.   Petitioners also

tried to grow strawberries and grapes on their land and to raise

fish.

C.   Petitioners’ Tax Returns

     Petitioners reported on Schedules F, Profit or Loss From

Farming, attached to their tax returns for 1993 to 1998 that they

operated a tree farm.   Petitioners reported the following amounts

of nonfarm income (i.e., wages, pension, interest, and taxable
                              - 6 -

income tax refunds) on their income tax returns filed for 1993

through 1998:

       Year        Wages       Pension      Nonfarm Income

       1993      $ 95,578                      $ 96,065
       1994       101,750                       102,222
       1995       108,877                       110,432
       1996       118,377                       119,374
       1997       102,510      $22,836          125,954
       1998        63,783       39,810          102,587

          Petitioners reported the following amounts of taxable

income, expenses, and losses from their tree farm on their tax

returns for tax years 1993 to 1998:

       Year      Income       Expenses     Profit & (Loss)
       1993     $ 275          $ 9,506        ($ 9,231)
       1994        320          28,400        ( 28,080)
       1995        360          17,059        ( 16,699)
       1996          0          13,891        ( 13,891)
       1997          0          14,870        ( 14,870)
       1998      4,270           4,069             201
                                  - 7 -

     Petitioners deducted the following amounts of farm expenses

for tax years 1993 to 1998:

                 1993     1994       1995      1996    1997     1998
   Seeds and      132      354        423      1,320    638       -–
    plants
  Fertilizers     352       --            –-     19       2       -–


     Labor         –-       80        150        –-      –-       –-


  Custom hire     613    10,721     1,107        –-      –-      –-
   (machine
     work)
  Advertising      –-       --            –-     –-      –-     688

 Depreciation1   3,331   3,550      3,243      2,268    718     483

Car and truck     896      870      1,200      1,307   1,242    383

   Mortgage
   interest        –-    3,955      3,556      3,533   4,030     –-

   Gasoline      1,456   2,595      1,844      1,781   1,359    709

  Repairs and
  maintenance      –-    3,325        963       133     215    1,532

   Insurance      362      388        429       451     916      --

   Supplies      1,531   1,756      3,235      1,149   4,427    274

     Taxes        433      351        390       459     487      –-

   Utilities      400      450        520       560     560      –-

 Machine parts     –-       –-            –-    905      –-      –-

   Legal fee       –-       –-            –-     40      –-      –-

     1
        Petitioners depreciated a truck, a mulch sweeper, a
generator, a compressor, a pump, and chain saws.
                               - 8 -

     Petitioners timely filed joint Federal income tax returns

for 1994 and 1995.   In November 1997, they signed Form 872,

Consent to Extend the Time to Assess Tax, extending the period to

assess tax for 1994 to June 30, 1999.

     Respondent sent a notice of deficiency to petitioners on

June 23, 1998, in which respondent determined that petitioners’

tree farm was not operated for profit in 1994 or 1995.

                              OPINION

A.   Whether Petitioners Operated Their Tree Farm for Profit

     The first issue for decision is whether petitioners operated

their tree farm for profit in 1994 and 1995.   A taxpayer conducts

an activity for profit if he or she does so with an actual and

honest profit objective.   See Osteen v. Commissioner, 62 F.3d

356, 358 (11th Cir. 1995), affg. in part and revg. on other

issues T.C. Memo. 1993-519; Surloff v. Commissioner, 81 T.C. 210,

233 (1983); Dreicer v. Commissioner, 78 T.C. 642, 645 (1982),

affd. without opinion 702 F.2d 1205 (D.C. Cir. 1983).    In

deciding whether petitioners operated their tree farm for profit,

we consider the following nine nonexclusive factors:    (1) The

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

expertise of the taxpayer or his or her advisers; (3) the time

and effort expended by the taxpayer in carrying on the activity;

(4) the expectation that the assets used in the activity may

appreciate in value; (5) the success of the taxpayer in carrying
                               - 9 -

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.     See sec. 1.183-

2(b), Income Tax Regs.   No single factor controls.    See Osteen v.

Commissioner, supra at 358; Brannen v. Commissioner, 722 F.2d

695, 704 (11th Cir. 1984), affg. 78 T.C. 471 (1982); sec. 1.183-

2(b), Income Tax Regs.

B.   Application of the Factors

     1.   Manner in Which the Taxpayer Conducts the Activity

     Maintaining complete and accurate books and records,

conducting the activity in a manner substantially similar to

comparable businesses which are profitable, and making changes in

operations to adopt new techniques or abandon unprofitable

methods suggest that a taxpayer conducted an activity for profit.

See Engdahl v. Commissioner, 72 T.C. 659, 666-667 (1979); sec.

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

     There is no evidence establishing that petitioner had a

business plan.   Petitioner wanted to sell evergreen trees and

some of the trees that were growing indigenously on the land to

nurseries and to individuals, and he knew that he could not sell

the trees he planted for 10 years.     However, the fact that he

planted trees without keeping records of the number planted and
                              - 10 -

that he had no specific concept for operating a profitable tree

farm shows that he did not have a business plan.

     Petitioners contend in their brief that they planned to

plant about 500-1000 seedlings each year and to sell 300-1000

trees for $9,000-$30,000 per year around years 10 to 12.

However, statements in a brief are not evidence.   See Rule

143(b); Niedringhaus v. Commissioner, 99 T.C. 202, 214 n.7

(1992); Viehweg v. Commissioner, 90 T.C. 1248, 1255 (1988).

     Petitioners contend that petitioner made income projections

for the tree farm.   However, we have not so found because

petitioners offered no evidence to support that contention.

     Petitioner kept records of income and expenses for his tree

farm to substantiate the deductions petitioners claimed on their

1994 and 1995 returns.   These records do not establish that their

tree farm had profit potential.

     Petitioners contend that they tried to make their tree farm

profitable without spending large amounts of money other than for

the pond.   However, they offered no evidence of the amount of

expenses or sales they expected to have.   There is no evidence in

the record showing that enough of petitioners’ trees will be

available for sale to enable them to make a profit.

     Petitioners contend that they made numerous changes in their

operations to improve their profit potential.   We disagree.
                              - 11 -

Petitioners offered no evidence that they changed their

operations.

     This factor favors respondent.

     2.   The Expertise of the Taxpayers or Their Advisers

     Efforts to gain experience, a willingness to follow expert

advice, and preparation for an activity by extensive study of its

practices may indicate that a taxpayer has a profit objective.

See sec. 1.183-2(b)(2), Income Tax Regs.   A taxpayer’s failure to

obtain expertise in the economics of an activity indicates that

he or she lacks a profit objective.    See Burger v. Commissioner,

809 F.2d 355, 359 (7th Cir. 1987), affg. T.C. Memo. 1985-523;

Golanty v. Commissioner, 72 T.C. 411, 432 (1979).

      Petitioner contends that he had the necessary expertise to

operate a profitable tree farm and that he learned the basics

from his parents.   However, petitioner did not specify how he was

involved in his parents’ tree farming activity.

     Petitioner contends that he sometimes sought advice from his

botanist neighbors about growing trees and that he attended an

evergreen seminar in 1995.   However, petitioners did not show

that they had expertise relating to the tree farming business,

or seek expert advice on how to operate their farm for profit.

     This factor favors respondent.
                                - 12 -

     3.     Taxpayer's Time and Effort

     The fact that a taxpayer devotes much time and effort to an

activity may indicate that he or she has a profit objective.       See

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

     Petitioner was employed full-time as an engineer in 1994 and

1995.     He worked 15 to 20 hours a week in 1994 and 1995 on the

tree farm.     However, much of the time petitioner spent working on

the tree farm in those years was not directly related to raising

or selling trees.     He built a pond in 1994, he built an access

road in 1994 and 1995, and he was engaged in litigation relating

to the pond in 1995.     Petitioner failed to show to what extent

the pond and road were directly related to the tree farm.

Petitioner testified that the pond supported irrigation up to

about 1,000 feet from the pond, but he did not show how many of

his trees were within 1,000 feet of the pond.     This factor favors

respondent.

     4.      Expectation That Property Used in the Activity Will
             Appreciate in Value

     A taxpayer may intend to make an overall profit when

appreciation in the value of assets used in the activity is

realized.     See sec. 1.183-2(b)(4), Income Tax Regs.   There is an

overall profit if net earnings and appreciation are enough to

recoup losses sustained in prior years.     See Bessenyey v.

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

Cir. 1967).
                              - 13 -

     Petitioners contend that their land is well located for

future development.   They contend that, at the time of trial, the

farm was worth more than $750,000.     Petitioner testified that

sometime in the future he probably would sell some of the farm

land for commercial development to realize the appreciation that

has occurred in the 20 years petitioners have owned it.     His

testimony did not convince us that, either when he started the

tree farm or during the years in issue, he considered or expected

that future appreciation of the farm land would offset the

cumulative losses from the farm.

     The record is silent as to the fair market value of

petitioners' land when they started the tree farm.     Thus, we can

only compare the fair market value of petitioners' 85 acres in

2000 to the $78,300 petitioners paid for it sometime before 1979.

Such a comparison improperly includes appreciation in the value

of petitioners' farm that occurred before petitioners began their

tree farm activity in 1990.   See Pearson v. Commissioner, T.C.

Memo. 1996-66.

     Petitioners contend that their trees will increase in value.

However, petitioners did not show how much the value of their

trees will appreciate or when tree appreciation plus other tree

income will exceed their accumulated losses.

     This factor favors respondent.
                              - 14 -

     5.   Taxpayer's Success in Other Activities

     The fact that a taxpayer previously engaged in similar

activities and made them profitable may show that the taxpayer

has a profit objective.   See sec. 1.183-2(b)(5), Income Tax Regs.

The record does not show how petitioner was involved in his

parents’ tree farm or if they operated it successfully.   Thus,

petitioner has not established that he successfully engaged in

any other activity similar to the tree farm.   This factor favors

respondent.

     6.   Taxpayer's History of Income or Losses

     A history of substantial losses may indicate that the

taxpayer did not conduct the activity for profit.   See Golanty v.

Commissioner, supra at 427; sec. 1.183-2(b)(6), Income Tax Regs.

A taxpayer may have a profit objective even when the activity has

a history of losses, see Bessenyey v. Commissioner, supra at 274,

because losses during the initial stage of an activity do not

necessarily indicate that the activity was not conducted for

profit, see Engdahl v. Commissioner, 72 T.C. at 669; sec. 1.183-

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

     Petitioners contend that it will take 10-14 years for the

tree farm to be profitable.   The years at issue are years 5 and 6

of petitioners' activity.   Because petitioners’ losses were

incurred during the startup period of their activity, this factor
                                - 15 -

is neutral.     See Strickland v. Commissioner, T.C. Memo. 2000-309;

Davis v. Commissioner, T.C. Memo. 2000-101.

           7.     Amount of Occasional Profits, If Any

     The amount of any occasional profits the taxpayer earned

from the activity may show that the taxpayer had a profit

objective.    See sec. 1.183-2(b)(7), Income Tax Regs.

Petitioners’ tree farm generated no profit during the years in

issue and showed a small profit in 1998.    This factor is neutral.

     8.    Financial Status of the Taxpayer

     The receipt of a substantial amount of income from sources

other than the activity, especially if the losses from the

activity generate large tax benefits, may indicate that the

taxpayer does not intend to conduct the activity for profit.     See

sec. 1.183-2(b)(8), Income Tax Regs.

     Petitioners had $102,222 in unrelated gross income for 1994

and $110,432 for 1995, and claimed Schedule F losses of $28,080

and $16,699, respectively.    Although petitioners had income

against which they deducted their losses, they did not realize

substantial tax benefits from the tree farm activity.    Of their

losses, depreciation accounted for only 12.6 percent in 1994 and

19.4 percent in 1995; most of their losses were from cash

outlays.   See Davis v. Commissioner, supra (the fact that the

taxpayers spent 40-50 percent of their income on the activity and

that depreciation accounted for only 9-17.5 percent of their
                                - 16 -

losses indicated that the activity was not a hobby).

Petitioners’ financial status does not affect our analysis.         See

Callahan v. Commissioner, T.C. Memo. 1996-65, affd. 111 F.3d 892

(5th Cir. 1997).     Consequently, this factor is neutral.

     9.   Elements of Personal Pleasure

     The presence of recreational or personal motives in

conducting an activity may indicate that the taxpayer is not

conducting the activity for profit.      See sec. 1.183-2(b)(9),

Income Tax Regs.

     Petitioner worked hard planting trees, removing thorns and

brush, and building the pond and access road.      We do not know

whether he enjoyed doing that work.      Petitioners' residence is

located on their land, and they have not shown that their tree

farm activity did not benefit their residence and their enjoyment

of their property.    See Estate of Dickerson v. Commissioner, T.C.

Memo. 1997-165 (Christmas tree farm activity not conducted for

profit; the trees provided personal pleasure because they were

located near the taxpayers’ residence).      Petitioners have not

shown that they lacked recreational or personal motives for

engaging in the tree activity.    This factor is neutral.
                                - 17 -

     10.    Conclusion

     We conclude that petitioners did not operate their tree farm

for profit in 1994 and 1995.1

C.   Whether the Statute of Limitations Bars Assessment of Tax
     for 1994 and 1995

     Petitioners contend that the time to assess tax for 1994 and

1995 expired because the IRS had not made an assessment by June

30, 1999.    We disagree.   Generally, the Commissioner must assess

tax within 3 years after the due date of a timely filed return.

See sec. 6501(a).    Respondent bears the burden of proving that an

exception to the 3-year limit on the time to assess tax applies

if, as here as to 1994, the notice of deficiency was mailed more

than 3 years after the filing date.      See Farmers Feed Co. v.

Commissioner, 10 B.T.A. 1069, 1075-1076 (1928).

     Petitioners timely filed joint Federal income tax returns

for 1994 and 1995.    They signed a Form 872, Consent to Extend the

Time to Assess Tax, in November 1997, extending the period to

assess tax for 1994 to June 30, 1999.     Respondent mailed a notice

of deficiency for 1994 and 1995 on June 23, 1998, which was prior

to the expiration of the periods to assess tax for petitioners

for 1994 and 1995.




     1
        Because of our holding, we need not decide whether
petitioners must capitalize expenditures for improvements to land
and buildings with a useful life beyond the years in issue.
                             - 18 -

     The running of the period of limitations is suspended when a

notice of deficiency is mailed, and, if a proceeding with respect

to the deficiency is brought before this Court, the period of

limitations remains suspended until the decision of this Court

becomes final and for 60 days thereafter.   See secs. 6213(a),

6503(a)(1); sec. 301.6503(a)-1, Proced. & Admin. Regs.   Thus, the

time for assessment of tax for 1994 and 1995 remains open until

60 days after our decision in this case becomes final.

     To reflect the foregoing,

                                        Decision will be

                                   entered for respondent.
