                        T.C. Memo. 1997-54



                     UNITED STATES TAX COURT



      STANLEY M. KURZET AND ANNE L. KURZET, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 27982-91.                    Filed January 29, 1997.



     J. Gordon Hansen and Daniel M. Allred, for petitioners.

     M.K. Mortensen and Mark H. Howard, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     SWIFT, Judge:   Respondent determined deficiencies, additions

to tax, and accuracy-related penalties in petitioners' Federal

income taxes for 1987, 1988, and 1989, as follows:
                                        - 2 -
                                                                              Accuracy-
                                                                              Related
                                        Additions to Tax                      Penalty
                                      Sec.
                        Sec.       6653(a)(1)/         Sec.          Sec.      Sec.
Year   Deficiency    6651(a)(1)   6653(a)(1)(A)   6653(a)(1)(B)     6661      6662(a)

1987   $440,539          ---         $22,027            *          $110,135     ---
1988    202,360          ---          10,118           ---           50,590     ---
1989    215,930        $7,845          ---             ---            ---     $43,186

       *   50 percent of interest due on portion of underpayment
           attributable to negligence.


       In an Amendment to Answer, respondent increased the

  deficiency, addition to tax, and accuracy-related penalty for

  1989 to $404,418, $17,269, and $80,883, respectively.

       The primary issues for decision are:            (1) Whether, during

  the years in issue, petitioners' ownership and management of a

  timber farm property near Coos Bay, Oregon, constituted a trade

  or business activity entered into for profit, as petitioners

  contend, or a personal, nonbusiness, not-for-profit activity, as

  respondent contends; (2) whether petitioners' investment in

  property in Tahiti constituted a for-profit investment under

  section 212; (3) the deductibility under section 162 or section

  212 of expenses relating to petitioners' use of a Lear jet to

  travel, among other places, to their Oregon timber farm property

  and to their property in Tahiti; and (4) to what extent expenses

  of petitioners' residence in Orange, California, qualify as home

  office expenses under section 280A.           Various additional and

  alternative issues are also for decision (e.g., if petitioners'

  timber farm constitutes a for-profit trade or business activity,
                               - 3 -

whether petitioners should be required to capitalize additional

costs relating to the timber farm as part of the costs of a water

reservoir).

     Unfortunately, pretrial, trial, and posttrial proceedings in

this case are marked by miscommunication between the lawyers for

the parties and by frequent allegations by one lawyer against

another that there is misrepresentation of the facts and

evidence.   The inability of the parties' lawyers in this case to

communicate effectively with each other resulted in the trial of

issues that should have been settled and in the presentation of

evidence and arguments in an untimely and confusing manner.

     The Court spent hours with the parties' lawyers attempting

to identify and articulate the various primary and alternative

issues and arguments and the relationship of the issues to each

other.   Similar to much of the miscommunication between the

parties throughout the pretrial and trial, arguments made in the

parties' posttrial briefs are filled with unnecessary accusatory

statements.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code, and all Rule references are to the Tax

Court Rules of Practice and Procedure.
                                - 4 -

                           FINDINGS OF FACT

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

the time their petition was filed, petitioners resided in Park

City, Utah.

     Petitioner Stanley Kurzet (petitioner) was a successful

inventor and businessman.    For many years, petitioner owned and

personally managed ALS Corp. (ALS), a company based in southern

California that petitioner founded in 1958 and that was involved

in the design and manufacture, apparently for the U.S. military,

of sophisticated electronic and engineering equipment.

     ALS became extremely profitable and valuable.   In 1984, at

the age of 53, petitioner sold the stock of ALS in an arm's-

length transaction to an unrelated third party for $20 million in

cash.

     As part of the sale of ALS, petitioner entered into a

limited, 7-year consulting agreement with the new owners of ALS

to be available to consult with the new owners in the continuing

management of ALS, and petitioner entered into a broad covenant

not to compete with ALS.    The covenant not to compete prohibited

petitioner from engaging in any business or investment activity

relating, in any way, to the type of engineering work and

business in which ALS was engaged and severely restricted

petitioner's ability to engage in any business or for-profit

activity that related, in any way, to petitioner’s prior work and

experience at ALS.
                               - 5 -

     As a result of a number of factors (namely, the $20 million

that became available to petitioners on the sale of ALS, the

consulting agreement that required little of petitioner's

considerable skill, experience, and time, the broad restrictions

on petitioner's activities to which petitioner became subject

under the covenant not to compete, and petitioner's relatively

youthful age and vigor), after the sale of ALS in 1984,

petitioner began an extensive and businesslike investigation of

business and investment opportunities in which the approximately

$20 million that petitioners had available might appropriately be

invested and to which petitioner might apply his considerable

business talent.   Petitioner personally consulted with various

experts and obtained advice regarding market trends and types of

industries that might have unique and positive growth and

appreciation potential.

     Over the course of the next few years and as a result of

various activities, investments, and companies in which

petitioners invested and were involved, petitioners earned and

realized very significant income.   Assets in which petitioners

invested appreciated significantly, some of which appreciation

petitioners have realized and some of which, as of the time of

trial, petitioners have not yet realized because the assets are

still held by petitioners.   Over the years, petitioner has

demonstrated a skill and talent for making a profit.
                              - 6 -

     After selling ALS in 1984, the primary activities and assets

in which petitioners invested and participated and that are at

issue in this case involve timber farming in Oregon, real

property in Tahiti, a Lear jet, a limited consulting business

based in southern California, and a computer and real estate

rental business based in southern California.    Petitioners

incurred significant expenses associated with each of these

activities and businesses, and petitioners, on their books and

records and on their joint Federal income tax returns, treated

most of the expenses relating to these activities and businesses

as deductible expenses of a trade or business.

     Apparently due to errors made by petitioners and to careless

income tax return preparation by petitioners' accountants and tax

return preparers, numerous errors and mistakes in classification

of the expenses relating to the above activities occurred on

petitioners' original books and records and on petitioners'

Federal income tax returns.

     On audit, respondent made blanket determinations that

essentially all of petitioner's activities constituted personal,

nonbusiness, and not-for-profit activities.   Respondent's blanket

determinations, combined with the errors that occurred on

petitioners' books and records and Federal income tax returns,

resulted in the disallowance of many of the expenses claimed on

petitioners' Federal income tax returns for the years in issue

and in respondent's determination of the substantial income tax
                               - 7 -

deficiencies, additions to tax, and accuracy-related penalty set

forth above.

     Prior to and during trial in this case, petitioners'

representatives submitted to respondent on behalf of petitioners

a number of "proposed revised" Federal income tax returns for

each of the years in issue that attempt to correct or clarify

some of the classification errors that occurred on petitioners'

original income tax returns.   Respondent argues that petitioners'

proposed revised income tax returns are confusing and

inconsistent, and perpetuate many of the errors made in

petitioners’ original income tax returns, that petitioners’

proposed revised income tax returns should be ignored, and that

petitioners' original income tax returns should be the focus of

our analysis.

     We disagree with respondent, in significant part, on this

point.   In the many instances where petitioners' proposed revised

Federal income tax returns reflect additional items of income or

reductions in amounts claimed as expenses on petitioners'

original Federal income tax returns and/or the reclassification

of expenses consistent with classifications made by respondent in

respondent's notice of deficiency, petitioners' proposed revised

Federal income tax returns, with regard to such items, are to be

treated as concessions by petitioners.

     Where petitioners' proposed revised returns reflect

reductions in petitioners' alleged income or increases in claimed
                                 - 8 -

expenses, as compared with petitioners' original Federal income

tax returns as filed with respondent, petitioners' proposed

revised returns, with regard to these new items and issues, are

to be ignored except to the extent that petitioners have filed

with the Court amendments to their pleadings to properly raise

new issues with regard to such alleged reductions in income and

alleged increases in expenses.    Rule 41.

     We also note that as a result of information provided by

petitioners to respondent during the course of the audit and

litigation, including the proposed revised returns, respondent

has significantly revised and lowered her original deficiency

determinations against petitioners.


Timber Farm

     Prior to 1984, petitioner had no experience in the timber

industry, in farming, or in cattle raising.   Petitioner, however,

in 1984 and 1985, after receiving approximately $20 million from

his sale of ALS, investigated and consulted with a number of real

estate and forestry experts about the timber industry and

forestry management.

     Specifically, with regard to 621 acres of timber property in

Coos County, Oregon (timber farm), petitioner inspected the

timber farm and the trees growing thereon with real estate agents

and forestry experts.   Petitioner and the experts considered the

type and quantity of trees growing on the timber farm, the type
                              - 9 -

of soil and terrain, the expected growth rate of the trees, and

water resources on the timber farm.

     Petitioner also studied information received from the U.S.

Forest Service relating to tree growth and management.

     After inspecting the timber farm and conferring with experts

and after considering the financial risks and profit potential,

in June of 1985 petitioners purchased for $568,890 in cash the

timber farm in Coos County, Oregon.

     The timber farm included 454 acres of forest land covered

primarily with Douglas fir and spruce trees, 152 acres of bottom

land, a number of barns, sheds, and three small houses.

     In 1985, the Douglas fir, spruce, and other trees located on

the timber farm were of an average age of 30 to 40 years.    The

trees were just reaching their peak growth rate, growing at a

rate of approximately 10 percent per year.

     Petitioner agreed to the $568,890 purchase price for the

timber farm based on his analysis that, as of the time of

purchase in June of 1985, the cumulative value of the standing

timber on the timber farm, of the land, and of the existing

buildings and improvements totaled approximately $750,000.

     For many years prior to 1985, the timber farm that

petitioners purchased was considered timber farm property on

which trees had been grown, cut, and commercially logged.    The

prior owners of the timber farm last conducted a major harvest of
                               - 10 -

timber on the timber farm in 1945.      The most recent harvest of

timber on the timber farm occurred in 1975.

     Douglas fir and spruce trees are typically cut or harvested

by commercial foresters once every 35 to 60 years.

     In prior years, the timber farm also was used to raise

cattle and as a dairy farm.

     Petitioners’ timber farm was typical of other timber farm

property located along the Oregon coast.      Such timber farm

property is typically used to grow and cut timber, to grow hay,

and to raise cattle.   Typically, timber farmers make the decision

when to cut and harvest timber based on the price of timber and

their individual financial needs.

     Petitioners' timber farm is bordered on all sides by

commercial timber property, most of which is owned by Georgia

Pacific Corp., which has been commercially cutting and harvesting

timber on the adjacent property for a number of years.

     At the time of petitioners' purchase of the timber farm, the

roads, houses, and barns located on the timber farm were in

significant disrepair and were inadequate for continued

occupancy.

     Petitioner initiated many projects to improve the timber

farm.   The small houses and barns were repaired and improved.

Poisonous plants in the pastures were eradicated and a water

reservoir was constructed.    Junk cars and junk farm machinery

located on the timber farm were removed and hauled to the dump.
                              - 11 -

     In western Oregon, because of the wet climate and high

rainfall that occur during the winter months, owners of timber

farm property with main roads running through it that are "in

place" and “hardened off” --- which takes a year or two after

construction -- have a significant marketing advantage because

they are able to cut and harvest timber on their property in

winter and on short notice, and can thereby take better advantage

of short or sudden swings in the price of cut timber.

     Accordingly, after purchase of the timber farm, petitioner

made a particular effort to improve the roads on the timber farm.

Petitioner incurred many expenses and hired employees to repair

and improve the existing roads and to construct new roads so as

to be in a position, in subsequent years, to cut and harvest

timber on the timber farm on short notice and thereby take

advantage of favorable prices for cut timber.

     Petitioner also initiated construction of a large new

building for a machine shop and installation of a mobile unit and

related water system.

     Rather than hire expensive contractors to come onto the

timber farm to perform the many repair, improvement, and

construction projects that petitioner initiated, petitioner

himself designed and performed much of the work on the timber

farm.   Petitioner himself often operated graders and other heavy

equipment on the timber farm in repairing and improving the
                             - 12 -

roads, in constructing new roads, and in constructing the water

reservoir.

     In 1986, 1987, and 1988, petitioner made significant

expenditures of his own time and money to repair buildings, to

improve and construct 5 miles of roads, to grade fields, and to

install several miles of pipes.

     For the various projects that were undertaken and also for

security on the timber farm, petitioner hired two employees to

live and work on the timber farm.   These employees were

experienced farmers, timber men, and carpenters.   Petitioner and

his employees had to constantly watch for and keep off of the

timber farm individuals who would attempt to trespass on the

property to strip cedar trees, to pick mushrooms, and to grow

marijuana.

     During these years in which petitioner was building roads

and improving and maintaining the timber farm for purposes of

eventual cutting and harvesting of timber, Georgia Pacific, on

its adjacent timber property, was building more miles of roads

per acre than petitioner built on his timber farm.

     The principal risk to a mature stand of timber is fire.

During the years before us, petitioner and his employees had to

fight one fire on the timber farm which destroyed 1½ acres of

timber before the fire was extinguished.

     As mentioned, in 1987 and 1988, in order to establish a

source for additional water to protect trees on the timber farm
                               - 13 -

from fire and to provide irrigation for hay and cattle, a water

reservoir was constructed on the timber farm by excavation of

earth abutting a creek.    The water reservoir was to be no higher

than the original stream flow, 5 to 15 feet deep, and no dam was

to be constructed.    In 1988, the reservoir first filled with

water and became available as a source of water for fighting

forest fires.

     Due to weather and erosion damage, in subsequent years the

water reservoir had to be regraded and refilled a number of

times.   No permit was needed to use the water in the reservoir to

fight forest fires.

     On a ridge above the reservoir, petitioner also excavated a

pond and constructed a windmill with the intent of using

electricity produced from the windmill to pump water from the

reservoir up to the pond so that a helicopter with a dip bucket

could scoop water up from the pond to fight fires.

     The use of water reservoirs or ponds as a source of water to

fight fires was a common practice in this part of Oregon, and the

reservoir and pond excavated on petitioners’ timber farm were

suitable for that purpose.    Weyerhaeuser Corp. constructed 70 or

80 ponds, and the U.S. Bureau of Land Management constructed over

200 ponds in western Oregon to aid in fighting forest fires.

     Construction of an elevated pond and pumping water up to the

pond via power generated from a windmill, however, do not

constitute improvements typical of Oregon timber property.
                                - 14 -

Petitioners did not submit applications to the State of Oregon

for permission to perform the land excavation relating to

construction of the water reservoir until 1988, and permission

was not received from the State of Oregon until September of

1990.

     Further excavations and improvements to the water reservoir

were the primary construction project on which petitioners and

his employees worked in 1989.

     Rather than rent the numerous pieces of farm equipment and

machinery needed for the various projects that petitioner and his

employees personally undertook on the timber farm, during the

years before us, petitioner traveled occasionally throughout

Oregon and Washington to auctions of used farm equipment and

machinery in order to acquire used equipment for use on the

timber farm.   Often, at the time of purchase by petitioner, such

equipment was not operational, and petitioner personally and with

his employees would rebuild and restore the equipment.

     In 1985, petitioner purchased a used fire truck for use in

protecting trees on the timber farm from fire.   Petitioner

purchased used equipment for harvesting, cutting, and baling hay,

and chain saws and other equipment to cut timber.   Petitioner

purchased used machine shop equipment to maintain the machine

shop on the timber farm so that petitioner and his employees

could make, on the property, essentially all repairs to the farm
                               - 15 -

and other equipment without hiring expensive machinists and

equipment repairmen.

        Again, we note that petitioner purchased for the timber

farm old and used farm and machine shop equipment because it was

much cheaper than purchasing new equipment, because much of the

equipment would not be used frequently on the property, and

petitioner therefore had no need for new equipment, and because

of petitioner's talent and competence in restoring and

maintaining mechanical equipment.

        Petitioner was able to acquire from auctions a large

variety of used farm equipment, to restore the equipment, and, as

of the time of trial, in the barns located on the timber farm,

petitioner maintained in excellent condition and stored for use

on the timber farm approximately 30 pieces of old but operational

farm equipment.    The parties and their experts are in agreement

as to the excellent restoration and high quality maintenance of

the equipment located on the timber farm.

     From the time petitioners purchased the timber farm in June

of 1985, until September 8, 1989, petitioners’ primary residence

was in Orange, California.    From September 8, 1989, through the

time of trial, petitioners' primary residence was in Park City,

Utah.

     Petitioners traveled to their Oregon timber farm

approximately 4 or 5 times a year, and on each trip petitioners

typically would spend a number of weeks on the timber farm.       In
                             - 16 -

1987, 1988, and 1989, petitioners spent 127, 139, and 80 days,

respectively, on the timber farm.

     On the days on which petitioners were at the timber farm,

petitioner worked constantly on the timber farm -- designing and

planning repairs and improvements, personally operating heavy

equipment such as graders, and working to improve and maintain

roads and buildings, to clear brush, to build new roads for fire

protection and for use in eventual harvesting of the timber.

     When at the timber farm, Mrs. Kurzet worked on the records

and other chores relating to maintenance of the timber farm, and

petitioners generally worked from sunrise until sunset on various

projects relating to the timber farm.

     When petitioner was not working on the timber farm,

petitioner would leave detailed written instructions for the

employees to follow in his absence, listing priority projects on

the timber farm on which the employees should work.

     In 1985, petitioners purchased a modest mobile unit and

placed it on the timber farm for use as an office and on-site

sleeping accommodation for the days they were at the timber farm.

Two of the rooms in the mobile unit were used as a computer room

and work room in connection with the timber farm.   One room was

used as a bedroom for petitioners.    The kitchenette and dining

area were used frequently for paperwork, recordkeeping, meetings,

and an office for the timber farm.
                               - 17 -

     Petitioners made and paid for modest improvements to the

mobile unit.    From 1985 through 1989, petitioners' total cost for

purchase of and improvements to the mobile unit was $147,643.

     Petitioners have never stayed on or used the timber farm for

personal purposes.   Similarly, petitioners have never stayed

overnight in the mobile unit for personal purposes.    Petitioners

remained in the mobile unit overnight only when they were at the

timber farm to work on the various repair and improvement

projects.

     After purchasing the timber farm in 1985, petitioner

continued to investigate, study, and consult with experts in the

timber industry as to how to manage the timber farm.   Petitioner

spoke frequently with representatives of Georgia Pacific and

observed how Georgia Pacific managed and harvested timber from

its timber farm property adjacent to petitioners' timber farm.

Petitioner often checked the market price for cut timber and

evaluated whether any of the timber on the timber farm should be

cut and sold.

     In 1985 and 1986, soon after petitioners purchased the

timber farm, timber prices fell dramatically in the United States

and, until at least 1989, remained below the estimated costs

petitioner would incur to harvest the timber.   Accordingly, on

advice of others in which he concurred, petitioner postponed the

cutting, harvesting, and sale of any of the standing timber on

the timber farm.
                                - 18 -

     As explained by one of the timber experts with whom

petitioner frequently consulted and with which explanation we

agree --


     the age class of the timber when * * * [petitioners]
     bought the property was roughly 30 to 40 years old. It
     was just reaching its peak in growth rate. Quality was
     becoming better by natural pruning of the limbs, log
     diameters were increasing. It was probably growing at
     10 percent a year, so it had been -- the worst thing
     * * * [petitioners] could have done would have been cut
     the timber shortly after they bought the property,
     which the recruise shows now that that was the smart
     thing to do. The volume’s -- over doubled.


     After 1989, even though prices for cut timber increased,

petitioner has continued to postpone the cutting and sale of

timber on the timber farm in part because the trees on the timber

farm were approaching 60 years of age -- at which point in time

trees move into a separate commercial class for trees over 60

years of age and increase in value by approximately 30 percent.

     From the time of purchase in 1985, until the time of trial

in 1995, the volume of timber in the trees on petitioners’ timber

farm has approximately doubled.

     As of May of 1995, the assets on petitioners’ timber farm

have a fair market value of approximately $3,524,000, as set

forth below:

                                             May 1995
           Timber Farm Assets            Fair Market Value

     Timber                                 $2,100,000
     Buildings and improvements                908,000
     Equipment and machinery                   516,000
                         Total              $3,524,000
                               - 19 -



     Petitioners never raised any cattle or sheep on the timber

farm, and, in approximately 1989, petitioners abandoned plans to

raise cattle and sheep on the timber farm due to lack of adequate

summer rainfall to sustain a second harvest of hay that the

cattle and sheep would need.

      There were no recreational amenities or activities of any

kind on the timber farm -- no tennis court, no putting green, no

swimming pool, no horses, no lake, no boating, no fishing, no

recreational or resort facilities.      The evidence is clear that

petitioners' timber farm was not owned, operated, or used by

petitioners for recreation, leisure, or other personal purpose.

     Petitioner personally set up and maintained computerized

accounting records with respect to expenses relating to the

timber farm.   As mentioned earlier, petitioners' records were not

totally adequate, and expenses relating to the timber farm were

often mislabeled or associated with the wrong activity.      The

evidence establishes, however, and respondent does not dispute,

that all of the expenses claimed on petitioners' original Federal

income tax returns and all of the expenses claimed on

petitioners' proposed revised Federal income tax returns with

respect to the timber farm were incurred and are fully

substantiated -- as to amount and payment -- by petitioners'

books and records.
                             - 20 -

     From the time of purchase in 1985 through May of 1995,

approximate total expenditures petitioners incurred and paid in

connection with the timber farm -- as allocated by petitioners

between petitioner's various activities and including

petitioners’ allocation for expenses of traveling to the timber

farm in petitioner's Lear jet (as explained more fully below) but

not including mere book items such as depreciation and recapture

thereof --- are summarized below:


      Category of Timber Farm Expenses                Amount

     Purchase Price of Timber Farm                $  569,000
     Cost of Improvements to Land                    400,000
     Cost of Equipment and Vehicles                  625,000
     Maintenance and Operating Expenses            1,160,000
     Lear Jet Operating Expenses                     428,000
       Cumulative 1985-May 1995 Expenses          $3,182,000


     In summary, by May of 1995, the $3,524,000 total estimated

fair market value of the timber located on petitioners' timber

farm, of the land, of the buildings, of improvements to the land

and buildings, and of the equipment and machinery purchased for

use on the timber farm reflected an unrealized profit (before

taxes) of approximately $342,000 over the total $3,182,000 that

petitioner paid over the years to purchase, improve, and maintain

the timber farm.

Tahiti Property

     In 1984, petitioners purchased 5.5 acres (consisting of

three adjacent parcels) of oceanfront property on the main island
                              - 21 -

of Tahiti for $1.1 million (Tahiti Property).    On the Tahiti

Property during the years in issue, petitioners or others paid by

petitioners remodeled and renovated a house, installed a solar

water heating system, a spa, a culinary water system, and

underground utilities, dredged a boat channel, added a satellite

TV system, converted the electrical power system to 110 volts,

installed a diesel power generator as an alternate source of

electricity, and made many other significant improvements.

     Petitioner personally designed and worked on many of the

projects undertaken at the Tahiti Property.    Petitioner hired an

individual to provide security for the property and to manage and

pay repairmen and workmen hired to work on the property.

     Generally, twice a year, petitioners traveled from

California or Utah to the Tahiti Property.    Typically, on each

trip, petitioners would stay at the Tahiti Property for a number

of weeks.

     To pay for costs incurred on the Tahiti Property in

connection with the various repair and improvement projects,

petitioners frequently transferred funds in U.S. currency from

their bank in California to a bank account they maintained in

Tahiti.   Petitioners have documentation of total funds

transferred to their bank account in Tahiti to pay for expenses

relating to the Tahiti Property, but the evidence does not show

or substantiate the specific use of the funds transferred to

petitioners' bank account in Tahiti.
                              - 22 -

     Petitioners allege that from 1984 through 1994 their

cumulative cash expenditures relating to purchase and

improvements undertaken on the Tahiti Property totaled

$1,760,000.


Lear Jet

     In 1984, because of anticipated frequent travel, petitioner

purchased a Lear jet airplane for $2 million.   The Lear jet was

used by petitioners for personal travel and to travel to

petitioners' timber farm in Oregon, to petitioners' Tahiti

Property, to computer symposiums, to machinery auctions, to pick

up equipment and parts needed in petitioners' various activities,

and to Park City, Utah, where petitioners skied and eventually

bought two condominiums and two vacant lots, on one of which

petitioners built a large personal residence.

     When traveling to the timber farm and to the Tahiti

Property, petitioner often would transport in the Lear jet

equipment and supplies that would be used at the timber farm and

on the Tahiti Property.   Occasionally, other family members would

travel with petitioners in the Lear jet.

     During 1987 through 1989, the first-class air fare between

Orange, California, where petitioners’ primary residence was

located, and North Bend, Oregon, the airport closest to

petitioners' timber farm, was approximately $1,600 per person.     A

commercial airplane trip between these two cities would take
                               - 23 -

approximately 9 hours and would involve two stops and at least

one change of planes.

       During the years in issue, petitioner paid a full-time pilot

approximately $30,000 a year to fly the Lear jet.    Petitioner

also was a pilot and served as the second pilot required to fly

the Lear jet.

       After flying petitioners to Oregon and to the Tahiti

Property, and while waiting to fly petitioners back to California

or Utah, the pilot, at petitioner’s request, would often assist

with various projects at the timber farm and at the Tahiti

Property.

       The Lear jet operating expenses for 1987, 1988, and 1989,

including depreciation totaled $667,709, $728,201, and $402,399,

respectively.

       Petitioner sold the Lear jet in 1994 for $2.45 million.

       For purposes of their books and records and their income tax

return treatment of expenses of operating the Lear jet,

petitioners each year made an allocation of expenses of the Lear

jet between what petitioners regarded as business and as personal

use.    For example, with regard to a trip from Los Angeles to Salt

Lake City on February 6, 1989, for the stated purpose "to see

condo, conferring with architect, and ski", the total 1.4 hours

each way for the Lear jet were allocated by petitioners .7 hour

for personal and .7 hour for business, because petitioners viewed
                              - 24 -

the trip as having a dual purpose (namely, to ski and to meet

with a contractor doing work on one of petitioners'

condominiums).


Personal Residence

     As indicated, during 1987, 1988, and until September 8,

1989, petitioners’ principal residence was located at 394 South

Esplanade, Orange, California.   This residence was an elegant 24-

room home on 3.5 lushly landscaped acres.   It had a swimming

pool, garden patio, servants' quarters, a garage workshop, garden

equipment buildings, and parking for up to approximately 40 cars.

     Petitioner had rooms in this residence in which petitioner

performed paperwork and computer tasks associated with his

various activities.   In their residence in Orange, California,

petitioners also performed bookkeeping, maintained reference

manuals and industry publications, and paid numerous bills

relating to their many activities.

     Petitioners' residence consisted of three levels.   In the

partial, walkout basement were located two rooms in one of which

computers and a copy machine were placed, a bathroom, a furnace

room, a small wine room, and a family room.

     On the main level were located a study or library in which

petitioner occasionally met with others on business matters, the

main living room, a large entry, a dining room, three bedrooms,

three full baths, and one-half bath.
                                - 25 -

     On the upper level of the residence were 3 rooms in which

were located many of petitioners' business, financial, and

personal records, additional computers, and a bath.    In one of

these rooms, Mrs. Kurzet reviewed, paid, and maintained files

relating to business and personal bills and activities.    In the

other two rooms, petitioner maintained an office and a lab with

electronic circuit testing equipment related to ALS and his

consulting duties.

     For 7 years, from 1984 to 1991, petitioner continued to be

available to act as a consultant to ALS, and petitioner received

a $10,000 per month consulting fee under the contract for the

sale of ALS.

     Over the course of the 3 years in dispute, petitioner

actually performed for ALS consulting services 3 or 4 times a

year.   Petitioner had no other clients as a consultant.

     In connection with his consulting for ALS, petitioner had

access to the offices of ALS.

     The primary real estate that petitioners owned and rented to

tenants consisted of a large industrial warehouse in southern

California.    Petitioners also owned and rented to tenants two

condominiums in Park City, Utah.    The evidence is not clear to

what extent petitioners used a real estate firm in Park City,

Utah, to manage the condominiums.
                                - 26 -

Petitioners’ Books and Records

     In 1984 and 1985, petitioner personally developed a

computerized bookkeeping system or software program for keeping

track of expenses relating to petitioners’ various personal,

business, and investment activities.     Petitioners’ bookkeeping

system represents a single entry system encompassing the debit

side of what is normally encompassed in a double-entry

bookkeeping ledger.   Petitioners' computerized system is

homemade, but it does allow petitioners to track their expenses

and to sort and analyze expenses by activity to which the

expenses are charged, by job, by payee, and by a number of other

criteria.

     Petitioners generally retained receipts relating to the

majority of their business and personal expenses, and such

receipts generally are still available.

     As indicated, petitioners' computerized bookkeeping system

did not keep track of income.    Relatively few transactions

produced large amounts of income for petitioners.     Mrs. Kurzet

kept track of income received by way of separate records and

files.   Generally, other than income on bank accounts and

security transactions, income petitioners received was deposited

into petitioners’ bank accounts.    Copies of the deposit receipts

were retained in a file, and at the end of each year all income

was entered onto spreadsheets that were given to the accountants

who prepared petitioners’ income tax returns.
                              - 27 -

     Petitioners’ computerized bookkeeping system for their

expenses has 153 different account numbers for each of nine

different classes of activity.   If an expense was regarded by

petitioners as a personal expense, it would be so identified.

     Many of petitioners’ business and personal expenses were

paid for by credit card.   Upon receipt of each monthly credit

card bill, petitioners would allocate each charge on the bill

between what they regarded as business and personal expenses.

If an expense was to be treated as a business expense,

petitioners would identify the particular business activity to

which the expense would be allocated.

     On their three checking accounts -- one located at a bank in

California, one located at a bank in Oregon, and one located at a

bank in Tahiti -- petitioners wrote checks to pay bills relating

to their business and personal activities.   Mrs. Kurzet would

prepare most of the checks to pay both business and personal

bills on a computer located in their residence in Orange,

California.


Petitioners’ Federal Income Tax Returns

     Petitioners acknowledge that many errors were made both on

their 1987, 1988, and 1989 Federal income tax returns as

originally filed and as submitted to respondent as proposed

revised returns.   Petitioners attribute many of the errors to the

fact that petitioners were not trained accountants, that
                             - 28 -

petitioners personally developed the bookkeeping system and

maintained the books and records relating to their various

activities, and they claim that only inadvertently were expenses

not properly allocated by petitioners to the proper activity.

     For example, on petitioners’ original returns for the years

in issue, petitioner’s Roll Royce and a condominium in Park City,

Utah, both of which were personal assets not used in any of

petitioners’ businesses, were incorrectly allocated to a business

activity and depreciation was claimed thereon.

     Petitioners’ and their accountants’ casualness -- in making

allocations on both their original and their proposed revised tax

returns between petitioners’ alleged business, investment, and

personal activities -- is illustrated by the allocation of costs

associated with an umbrella liability insurance policy relating

to petitioners’ Orange, California, residence.



          Q. [by petitioners’ lawyer] I just handed you another
     document entitled "Allocation of Umbrella Liability
     Insurance," which has been entered into evidence as Joint
     Exhibit 103-CY. Are you also familiar with this document?

          A. [by petitioners’ accountant] Yes, I am.

          Q.   And did you prepare it?

          A.   Yes, I did.

          Q.   Would you please describe it to the Court?

          A.   This is a document that I prepared entitled
     "Allocation of Umbrella Liability Deductions Claimed on
     Revised Returns." It simply allocates the umbrella
     liability portion of their insurance which is a component of
                         - 29 -

other insurance on the home, which is contained in Exhibit 5
-- or account 524 and Exhibit 116 again, and I’ve allocated
it equally to each one of these business activities based on
conversations with Mr. Kurzet on -- on his purpose for
purchasing that additional insurance.

     THE COURT: This is umbrella liability on -- on their
activities or on the home, the Orange County --

     THE WITNESS: It’s on -- my understanding, Your Honor,
is it’s activities that happen at four -- essentially four
locations: the home in Orange County, the timber farm, the
investment property in Tahiti, and the industrial building
in Orange County, and I simply allocated it equally to each
of those.

     THE COURT:   Not the home, not the Orange County home?

     THE WITNESS:   It does include the Orange County home.

     THE COURT:   Where is that on your schedule?

     THE WITNESS:   It would be the consulting.

     THE COURT: Consulting you labeled as "home"? It’s in
fact the home, and you labeled it consulting? How do you
get the "consulting" label for the home in Orange County?

     THE WITNESS:   Because that’s where the activity was
carried out.

     THE COURT: I’m missing something here.    There were
many activities carried on at the home --

     THE WITNESS:   Right.

     THE COURT: -- 20 percent of which allegedly is
consulting and business related, and 80 percent of which is
personal?

     THE WITNESS:   Right.

     THE COURT:   So where -- where is the personal aspect of
the allocation?   Where is the allocation --

     THE WITNESS:   We have not --

     THE COURT: -- of the umbrella liability to the
personal activities?
                                   - 30 -

             THE WITNESS:   We have not allocated any to personal
     here.

             THE COURT:   Why not?

          THE WITNESS: Mr. -- that was based on conversations
     with Mr. Kurzet that -- that his sole purpose for the
     additional insurance -- this is liability over and above the
     homeowners which we have taken personal portion, but for
     this --

             THE COURT:   Well, they have three and a half acres of--

             THE WITNESS:   Right.

          THE COURT: -- of country estate. They have a little
     swimming pool in the back yard, and you don’t allocate
     anything to personal?

             THE WITNESS:   We didn’t.

          THE COURT:      Why not?   Did they use the swimming pool
     for consulting?

             THE WITNESS:   No.

          THE COURT:      What do you think they used the swimming
     pool for?

             THE WITNESS:   It’s personal.

          THE COURT:      Did you know there was a swimming pool
     there?

             THE WITNESS:   Yes.

          THE COURT: And you did not allocate any of the
     umbrella liability policy to personal?

             THE WITNESS:   Not on this policy.


     Petitioners' original Federal income tax returns for 1985

through 1989, reflect, among other income, the following annual

income, before expenses, from consulting, interest on bank and

security investments, and rent:
                                  - 31 -


   Year     Consulting       Interest        Rent        Total

   1985      $120,000        $933,054      $304,845    $1,357,899
   1986       120,000         599,692       242,500       962,192
   1987       120,000         681,950       312,154     1,114,104
   1988       120,000         694,879       258,817     1,073,696
   1989       120,000         652,926       295,411     1,068,337


     On their books and records and tax returns, petitioners

regarded the timber farm as qualifying as a trade or business,

and petitioners generally treated current expenses incurred on

the timber farm as ordinary and necessary expenses of a trade or

business.

     The employees on the timber farm maintained a log of

expenses they incurred, and receipts were maintained with an

indication of the equipment and activity to which the expenses

related.

     Petitioners capitalized many of the costs relating to

capital assets located on or constructed on the timber farm.     For

example, the water reservoir was treated as a self-constructed

capital asset, and costs that petitioners allocated thereto were

not expensed but were charged to a capital construction account

for the reservoir.    On petitioners' original Federal income tax

returns for 1987, 1988, and 1989, a total of approximately

$70,000 was capitalized as part of the capitalized costs of the

reservoir and pond.

     On petitioners' proposed revised Federal income tax returns

for 1987, 1988, and 1989, a total of $174,000 in costs is
                              - 32 -

capitalized as reservoir and pond related costs.   Petitioners'

revised capital costs of the reservoir and pond are based, in

part, on the allocation to the capital costs of the reservoir of

a portion of the direct labor costs and of the indirect or

general expenses incurred each year on the timber farm and on

petitioners' estimate that 40 percent of total direct labor costs

incurred on the timber farm related to the reservoir and should

therefore be capitalized as part of the costs thereof.   Also, in

allocating general overhead costs of the timber farm to the

capital costs of the water reservoir and pond, petitioners

applied the above 40-percent direct-labor ratio.   Further, on the

proposed revised returns, petitioners allocated to the capital

costs of the reservoir 100 percent of the depreciation on the

reservoir-unique equipment but no portion of the depreciation on

the nonreservoir-unique equipment.

     In allocating general overhead costs of the timber farm to

the capital costs of the water reservoir and pond and in applying

the above 40-percent ratio (based on petitioners' computation of

the ratio of direct labor costs of the reservoir to total direct

labor costs incurred on the timber farm), neither petitioner’s

time and labor nor two other individuals’ time or labor, while

working on the reservoir and pond were factored into the direct-

labor percentage.   Petitioners did not factor into the direct-

labor percentage petitioner's personal labor on the reservoir

because no hard dollar cost was incurred therefor (i.e.,
                               - 33 -

petitioner's labor was contributed, and no wage or fee was paid

to petitioner for his labor on the timber farm).

     Petitioners' total $147,643 cost for purchase and

improvement of the mobile unit was capitalized, and depreciation

thereon was claimed by petitioners as an expense of the timber

farm.

     The primary difference between petitioners’ original Federal

income tax returns and petitioners’ proposed revised Federal

income tax returns, all of which were prepared by accountants and

experienced tax return preparers, relates to the Lear jet.      On

petitioners’ original Federal income tax returns, the Lear jet

was treated as a separate trade or business activity, and all

noncapital costs thereof were treated as current business

expenses, including depreciation.    On the proposed revised

returns, the Lear jet is not treated as a separate business

activity.    Rather, based on the Lear jet’s flight logs, the

noncapital costs of the Lear jet (including depreciation) are

allocated to the various separate other activities of petitioners

and treated as deductible section 162 business expenses,

deductible section 212 expenses, or as nondeductible personal

expenses depending on the business, investment, or personal

nature of the underlying activity to which the expenses are

allocated.

     On petitioners’ proposed revised Federal income tax returns,

petitioners treat their Tahiti Property as a for-profit
                               - 34 -

investment activity and the expenses thereof as deductible under

section 212 only from adjusted gross income and subject to the 2-

percent floor on miscellaneous itemized deductions under section

67.

      Petitioners’ proposed revised Federal income tax returns

continue to treat petitioners as engaged in a number of separate

trades or businesses, specifically a timber farm business, a

consulting business, and computer and real estate rental

businesses.

      On petitioners' original Federal income tax returns for the

years in issue, petitioners claimed $897,685 in total net losses

relating to the timber farm.   On petitioners’ Federal income tax

returns for the years 1985 through 1992, petitioners claimed

$2,114,325 in total net losses relating to the timber farm.

      By the end of 1993, on petitioners’ proposed revised Federal

income tax returns for 1985 through 1993, petitioners claimed

$3,051,225 in total net losses relating to the timber farm.

      On the line on each of their original Federal income tax

returns for each year in issue, to indicate whether they

maintained a home office, petitioners indicated "No".   However,

on the Schedules C of their original Federal income tax returns

for 1987, 1988, and 1989, relating to their various alleged

business activities (namely, the timber farm, the Tahiti

Property, the consulting business, and the computer and real

estate rental businesses), petitioners claimed expenses relating
                             - 35 -

to five rooms or one-fifth of all expenses of the Orange County

residence as deductible home office business expenses.


Respondent's Audit

     On audit, respondent did not dispute that petitioner's

consulting and his computer and real estate rental activities

constituted trade or business activities.   Respondent, however,

disallowed numerous expenses claimed on petitioners’ original

Federal income tax returns on the grounds, among others, that

petitioners had not substantiated many of the claimed expenses

and that the timber farm, Tahiti Property, and Lear jet

activities in which petitioners were engaged did not constitute

trade or business activities under section 162, nor for-profit

investment activities under section 212.

     With exception of expenses claimed relating to the Tahiti

Property, respondent now stipulates that essentially all of

petitioners' claimed expenses have been substantiated as to

amount and payment, but not necessarily as to character.

     The primary remaining adjustments will be addressed in the

following sequence: (1) Whether petitioners’ timber farm

constituted a for-profit trade or business activity under

section 162 and whether petitioners' Tahiti Property constituted

a for-profit investment activity under section 212; (2) whether

the percentage of timber farm general expenses that should be

capitalized as part of the capital costs of the water reservoir
                              - 36 -

and pond should take into account the hours that petitioner and

other individuals worked on the reservoir and pond and whether

some portion of costs relating to the nonreservoir-unique

equipment should be allocated to the reservoir and pond and

therefore capitalized; (3) whether petitioner’s use of the Lear

jet for petitioner’s business- and investment-related travel was

excessive and unreasonable and therefore whether the expenses of

the Lear jet are deductible under sections 162 or 212; and

(4) whether any portion of petitioners’ residence in Orange,

California, qualifies as a home office under section 280A and

whether expenses relating thereto are deductible.

     A number of other issues are also addressed, but various

adjustments that are still in dispute we do not address at this

time.   We believe that the parties should be able to settle the

remaining issues.


                             OPINION

Timber Farm and Tahiti Property

     To be treated as a trade or business under section 162 or

as a for-profit activity under section 212, taxpayers must be

engaged in the activity in question with the good faith

objective and actual purpose of making a profit.    Jackson v.

Commissioner, 864 F.2d 1521, 1525 (10th Cir. 1989), affg. 86

T.C. 492 (1986); Dreicer v. Commissioner, 78 T.C. 642, 643-644

(1982), affd. without opinion 702 F.2d 1205 (D.C. Cir. 1983).
                              - 37 -

     The issue is one of fact and is to be resolved not on the

basis of any one factor, but on the basis of all of the facts

and surrounding circumstances.   Allen v. Commissioner, 72 T.C.

28, 34 (1979); sec. 1.183-2(b), Income Tax Regs.   Petitioners

bear the burden of proving that their timber farm and their

Tahiti Property, during the years in issue, constituted the

actual, good faith conduct of a trade or business or of an

activity entered into for profit.   Rule 142(a).

     Section 1.183-2(b), Income Tax Regs., provides a list of

nine nonexclusive factors that are to be analyzed in determining

whether an activity was conducted with an actual and honest

objective of making a profit, as follows:   (1) The manner in

which the taxpayer carried on the activity; (2) the taxpayer's

expertise; (3) the time and effort expended by the taxpayer in

carrying on the activity; (4) the expectation that the assets

used in the activity would appreciate in value; (5) the success

of the taxpayer in carrying on the activity; (6) the taxpayer's

history of income or losses with respect to the activity;

(7) the amount of profits, if any, which are realized in the

activity; (8) the financial status of the taxpayer; and

(9) whether elements of personal pleasure or recreation are

involved.   More weight is to be given to objective factors than

to a taxpayer's mere statement of intent.   Beck v. Commissioner,

85 T.C. 557, 570 (1985).   Further, the absence of one particular
                               - 38 -

factor may be more significant than the superficial presence of

other factors.     Id.

     Citing Richmond Television Corp. v. United States, 345 F.2d

901, 907 (4th Cir. 1965), vacated on other grounds 382 U.S. 68

(1965), respondent argues that even if, in later years, the

timber farm constituted a trade or business or for-profit

activity, because of petitioners' failure to cut and sell any of

the timber during the years in issue, petitioners' activity with

regard to the timber farm should be regarded only as startup

activity, not activity of an existing trade or business or for-

profit activity.    Respondent's argument seems to be based on the

assertion that to be treated as a current for-profit activity,

the timber farm must have generated current income during the

years before us.

     We disagree with respondent’s arguments as to the timber

farm.   In each year, the trees on petitioners' timber farm were

increasing in size, width, volume, and, generally, in value

depending on market prices for cut timber.

     As the U.S. Dept. of Agriculture’s Forest Owners’ Guide To

Timber Investments, The Federal Income Tax, and Tax

Recordkeeping, No. 681 (1989), explains with regard to timber

growing activity, a timber farm activity may be regarded as a

current for-profit activity --


     even if the property is currently producing no income --
     provided that the timber growing activity is being engaged
                                - 39 -

     in for profit and the expenditures are directly related to
     the income potential of the property. [Id. at 19-20.]


     Respondent's argument fails to appreciate that in a very

real sense petitioners' timber farm, in every year, was

maintained for the purpose of generating income through the

growth and increase in value of the trees.   Respondent's

argument also fails to appreciate that in the timber business,

individual trees typically are harvested only once every 50 to

60 years.   Respondent’s argument, carried to the extreme, would

treat taxpayers in the timber business as engaged in that

business, for Federal income tax purposes, only in the

particular year they actually harvest trees.

     The evidence in this case indicates and supports our

conclusion that petitioners invested in their timber farm with

an actual and good faith profit objective and that petitioners'

operation and management of the timber farm constituted a

legitimate business activity.

     This case is not dissimilar from Allen v. Commissioner,

supra, and Hoyle v. Commissioner, T.C. Memo. 1994-592, in which

the taxpayers' financial resources, among other things,

explained the taxpayers' ability, over a number of years, to

absorb large expenses and losses until appreciation in the value

of the property is realized.    The explanation provided in Allen

v. Commissioner, supra at 36, is particularly apropos:
                              - 40 -

          Although the petitioners have sustained substantial
     current losses, they still hope, in the long run, to
     realize a profit because the fair market value of the lodge
     has appreciated * * *. The appreciation in value may, or
     may not in fact, offset the aggregate operating losses, but
     the prospect of realizing a profit on the sale of the lodge
     was bona fide when * * * [the taxpayers] decided to invest
     in the lodge and is sufficient to explain * * * [their]
     willingness to continue to sustain operating losses. Sec.
     1.183-2(b)(4), Income Tax Regs. Moreover, the out-of-
     pocket expenses graphically demonstrate that part of the
     losses were economic losses and not merely tax losses.

          Most importantly, the * * * [taxpayers] have
     established that they never used the lodge for their own
     personal enjoyment. Only in connection with the management
     of the lodge did the * * * [taxpayers] stay in it
     overnight. At all times, the lodge was either rented,
     available for rent, or being prepared to be rented. Thus,
     it offered them no recreational benefits.


See also St. Germain v. Commissioner, T.C. Memo. 1959-73,

involving the for-profit operation of a timber farm.

     On brief, respondent appears to concede that upon purchase

of the timber farm in the spring of 1985, petitioners had the

objective of owning and operating the timber farm for profit and

as a business.   Respondent, however, goes on to argue that

petitioners "abandoned these plans" during 1985 because of

falling timber prices.   We disagree.   Nothing suggests that

petitioners ever abandoned their profit objective with regard to

the timber farm.   In 1986, 1987, and 1988, because of an

unexpected decline in timber prices, petitioners simply deferred

cutting and selling the timber.

     Respondent also argues that the startup nature of

petitioners' timber farm, during the years before us, is
                                 - 41 -

established by petitioners' construction of a water reservoir on

the property in preparation to enter into the livestock

business.     We disagree.   The water reservoir related at least

equally to the fire risk to which existing trees on the timber

farm were exposed.

        Not a single recreational or personal objective for

petitioners' large cash investment in and extensive work and

activity on the timber farm has been suggested, and on brief

respondent concedes "there appear to be no elements of

recreation, in the traditional sense," involved in petitioners’

timber farm.     Not one of the factual witnesses respondent called

supported respondent's position that petitioners carried on the

timber farm as anything other than a good faith for-profit

business activity.

        With regard further to specific factors typically analyzed

under section 183, we conclude as follows.


        (1) Manner of conducting activity:   Petitioners carried on

the timber farm activity in a businesslike manner.      They worked

hard and long hours on the timber farm.      They hired competent

people to manage and secure the property on a day-to-day basis.

They made necessary and significant improvements to the timber

farm.     They did not use the timber farm for personal

entertainment, recreation, or retirement.      They were creative

and innovative in attempting to improve the timber farm and
                                - 42 -

eventually to realize substantial overall net profits therefrom

at the time the trees are cut and sold.    Petitioners'

bookkeeping was amateurish but extensive.

     (2) Expertise:   Petitioners were innovative, attentive,

informed, hardworking, capable, and no-nonsense owners and

managers of the timber farm.    They hired experienced employees,

and, where necessary, they hired experts to advise them on

aspects of the timber farm.

     (3) Time and effort:     Petitioner worked extremely long

hours and put a great deal of effort in maintaining and

improving the timber farm, and he expected the same of his

employees.

     (4) Appreciation in value of assets:     Petitioners' good-

faith intent and expectation that the timber on the timber farm

would appreciate in value are clear and have been proven

accurate.

     (5) Success in other activities:     Petitioner's success as a

businessman in a number of activities is unquestioned.

     (6) and (7) Income or losses realized:     Profits and

appreciation that appear to be available from petitioners'

timber farm have not yet been realized or cashed in.      But they

are there, ready to "harvest", in amounts significantly in

excess of petitioners' costs.

     Respondent argues that under a proper calculation of the

costs that petitioners incurred on their timber farm,
                               - 43 -

petitioners' actually incurred losses from their timber farm far

in excess of appreciation that occurred in the value of the

timber.   We disagree.   Respondent's calculations are flawed and

ignore the credible evidence as to the value of the timber and

other improvements to and assets located on the timber farm.

     (8) Financial status of taxpayers:    Petitioners are wealthy

and, during the years in issue, could well afford to wait to

realize expected profits from their timber farm until the prices

for cut timber and the market make it appropriate to maximize

those profits.

     (9) Personal pleasure or recreation:    None.



     In summary, the evidence indicates that petitioners in 1985

purchased an existing, mature timber farm, that petitioners

immediately and in each year undertook substantial activity, and

incurred substantial expenses, to protect and enhance their

timber farm business, that petitioners' activity in connection

with the timber farm constituted an existing for-profit trade or

business, and that petitioners' use of the timber farm did not

constitute a hobby, personal recreation, nor a personal,

nonbusiness activity.

     At the time of purchase in 1985 and during each of the

years in issue (namely, 1987 through 1989), petitioners intended

to, and did, hold and manage the timber farm as a for-profit

business activity.   Petitioners' ownership and operation of the
                                - 44 -

timber farm constituted a for-profit, business activity with

respect to which the ordinary and necessary expenses are

deductible under section 162.


Capital Costs of Water Reservoir and Pond

     Respondent argues that, using a direct-labor percentage,

the percentage of timber farm general expenses that should be

capitalized as part of the capital costs of the water reservoir

and pond on the timber farm should take into account the hours

that petitioner and his two employees worked on the reservoir

and pond and that some portion of the costs relating to the

nonreservoir-unique equipment should be allocated to the

reservoir and pond and therefore capitalized.

     We agree with respondent as to the need to include in the

direct-labor percentage (used to allocate general expenses of

the timber farm to the capital costs of the water reservoir and

pond) a factor for petitioner’s and his two employees’ labor on

the reservoir.

     With regard to the direct costs of the nonreservoir-unique

equipment, we do not believe an allocation to the capital costs

of the water reservoir and pond is appropriate.   The evidence is

not compelling that any nonreservoir-unique equipment was used

extensively on the water reservoir or pond.   We do not sustain

this adjustment.
                              - 45 -

Tahiti Property

     With regard to petitioners' Tahiti Property, our

conclusions are just the opposite.     Petitioners' Tahiti Property

has inherently associated with it extensive recreational and

personal aspects.   Petitioners have not satisfied their burden

of proof that the Tahiti Property was held and managed by them

for anything other than personal reasons.    Rule 142(a).

     Petitioners did not maintain complete and adequate records

with regard to expenditures made on the Tahiti Property.

Petitioners’ assertion as to significant appreciation in the

value of the Tahiti Property is neither credible nor persuasive.

Petitioners claim that, as a result of their efforts and

improvements, by 1994, the fair market value of the Tahiti

Property increased to $3.7 million and that, after their

purchase costs of $989,000 and additional costs of $597,000, for

total alleged cash expenditures of $1,760,000, petitioners have

realized on paper an economic gain of $1,940,000 in connection

with the Tahiti Property.

     No credible evidence supports either the amount or nature

of the claimed total expenses petitioners incurred on the Tahiti

Property, nor the fair market value of the Tahiti Property.

     We conclude that, during the years in issue, petitioners'

ownership and management of the Tahiti Property constituted a

personal activity with respect to which petitioners' expenses
                              - 46 -

are not deductible under either section 162 or 212.     See sec. 262.

Lear Jet

     Petitioners have not satisfied their burden of proving that

the large expenses of operating the Lear jet qualify as ordinary

and necessary business expenses of petitioners' timber farm, of

petitioner’s consulting business, or of petitioner's computer

and real estate rental businesses.     The expenses of purchasing,

maintaining, and operating a personal Lear jet to make a few

trips each year to Oregon and to Utah appear extraordinary.    On

the facts of this case, such expenses do not constitute ordinary

and necessary expenses of any of petitioners’ business

activities.

     Further, because the Tahiti Property does not qualify as a

business or for-profit activity, petitioners' transportation to

Tahiti in the Lear jet does not qualify as anything other than

personal travel.   The large transportation expenses (including

significant noncash expenses such as depreciation) associated

with the Lear jet appear to be out of the ordinary and to be

unnecessary particularly in light of the fact that petitioners'

timber farm was not producing any current income (due to

petitioner's decision to defer cutting any of the timber) and to

the fact that the Tahiti Property, as we have held, did not

constitute a for-profit activity.    See Commissioner v.

Heininger, 320 U.S. 467, 469 (1943), as to the factual nature of

this issue.
                             - 47 -

     The inconvenience that petitioners would have experienced a

few times a year in flying to the Oregon timber farm via

commercial air carrier we regard as minimal, as ordinary, and as

common, both for individuals and for businessmen.   That

petitioners -- as an ordinary and necessary business expense

under the facts of this case -- would incur the extravagant

costs of purchasing and maintaining a Lear jet to avoid such

infrequent and slight inconvenience has not been established.

See Harbor Med. Corp. v. Commissioner, T.C. Memo. 1979-291,

affd. without published opinion 676 F.2d 710 (9th Cir. 1982);

Bullock's Dept. Store, Inc. v. Commissioner, T.C. Memo. 1973-

249; Hatt v. Commissioner, T.C. Memo. 1969-229, affd. 457 F.2d

499 (7th Cir. 1972); cf. Palo Alto Town & Country Village, Inc.

v. Commissioner, 565 F.2d 1388 (9th Cir. 1977), revg. in part

and remanding T.C. Memo. 1973-223; Noyce v. Commissioner, 97

T.C. 670, 688 (1991).

     We conclude that petitioners, for the years before us,

should be allowed (with respect to each of the trips from

Orange, California, at which was located petitioner's consulting

and computer and real estate rental businesses, to their Oregon

timber farm) a business travel expense deduction under section

162 for the estimated or constructive travel expenses that

petitioners would have incurred based on first class air fare.

     With regard to the constructive expenses of transporting

equipment and machinery that petitioners apparently transported
                               - 48 -

with them to Oregon in their Lear jet, petitioners have provided

no basis on which we can estimate what such transportation

expenses would have been.    The evidence does not specifically

itemize or adequately describe any of the equipment or machinery

so transported, its weight, or size.    On the evidence before us,

we are unable to estimate constructive transportation expenses

of equipment and machinery to petitioners' Oregon timber farm.

     In summary, the use of a private Lear jet by petitioners in

connection with their Tahiti Property we regard as personal.

Even for a businessman as successful, busy, and wealthy as

petitioner, on the facts of this case, we regard petitioners'

use of a Lear jet in connection with travel to their timber farm

in Oregon as extravagant and not ordinary and necessary.

     Because of the substantial personal aspect of petitioners'

travel to Utah (namely, to ski and to purchase and build a

personal residence), we decline to make any attempt to estimate

what portion of petitioners' claimed travel expenses to Utah

might arguably be deductible as relating to the two rental

condominiums that petitioners owned in Park City, Utah.    The use

of the Lear jet in connection with petitioners' travel to Utah

we regard either as personal (and relating to petitioners'

skiing and personal residence that was being constructed in Park

City, Utah), or as extravagant and as not qualifying as ordinary

and necessary expenses of the two condominium rental units that

petitioners owned in Utah.
                               - 49 -


Personal Residence

     Petitioners claim that one-fifth of all expenses of their

residence in Orange, California, qualify under section 280A as

deductible home office expenses relating to petitioner's various

business and investment activities.     Petitioners claim that five

rooms or one-fifth of the residence was used exclusively for

business.    Respondent claims that none of the residence

qualifies as a home office and that none of the expenses of the

residence qualify as deductible home office expenses.    We agree

with respondent.

     The evidence does not establish that any portion of

petitioners' residence satisfies the threshold requirements of

section 280A(c)(1); namely, that the alleged home office

qualifies either as "the principal place of business" for at

least one business of the taxpayer, as a place in which the

taxpayer meets with clients in the normal course of at least one

of his business activities, or as a structure separate from the

residence.

     The evidence is clear that petitioners' alleged home office

does not qualify as a place in which petitioners regularly met

with clients, nor as a structure separate from their residence.

With regard to whether petitioners' alleged home office

qualifies as "the principal place of business" for any of

petitioner's businesses, the evidence is conspicuously thin.
                              - 50 -

     The principal place of petitioner's timber farm, which we

have found constituted a trade or business, obviously was

located in Oregon.   The principal place of petitioners'

consulting business would appear to be at the nearby southern

California offices of ALS, petitioner's former corporation and

his only client in his consulting business.

     The evidence in the record does not enable us to find that

the principal place of petitioner’s computer and real estate

rental businesses was located in a portion of petitioners'

residence.

     We acknowledge petitioners' extensive business and

investment activities.   The evidence in this case, however, on

this issue on which petitioners have the burden of proof does

not provide us with adequate information to make an affirmative

finding that petitioners' residence constituted the primary

place of petitioner's consulting or computer and real estate

rental businesses.   Commissioner v. Soliman, 506 U.S. 168, 176-

179 (1993).

     We emphasize that, under section 280A, the absence outside

the taxpayer's residence of any suitable office or place in

which the taxpayer may manage investments is not adequate.

Managing investments in one's personal residence does not

qualify the residence, or any portion thereof, as a home office.

An existing trade or business must be domiciled in the

residence.
                              - 51 -

     For the reasons stated, we conclude that no portion of the

expenses of petitioners' residence in Orange, California,

qualifies as deductible expenses of a home office.

     Respondent also claims that the mobile unit installed on

the timber farm constituted a personal residence of petitioners

and that for any of the expense of the mobile unit to qualify

for business expense deductions, the mobile unit or some portion

thereof must satisfy the requirements of section 280A.   We

disagree.

     During the years in issue, the mobile unit was not used as

a personal residence of petitioners.   Petitioners’ time on the

timber farm represented all work.   No portion thereof is to be

regarded as personal, and the mobile unit is not to be regarded

as a personal residence.   See Allen v. Commissioner, 72 T.C. 28,

32 (1979).

     Each of petitioners’ trips to and all of petitioners’ time

spent on the timber farm related to the work and business of the

timber farm.   Until September of 1989, petitioners lived in

their large personal residence in Orange, California, and

thereafter in their large personal residence in Park City, Utah.

The mobile unit located on the timber farm is not properly

regarded as a personal residence.   Petitioners’ use of the

mobile unit was work related and is not to be regarded as

personal.
                              - 52 -

     All of the expenses of the mobile unit are to be treated

either as ordinary or as capital expenses of petitioners’ timber

farm.


Additions To Tax

     For 1987 and 1988, respondent asserts against petitioners

the negligence and substantial understatement additions to tax

under sections 6653(a) and 6661, respectively.   For 1989,

respondent asserts against petitioners the accuracy-related

penalty under section 6662(a).

     Respondent emphasizes petitioners’ burden of proof as to

the above additions to tax and penalty, and as evidence of

petitioners’ negligence, respondent points to many errors on

petitioners’ Federal income tax returns.

     We do not believe, however, that the additions to tax and

penalty asserted by respondent against petitioners in this case

are appropriate.   Many of the errors on petitioners’ tax returns

are attributable to the amateurish books and records that

petitioners unfortunately established to keep track of their

many business, investment, and personal activities.   In our

opinion, the origin and maintenance of these books and records

are traced to petitioner’s overconfidence that he is a man of

many talents -- even bookkeeping and accounting.

     Despite his zeal to do everything himself, petitioner hired

an accounting firm to prepare petitioners’ income tax returns.
                              - 53 -

Having been hired, however, petitioners’ accounting firm and tax

return preparers surely bear some significant portion of the

fault for the fact that many of petitioners’ bookkeeping errors

were perpetuated on petitioners’ tax returns.   Many questions

that should have been asked by the accountants before preparing

and signing petitioners’ tax returns apparently were not asked.

A taxpayer’s strong personality is no excuse for the failure of

independent tax return preparers to exercise diligence and to

ask questions of their clients that are necessary and that

should be obvious to qualified tax professionals in the

preparation of tax returns.

     Petitioner’s reliance on professional tax return preparers

in the preparation and filing of their Federal income tax

returns for the years in issue constitutes a significant basis

for our conclusion that the additions to tax and penalty should

not be sustained in this case.   United States v. Boyle, 469 U.S.

241, 251 (1989); Chamberlain v. Commissioner, 66 F.3d 729, 732-

733 (5th Cir. 1995), affg. in part and revg. in part T.C. Memo.

1994-228; Freytag v. Commissioner, 89 T.C. 849, 888-889 (1987),

affd. 904 F.2d 1011, 1017 (5th Cir. 1990), affd. on another

issue 501 U.S. 868 (1991); Guenther v. Commissioner, T.C. Memo.

1995-280; Clark v. Commissioner, T.C. Memo. 1994-278; Beshear v.

Commissioner, T.C. Memo. 1990-544.

     We believe that the many errors that occurred on

petitioners' original and proposed revised Federal income tax
                              - 54 -

returns are reasonably explained by the factually oriented

nature of each of the issues in this case, by the factually

complicated nature of the many business, investment, and

personal activities in which petitioners were involved, by the

consuming manner in which petitioners undertook each of the

activities in which they became involved, by the nature and

volume of the many categories of expenses incurred by

petitioners each year, by the nature of the books and records

which petitioners innocently but amateurishly developed and

used, by the failure of petitioners’ accountants and tax return

preparers to prepare diligently the returns in question, and by

the unfortunate relationship that developed between petitioners'

and respondent's representatives throughout the course of this

dispute.

     No one of the above factors is determinative.        But we

believe that, on the unique facts and circumstances of this

case, imposition of any of the asserted additions to tax would

be inappropriate.   We so hold.


                                       Decision will be

                                  entered under Rule 155.
