                         T.C. Memo. 1995-544



                       UNITED STATES TAX COURT



                  LEONARD O. SCALES, Petitioner v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent


       Docket No. 6022-94.            Filed November 16, 1995.


       Leonard O. Scales, pro se.

       Thomas L. Fenner, for respondent.


                         MEMORANDUM OPINION

       DEAN, Special Trial Judge:   This case was heard pursuant to

the provisions of section 7443A(b)(3)1 and Rules 180, 181, and

182.




       1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years at issue. All
Rule references are to the Tax Court Rules of Practice and
Procedure.
                                - 2 -

     Respondent determined deficiencies in petitioner's 1990 and

1991 Federal income taxes in the amounts of $4,841 and $5,088,

respectively.

     After a concession2, the sole issue for decision is whether

petitioner is entitled to deduct expenses from engaging in

ranching activities during the taxable years 1990 and 1991.

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

The stipulation of facts and attached exhibits are incorporated

herein by this reference.    At the time the petition in this case

was filed, petitioner resided in Houston, Texas.

Background

     Petitioner has been employed by the U.S. Postal Service for

the past 25 years.    During the years at issue, petitioner worked,

on average, 45 hours per week, with normal work hours being 4:00

a.m. until 12:30 p.m.    Petitioner's annual salary was

approximately $35,000.    Petitioner has a bachelor's degree in

political science and has done work towards a master's degree in

city planning.

     At all relevant times, petitioner has been engaged in the

activity of raising and tending approximately 40 head of cattle

at a ranch he and his two sisters inherited from their father in

1977.    Located in Washington County, Texas, approximately 70

miles from petitioner's residence in Houston, the ranch consists

     2
      Respondent concedes that petitioner is entitled to a
dependency-exemption deduction for his mother for the tax years
1990 and 1991.
                                - 3 -

of 120 acres, 30 of which are used to grow hay, and 90 of which

are used to run and rotate the cattle.    Petitioner was born and

raised on a ranch, performing tasks which included plowing

fields, raising and breeding cattle, administering medication via

syringe, and hay harvesting.    Petitioner received some formal

education in agriculture while in high school, taking classes in

cattle breeding and raising, fertilization of land, and equipment

repair.

     Petitioner customarily travels to the ranch several times

per week in order to perform chores and to tend to the cattle.

Petitioner also spends most weekends at the ranch.    Since

inheriting an interest in the ranch, petitioner has spent more

than $25,000 on farm equipment.    Petitioner bought this equipment

with the intention of increasing productivity and decreasing the

man hours necessary for work on the ranch.

     Although the record is not clear on the matter, it appears

that petitioner began reporting income, deductions, gains, and

losses, with respect to his activities at the ranch on his 1982

Federal income tax return.   For the taxable years 1990 and 1991,

the years at issue, petitioner reported Schedule F gross income

from "Raising Cattle" and "General Livestock" in the respective

amounts of $1,068 and $1,200.    For those same years, petitioner

claimed Schedule F deductions for the following expenses:


      Item                       1990                 1991
Car and truck                   $2,722               $2,988
                               - 4 -

Depreciation                    6,183                 7,058
Feed purchases                  2,937                 2,277
Insurance                         --                    399
Conservation                      337                   --
Interest                        2,876                 1,361
Labor                             --                  1,298
Repairs & maintenance           2,790                 1,364
Supplies purchased              2,102                 1,921
Veterinary fees                   143                   --
Taxes                             --                    151
Legal & accounting                125                   --

Total                          20,215                 18,817


Petitioner claimed net farm losses in the amounts of $19,147 and

$17,617 for the taxable years 1990 and 1991, respectively.3

     To date, petitioner has not reported a net profit in any

year from his ranching activities.     At trial petitioner explained

that some of the losses in prior years were due to the theft or

death of some of his herd.   Petitioner produced no records,

however, nor could he recollect the exact number of such thefts

or deaths, or the year in which they took place.

     Petitioner concedes that he does not use a written budget to

control costs.   Furthermore, petitioner concedes that he has

never consulted an expert regarding available means by which he

could make his efforts profitable.     Petitioner has, however,

spoken about his cattle with a veterinarian friend, a lending

     3
      Although the taxable year 1989 is not at issue, the parties
stipulated that petitioner reported a net loss from his ranching
activities that year in the amount of $18,514. Furthermore, as
demonstrated by copies of petitioner's 1987, 1988, 1992, and 1993
Federal income tax returns admitted at trial, petitioner reported
net losses from his ranching activities those years in the
amounts of $22,691, $15,566, $9,233, and $15,587, respectively.
                               - 5 -

officer at Washington State Bank, his cousin, and other farmers.

Although petitioner does not maintain a separate checking account

for his ranching activities, he maintains monthly and yearly

ledger sheets which indicate items of ranch expense and amounts

paid.

     When asked at trial about the future profitability of his

activities, petitioner offered confused and often contradictory

testimony.   Nevertheless, we understand petitioner to have argued

that once he has paid off the debt on the farm equipment he has

purchased, he will be able to turn a profit from the sale of

calves born to his herd, the size of which he hopes will grow to

about 100 head.

     Respondent states that petitioner's ranching activities lack

a profit motive, and that he is not entitled to the Schedule F

deductions claimed for the years at issue.   Petitioner, of

course, disagrees and argues that he is entitled to the

deductions claimed as he engaged in the activities at the ranch

for the primary purpose of turning a profit.

Discussion

     In general, section 183(a) provides that if an activity is

not engaged in for profit, no deduction attributable to such

activity shall be allowed except as provided in section 183(b).

For purposes of section 183, the term "activity not engaged in

for profit" means any activity other than one with respect to

which deductions are allowable for the taxable year under section
                               - 6 -

162 or under paragraph (1) or (2) of section 212.     Sec. 183(c).

Section 1.183-2(b), Income Tax Regs., provides a non-exhaustive

list of 9 factors to consider in the determination of whether an

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

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

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

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

the expectation that assets used in the activity may appreciate

in value; (5) the success of the taxpayer in carrying on other

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

income or losses 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.     Resolution of a taxpayer's

profit motive is to be based on all the facts and circumstances

surrounding a case.   Engdahl v. Commissioner, 72 T.C. 659, 666

(1979).   However, in order for the taxpayer to prevail, the facts

and circumstances must indicate that the taxpayer entered into,

or continued, the activity with an actual and honest objective of

making a profit.   Dreicer v. Commissioner, 78 T.C. 642, 645

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

     Although several of the factors listed in Section 1.183-2(b)

favor petitioner, particularly the amount of time invested in his

activities and his moderate income level, we nevertheless find

that, based on all the facts and circumstances of this case,
                               - 7 -

petitioner lacked an actual and honest objective of making a

profit.

     Petitioner presented no credible evidence that he had any

real plan for reversing the continuous stream of net farming

losses he has reported over the past decade.      Petitioner has

never consulted an expert on the means by which he could turn a

profit, nor has he changed his operating methods in an effort to

correct what was obviously not working.       This is not surprising

considering that petitioner failed to keep any meaningful records

that would allow him to gauge the present or future profitability

of his activities.   Although petitioner maintained ledger sheets

recording his expenditures, there is no evidence that he used

this information in any constructive way.      The following exchange

at trial is particularly illuminating in this regard:


          Q: All right. When do you think that you will
     buy all of the equipment that you will have to buy,
     have it all paid off so that you will begin to make
     money at the ranch?

          A: I also expected -- I probably -- about '95 or
     '96. I owe on two more pieces of equipment, one note
     on each.

          *    *        *       *         *         *       *

          Q: All right. But after you pay off the
     equipment, though, won't -- certain of your expenses,
     they won't necessarily fall, decrease -- like, for
     example, the feed expense won't fall, or the supplies
     expense, or the truck expense. After you pay off your
     equipment, won't those expenses -- they shouldn't
     necessarily fall. Is that right?

          *     *       *       *         *         *       *
                                - 8 -

          A: I can't answer that, but the expenses could
     fall to a certain point. Depends on -- you know, it
     depends on what breaks down, or --

                THE COURT:   Or they could go up.

                THE WITNESS: Or it could go up. Way
           up. I can't make a statement saying they
           will fall, or that they will go up. I can't
           say that.


     In determining a taxpayer's profit motive, it is not crucial

that the expectation of profit be a reasonable one; it is enough

that the taxpayer has a bona fide expectation of realizing a

profit.   However, a record of continued losses over a series of

years, or the unlikelihood of achieving a profitable operation,

may be an important factor bearing on the taxpayer's true

intentions.   Bessenyey v. Commissioner, 45 T.C. 261, 274 (1965),

affd. 379 F.2d 252 (2d. Cir. 1967).     We note that it has been

recognized that:

     If losses, or even repeated losses, were the only
     criterion by which farming is to be judged a business,
     then a large proportion of the farmers of the country
     would be outside the pale. It is the expectation of
     gain, and not gain itself which is one of the factors
     which enter into the determination of the question.
     * * * [Riker v. Commissioner, 6 B.T.A. 890, 893
     (1927).]


Nevertheless, even in the case of farmers or ranchers, it is to

be borne in mind that the goal must be to realize a profit on

one's entire operation.   This presupposes not only future net

earnings, but also sufficient net earnings to recoup losses which
                                - 9 -

have been sustained in the intervening years.    Bessenyey v.

Commissioner, supra at 274.

     Even if we accept that petitioner will achieve his goal of

increasing the size of his herd to 100 head, and thereby the

number of calves born and available for sale, petitioner has

failed to produce any evidence that this will ever produce income

in excess of his expenses.    In light of the foregoing, we find

that petitioner has failed to demonstrate that he possessed the

requisite profit motive for his ranching activities.4

Accordingly, we sustain respondent on this issue.

     Section 183(b) states that:

     In the case of an activity not engaged in for profit to
     which subsection (a) applies, there shall be allowed --

          (1) the deductions which would be allowable under
     this chapter for the taxable year without regard to
     whether or not such activity is engaged in for profit,
     and

          (2) a deduction equal to the amount of the
     deductions which would be allowable under this chapter
     for the taxable year only if such activity were engaged
     in for profit, but only to the extent that the gross
     income derived from such activity for the taxable year
     exceeds the deductions allowable by reason of paragraph
     (1).

Substantiation of the Schedule F expenses was not raised as an

issue in this matter.   Based on the record, the Court is

satisfied that petitioner incurred expenses equal to the gross


     4
      We have considered the possibility that petitioner might be
holding the ranch for appreciation and sale in the future for
profit. See sec. 1.183-2(b)(4), Income Tax Regs. Petitioner,
however, stipulated that he plans to build a house on the ranch
and retire there.
                              - 10 -

income reported from the sale of calves during the years at

issue.5   Accordingly, petitioner is allowed, under section

183(b)(2), a deduction of expenses each year equal to the gross

income reported.

     To reflect the foregoing,

                                         Decision will be entered

                                       under Rule 155.




     5
      It is not clear from the record whether petitioner incurred
items of expense contemplated by sec. 183(b)(1) in either of the
years at issue. As there are sufficient expenses which otherwise
fall under sec. 183(b)(2), however, we are satisfied that
petitioner is entitled to a deduction each year in an amount
equal to the gross income reported from his ranching activities.
