                  T.C. Summary Opinion 2003-130



                     UNITED STATES TAX COURT



  THOMAS E. TRUSKOWSKY AND SUSAN L. TRUSKOWSKY, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 14066-01S.           Filed September 15, 2003.



     Harry D. Shapiro and Christopher J. Pippett, for

 petitioners.

     Innessa Glazman and Warren P. Simonsen, for respondent.



     DEAN, Special Trial Judge:   This case was heard under the

provisions of section 7463 of the Internal Revenue Code as in

effect at the time the petition was filed.   Unless otherwise

indicated, all other section references are to the Internal

Revenue Code in effect for the years at issue.    The decision to
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be entered is not reviewable by any other court, and this opinion

should not be cited as authority.

     Respondent determined deficiencies in petitioners' Federal

income tax of $17,656 for 1996 and $19,849 for 1997.   The issue

for decision is whether petitioners' business losses constitute

passive activity losses.   The amount of petitioners' allowable

itemized deductions and personal exemptions will be determined by

our disposition of the contested issue.

     The stipulated facts and exhibits received into evidence are

incorporated herein by reference.   At the time the petition in

this case was filed, petitioners resided in Moatsville, West

Virginia.

                            Background

Petitioners' Vocations

     During the years 1996 and 1997, petitioners resided in

Trappe, Pennsylvania, and both were full-time employees at a

large computer software corporation, the Oracle Corporation

(Oracle).   Petitioner Susan Truskowsky was a program manager in

the Program Management Group at Oracle Consulting.   Her job

required her to travel to projects around the country, mostly in

the Mid-Atlantic region and to Dallas, Texas.   In 1996,

petitioner Thomas Truskowsky was employed as senior principal

consultant for Oracle.   In 1997 he became a technical manager.
                                 - 3 -

Mr. Truskowsky commuted to central New Jersey from Trappe,

Pennsylvania, every day.

Petitioners' Cattle Breeding Activity

     Petitioners' cattle breeding activity began in 1994, when

they bought their first cows.    They were "Limousin" cattle, a

beef breed from France.    Petitioners decided to go into the

Limousin cattle business after considering other breeds of

cattle.

     The Farm

     Petitioners needed a place to board their cattle as they did

not own a farm during the years in issue.    Petitioners learned

about K-C Delight Farm (K-C) from a local newspaper that

advertises to farmers.    They visited K-C and other farms before

choosing K-C.   Chester Deitch, who operated K-C, did not own the

farm, but rented it.   He operated K-C primarily as a "multiple

acreage" general and dairy farm.    Near his home and included in

Mr. Deitch's farmland rental was a parcel of land where he

boarded petitioners' cattle.    Mr. Deitch maintained approximately

two dozen cattle of his own on the same parcel where he boarded

petitioners' cattle.   Mr. Deitch maintained his and petitioners'

animals in different paddocks.    Petitioners' animals had their

own shelter and automatic watering systems.

     Mr. Deitch did not live on the parcel of property where he

kept petitioners' cattle, at 117 Simmons Road.    There were,
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however, boarders in the house at that location, and Mr. Deitch's

brother, who helped him on the farm, lived on Simmons Road in the

"Summer house".    As the Simmons Road location was somewhat

isolated and Mr. Deitch and his brother had animals, tools, and

equipment that they needed to keep secure, there was an

understanding that the tenants would keep an eye on the farm for

Mr. Deitch and let him know if they saw someone come onto the

property.

     Mr. Deitch lived nearby in a house on Deitch Mill Road.      His

farm on Deitch Mill Road was used to keep dairy cows.     According

to Mrs. Truskowsky, she "didn't actually go there very often".

     The Agreement

     Mr. Deitch had an oral agreement with petitioners to board

their animals in the sheltered barn and pasture paddocks, and to

feed and "care" for their animals for $1 per day, per head of

cattle.   The agreement continued for about 2-1/2 years, from

Spring of 1995 until February of 1998.    The number of animals

boarded varied from week to week and month to month from about 15

to 20 head.    Mr. Dietch fed the cattle twice a day.   They were

fed silage hay and supplemental grain, some of which was grown by

Mr. Deitch on his farm.    Through the daily contact for feeding,

the animals were observed for general health and veterinary

needs.    If Mr. Deitch detected problems that were not too

complicated, he gave them any needed shots or other treatment.
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If a veterinarian was required, he generally contacted the

veterinarian.   He would also contact petitioners when the

veterinarian was needed, as they were responsible for the

resulting expenses.   Mr. Deitch estimates there were from 8 to 10

calves born to petitioners' animals during a year.   He, his wife,

or other family member was present for the births.   He spent, on

average, about 1-1/2 hours a day with petitioners' animals,

feeding and observing them, and performing other miscellaneous

tasks.

     Mr. Deitch did not invoice or bill petitioners under the

oral agreement, but petitioners kept track of the number of

cattle present at K-C during each month in 1996 and 1997 and,

generally, paid accordingly.

     Veterinary Breeding Services

     From time to time during the period at issue, petitioners'

cattle received veterinary services at some distance from K-C.

The services included in vitro fertilizations and embryo

transfers, techniques which particularly interested petitioners.

In 1996, some of the cattle were transported to a facility called

Em Tran in Elizabethtown, Pennsylvania.   In 1997, cattle were

sent to both Em Tran and Genetic Visions in Coatesville,

Pennsylvania.

     One or both of petitioners visited Em Tran about 8 times

over 2 years, and they went to Genetic Visions about 14 times in
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1997.    When petitioners went to Em Tran they checked the health

of their cattle and visited Dr. Henderson at the facility to

receive instruction on the "embryo process, the in vitro

process."    They also discussed these matters with Dr. Evans at

Genetic Visions.    At first, petitioners came to Genetic Visions

together, then sometimes Mr. or Mrs. Truskowsky would come alone,

as their schedules permitted.    When they came with their animals,

petitioners would typically spend from 1 to 6 hours working at

the facility.

        To get the cattle from K-C to facilities at Em Tran or

Genetic Visions, petitioners had to contract a livestock hauler

to transport the cattle.    The hauler would arrive at the farm,

and the cattle were loaded onto the truck, taken to the facility,

and unloaded.    The process would be reversed to return them to

the farm.

     Shows and Auctions

     Petitioners participated in buying their Limousin cattle at

shows and auctions.    Most of their purchases were initiated

through a broker using e-mail or fax.    But petitioners did attend

some shows and auctions in 1996 and 1997.

     Petitioners' Visits to K-C

     During the years at issue, petitioners would periodically

visit K-C to pay Mr. Deitch and to inspect the health and

condition of their animals.    Petitioners used grain to attract
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the cattle close enough to observe their general condition.

Petitioners would sometimes stop on the way to the farm to

purchase the grain, which took from a 1/2 hour to 1 hour.     The

farm, located between Gettysburg and Mechanicsburg, Pennsylvania,

was halfway between petitioners' home in Trappe and Mrs.

Truskowsky's mother's home near Washington, D.C.     The distance

between Trappe and the farm is approximately 99 miles.     Like Mrs.

Truskowsky's mother's home, the Oracle office where Mrs.

Truskowsky worked is located in the Washington, D.C. area.     It

was convenient for Mrs. Truskowsky, when she visited K-C on the

weekend, then to go to stay at her mother's house to prepare for

the coming work week instead of returning home to Trappe.

     Petitioners' Farm Search

     Petitioners had a desire to acquire a farm of their own.

During 1996 and 1997, they used the services of a real estate

agent to aid them in locating one.      Petitioners made trips with

an agent to look at farm property offered for sale.     Petitioners

eventually purchased a farm in West Virginia in November of 1998.

     Reconstructed Logs and Tax Returns

     Although petitioners maintained certain records of their

Limousin cattle activity, they did not keep any log of the actual

number of hours they devoted to the activity.     At the request of

their attorneys, petitioners prepared for use at trial documents
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that attempt to demonstrate the actual hours they devoted to

their Limousin cattle activity during 1996 and 1997.

     Petitioners filed with each of their 1996 and 1997 Federal

income tax returns, a Schedule C, Profit or Loss From Business,

for their cattle activity.    For 1996, petitioners reported a

Schedule C loss of $45,833.    Petitioners for 1997 reported a

Schedule C loss of $51,972.

                              Discussion

     Because the Court decides this case without regard to the

burden of proof, section 7491 is inapplicable.

Passive Activity Losses

     Section 469(a) states that a passive activity loss is not

allowed to an individual as a deduction for the year in which it

is sustained.   Section 469(d)(1) defines a passive activity loss

as the amount by which (A) the aggregate losses from all passive

activities for the taxable year exceed (B) the aggregate income

from all passive activities for such year.

     Passive activities are those activities which involve the

conduct of a "trade or business" in which the taxpayer does not

"materially participate."    Sec. 469(c)(1).   The term "trade or

business" for this purpose means any activity in connection with

any trade or business or "any activity with respect to which

expenses are allowable as a deduction under section 212."     Sec.

469(c)(6)(B).
                               - 9 -

     Material Participation

     Section 469(h)(1) provides that generally an individual

shall be treated as materially participating in an activity only

if he or she is involved in the operations of the activity on a

basis that is "regular", "continuous", and "substantial".

Congress directed the Secretary of the Treasury (Secretary) to

prescribe such regulations as may be necessary or appropriate to

carry out the provisions of section 469, including regulations

that specify what constitutes material participation.   Sec.

469(l)(1).   Both temporary and final regulations relating to the

meaning of the terms "participation" and "material participation"

have been promulgated under section 469.

     The term "participation" means generally "any work done by

an individual (without regard to the capacity in which the

individual does the work) in connection with an activity in which

the individual owns an interest at the time the work is done".

Sec. 1.469-5(f)(1), Income Tax Regs.   Temporary regulations

issued under section 469 provide certain exceptions to the

definition of participation.   One particular provision, section

1.469-5T(f)(2)(ii), Temporary Income Tax Regs., 53 Fed. Reg. 5727

(Feb. 25, 1988), provides that work done by an individual in the

capacity of an investor in an activity shall not be treated as

participation by the individual in the activity unless the

individual is involved in the day-to-day management or operations
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of the activity.   Work done by an individual as an investor in an

activity includes but is not limited to:    (1) Studying and

reviewing financial statements or reports on operations of the

activity; (2) preparing or compiling summaries or analyses of the

finances or operations of the activity for the individual's own

use; and (3) monitoring the finances or operations of the

activity in a non-managerial capacity.     Id.

     Temporary regulations relating to the meaning of the term

"material participation" in section 469(h)(1) provide that, in

general, an individual shall be treated, for purposes of section

469 and the regulations thereunder, as materially participating

in an activity for the taxable year if and only if--(1) The

individual participates in the activity for more than 500 hours

during such year; (2) the individual's participation in the

activity for the taxable year constitutes substantially all of

the participation in such activity of all individuals (including

individuals who are not owners of interests in the activity) for

such year; (3) the individual participates in the activity for

more than 100 hours during the taxable year, and such

individual's participation in the activity for the taxable year

is not less than the participation in the activity of any other

individual (including individuals who are not owners of interests

in the activity) for such year; (4) the activity is a

"significant participation" activity for the taxable year, and
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the individual's aggregate participation in all significant

participation activities during such year exceeds 500 hours; (5)

the individual materially participated in the activity for any 5

taxable years (whether or not consecutive) during the 10 taxable

years that immediately precede the taxable year; (6) the activity

is a personal service activity, and the individual materially

participated in the activity for any 3 taxable years preceding

the taxable year; or (7) based on all of the facts and

circumstances, the individual participated in the activity on a

regular, continuous, and substantial basis during such year.

Sec. 1.469-5T(a), Temporary Income Tax Regs., 53 Fed. Reg. 5725

(Feb. 25, 1988).

     In determining whether a taxpayer "materially participated"

in an activity, the participation of a spouse shall be taken into

account.   Sec. 469(h)(5).

     Respondent determined that petitioners did not materially

participate in the cattle activity and that petitioners' business

losses therefore constitute passive activity losses.   Petitioners

contend that they participated in the activity for more than 500

hours (Test 1), or for more than 100 hours during the taxable

year, and that their participation was not less than the

participation in the activity of any other individual (Test 3).
                              - 12 -

          Test 1

     In the time logs they prepared for trial, petitioners show

participation for a total of 777 hours for 1996 and 830.8 hours

for 1997 in their Limousin cattle activity.   Of the 777 hours

claimed for 1996, 404 are related to trips to K-C.   Of the 830.8

claimed for 1997, 310.5 are related to trips to K-C.

     Citing Goshorn v. Commissioner, T.C. Memo. 1993-578, and

Toups v. Commissioner, T.C. Memo. 1993-359, petitioners argue

that their travel between their home and K-C constitutes "work"

done in connection with their cattle activity.   See sec. 1.469-

5(f)(1), Income Tax Regs.   The Court recognizes that travel in

some circumstances can be "work" done in connection with a trade

or business.   In this case, for example, petitioners' travel

between K-C and the facilities at Em Tran and Genetic Visions is

"work" done in connection with their cattle activity.   The Court,

however, disagrees with petitioners' conclusion that all their

travel here was "work".

     Neither of the cases they cited supports the inclusion of

commuting hours as hours of "work" for purposes of section 1.469-

5(f)(1), Income Tax Regs.   Commuting is an inherently personal

activity and as such does not constitute "work" in connection

with a trade or business.   See Fausner v. Commissioner, 413 U.S.

838, 839 (1973) ("We cannot read section 262 of the Internal

Revenue Code as excluding such expenses from 'personal'
                              - 13 -

expenses"); Commissioner v. Flowers, 326 U.S. 465 (1946); sec.

1.262-1(b)(5), Income Tax Regs. (taxpayer's choice to live at a

distance from his place of business is personal, and a taxpayer's

costs of commuting to his place of business or employment are

personal).   Petitioners' total claimed hours of "work" must be

reduced by the number of hours each spent in the personal

activity of commuting between their home in Trappe, K-C, and Mrs.

Truskowsky's mother's home near Washington, D.C.

     The Court estimates an approximate travel time of 2 hours

from petitioners' home to K-C and 2 hours back or to go on to

Mrs. Truskowsky's mother's house, a total trip of about 4 hours.

For 1996, Mr. Truskowsky estimated that he made 36 trips to K-C,

which when multiplied by 4 hours is 144 hours.   Mrs. Truskowsky

estimated that she made 38 trips and therefore spent about 152

hours commuting to and from the farm.   Petitioners spent a total

of 296 hours commuting to and from the farm in 1996 that must be

deducted from their total claimed hours of work.   For 1997, Mr.

and Mrs. Truskowsky claimed 27 and 34 trips, respectively, to K-C

for a total of 244 commuting hours that must be deducted from

their total claimed hours.

     Section 1.469-5T(f)(2)(ii), Temporary Income Tax Regs., 53

Fed. Reg. 5727 (Feb. 25, 1988), provides that work done by an

individual in the individual's capacity as an investor in an

activity shall not be treated as participation by the individual
                             - 14 -

in the activity unless the individual is involved in the day-to-

day management or operations of the activity.   The Court is

unable to find from a preponderance of the evidence that

petitioners were involved in the day-to-day management or

operations of their Limousin cattle activity.   The Court finds,

therefore, that hours claimed for the activities of "Books" for

Thomas (4 for 1996 and 5 for 1997) and Susan Truskowsky (21.5 and

46), "Wire Xfers/Foreign Drafts" (9 for 1996 and 4.5 for 1997)

for Susan Truskowsky, "Shows and Sales" for Thomas (25 and 29),

and Susan Truskowsky (96 and 69), "Other Travel" for Thomas (2

and 18.5), and Susan Truskowsky (4 and 27.5) and "Farm Purchase"

for Thomas (52 and 36), and Susan Truskowsky(67 and 41), may not

be counted as participation in the cattle activity.   Reduced by

the amounts stated, petitioners' participation in their Limousin

cattle activity was in both years less than the 500 hours

required to qualify under test 1 as material participation.

          Test 3

     The Court finds that although petitioners did not

participate for 500 or more hours, they did participate in the

activity for more than 100 hours during the taxable year.   In

order to qualify under Test 3, however, they must also show that

their participation in the activity for the taxable year is not

less than the participation in the activity of any other

individual (including individuals who are not owners of interests
                               - 15 -

in the activity) for such year.    Mr. Deitch testified that he

participated in petitioners' cattle activity, on average, about

1-1/2 hours day.    When his daily participation is multiplied by

365, it is well over 500 hours a year, more than that of

petitioners.

     At trial there was some testimony and cross-examination

suggesting that Mr. Deitch did not contribute as many hours to

the activity as that to which he testified.    On the other side of

the scale, there was testimony and evidence suggesting that

petitioners' logs exaggerate the number of hours they contributed

to the activity.    The result is that the Court finds from a

preponderance of the evidence that petitioners' level of

participation in their cattle activity did not exceed Mr.

Deitch's day-to-day participation in the activity in either year.

Petitioners do not meet the requirements of Test 3.

           Test 7

     Although petitioners have not met the requirements of either

of the tests on which they relied in their trial memorandum and

at trial, there is an additional test under which they might yet

qualify.   Based on all the facts and circumstances, if

petitioners nevertheless participated in the Limousin cattle

activity on a "regular, continuous, and substantial" basis during

such year, they have materially participated even if they do not
                               - 16 -

pass any of the other six tests.    Sec. 1.469-5T(a)(7), Temporary

Income Tax Regs., 53 Fed. Reg. 5725 (Feb. 25, 1988)(Test 7).

     The standard for Test 7 is not explained in the temporary

regulations; however, the very structure of the regulations

suggests that it will apply only in exceptional circumstances

where the more specific and detailed requirements of the other

six tests are not met.   It is possible that the other six tests

may not be met, yet the taxpayer either works full time in the

business, or does all the activities necessary to conduct the

business, even though that is a small amount of work compared to

other businesses in general.   See H. Conf. Rept. 99-841, 1986-3

C.B. (Vol.4) 148.   It is also true that a taxpayer is more likely

materially participating in an agricultural activity if he is

conducting the activity at or near his primary residence.     See S.

Rept. 99-313, 1986-3 C.B. (Vol. 3) 733.

     Petitioners lived almost 100 miles from their Limousin

cattle activity, did not perform all of the activities necessary

to the conduct of the activity and did not perform the activity

on a full-time basis.    In addition, there was another individual

who was involved on a daily basis with the activity.   All of the

facts and circumstances of this case do not show, by a

preponderance of the evidence, that despite not meeting the

requirements of the other six tests, petitioners participated in

the Limousin cattle activity on a regular, continuous, and
                             - 17 -

substantial basis during 1996 and 1997.   They do not meet the

requirements of Test 7.

                           Conclusion

     Respondent's determination that petitioners' business losses

for 1996 and 1997 constitute passive activity losses is

sustained.

     Reviewed and adopted as the report of the Small Tax Case

Division.

                                          Decision will be entered

                                   for respondent.
