                        T.C. Memo. 1996-39




                      UNITED STATES TAX COURT



  TOLBERT S. WILKINSON AND SUZANNE T. WILKINSON, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 14862-93.                Filed February 1, 1996.



     Irwin D. Zucker, for petitioners.

     Gerald L. Brantley, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     KÖRNER, Judge:   Respondent determined deficiencies and

penalties with respect to petitioners' Federal income taxes for

the years and in the amounts as follows:

                                                  Penalty
     Year                   Deficiency          Sec. 6662(a)

     1989                    $36,896               $7,379
     1990                     31,212                6,242
                                  2

       All statutory references are to the Internal Revenue Code

in effect for the years in issue, and all Rule references are to

the Tax Court Rules of Practice and Procedure, except as

otherwise noted.

     The issues for decision are:     (1) Whether petitioners'

medical corporation and ranching activity should be considered as

one activity for purposes of section 183; (2) whether petitioners

were engaged in their ranching activity with the objective of

making a profit for purposes of section 183; and (3) whether

petitioners are liable for the accuracy-related penalty for a

substantial understatement of income tax under section 6662(a)

and (b)(2).

                          FINDINGS OF FACT

     Some of the facts are stipulated and are so found.     The

stipulations of facts and exhibits attached thereto are

incorporated herein by this reference.     Respondent objects to the

admission of the third supplement to the stipulations of facts,

and the exhibits attached thereto, alleging that petitioners did

not timely submit the exhibits contained therein, thereby

preventing respondent from using the information contained within

the documents for impeachment purposes at trial.     Respondent had

agreed to one extension of the submission deadline established by

the pretrial order, yet petitioners did not provide the documents

by this deadline.   The exhibits consist of copies of bills and

canceled checks.    At trial, respondent stipulated their
                                   3

authenticity.   Petitioner seeks to introduce the exhibits to show

that the records were kept, and that these were the records, but

not necessarily that these records were correct or accurate.        The

admission of these documents for that limited purpose will not

prejudice respondent, and accordingly the objection is overruled.

Petitioners resided in San Antonio, Texas, at the time the

petition was filed, and filed joint income tax returns for the

years in issue.   References to petitioner are to Tolbert S.

Wilkinson.

     Petitioner was a plastic surgeon employed by the Institute

for Aesthetic Plastic Surgery (the Institute), a corporation

wholly owned by petitioner in the years in issue.      Petitioner

wife is also employed by the Institute.      Petitioner received his

undergraduate degree from Wake Forest University, graduated from

Duke University Medical School in 1962, and has practiced in the

field of surgery.   Petitioner has no formal education in

agriculture, horses, cattle, or farming/ranching-related

activities.

     Petitioner has been involved with horses in different

capacities since the mid-1970's.       Petitioner became involved in

polo in the early 1980's.   The Retama Polo Center near San

Antonio attracted petitioner because it hosted numerous large

social events which garnered a great deal of publicity.

Petitioner concluded early in his career that because his

services were elective, there was a limited clientele who could
                                  4

afford them, and he believed those involved in equestrian

activities, traditionally an activity of the wealthy, would be a

source of patients for him.

     Initially, in some years prior to those before us,

petitioner kept horses at an independent ranch.      Petitioner began

looking for land to purchase to start his own ranch, to avoid

paying the fees to the independent ranch, and to facilitate

breeding.   Petitioner intended to retire to the ranch and

possibly open a small family practice, or in the alternative to

sell the ranch upon retirement.       He stated at trial that a horse

ranch would allow him to occupy himself with something about

which he had some know-how, a statement that may have startled

some of his patients.

     On March 31, 1987, petitioners purchased 52 acres in Bandera

County, Texas, for $287,250.    On October 7, 1988, petitioners

purchased 50-acre and 10-acre pieces of property in Bandera

County, Texas, each for $105,000.      The total cost basis in the

properties (considered as a whole) was $497,250.

     At the end of 1988, petitioners hired a Mr. White to live on

the ranch and act as foreman.    Petitioner initially bought and

sold horses, and later added the training and breeding of horses,

a cattle business, a hay business, deer and goat operations, a

general store, and guest accommodations.

     Petitioner considered that polo ponies could sell for as

much as $20,000, but he aimed to sell them in the $5,000 to

$6,000 range.   Petitioner targeted new polo players as customers;
                                   5

he sold four horses between 1987 and 1992 at an average of

approximately $2,400 per horse.        Petitioner's primary sources of

ponies were area dude ranches, which would periodically bring a

group of ponies to the ranch for petitioner to ride and try out.

Petitioner would then purchase the ponies he thought had

potential.   Petitioner considered that it would then take as many

as 6 years to train them.   To showcase the ponies for sale, he

would ride them at polo matches.

     Petitioner played polo, rode and trained the polo ponies in

part, and hosted various social gatherings at the ranch.

Petitioner enjoyed training and riding the polo ponies, and on

one occasion stated that it was wonderful to get on a horse after

a long day of surgery.   The social gatherings often received

publicity; petitioner considered that this type of publicity

would attract clients to the medical corporation.       Petitioner was

a contributing editor of Polo magazine, which periodically

printed articles by petitioner, as well as his picture and

address.

     Petitioners spent on average 3 weekends per month at the

ranch, as well as some weekday evenings.       Mr. White saw to the

day-to-day affairs of the ranch, but deferred to petitioner for

any major decisions.   Petitioner kept some records and paid

bills.   The records shown to the Court consisted of some receipts

and canceled checks, handwritten logs kept since 1987, and typed

summaries prepared by petitioner for each year.       The logs

contained one or two pages for each month, and listed
                                  6

expenditures and the method of payment--for instance, a charge at

a gas station or a cash payment to a veterinarian.      Petitioner

made summaries from the logs that he used to gauge operations,

and they were also used to prepare the tax returns.      At the end

of the year, the summaries were given to the tax return preparer.

The parties herein agreed in writing that the contents of certain

stipulated documents relating to the ranch were the authentic

documents that were kept, but they were not stipulated to be

accurate.    The summaries were not always accurate or complete.

     Petitioner maintained records of purchase and registration

documents for many of the horses and longhorn cattle that were

sold.   Petitioner did not introduce contemporaneously made

records of sales of the ponies.       Petitioner introduced no records

regarding contract labor, nor did he issue Forms 1099 or W-2 to

such employees, although such forms were maintained by the

medical corporation, which paid petitioners their salaries and

hired a payroll company.

     There was a small amount of gross income from various

activities at the ranch.    Although there were few horse sales,

there were various other sales of cows, calves, rabbits, goats,

and bulls.   Petitioner leased "Bryan the Buffalo" in 1988 and

1989 for a total of $969.    Finally, there was some rental income

from the guest cabins located on the ranch.      Petitioners reported

the following losses and income on their joint returns for the

years 1986 through 1992:
                                                      Petitioner's
                                                    Gross Income From
                                          7

Year Farm Expenses Farm Losses         Farm Gross Income         Medical Corp.

1986      $47,698      $50,598           ($2,900)                 $370,056
1987       79,230       78,430               800                   646,554
1988      109,216      109,216                 0                   497,333
1989      141,857      135,742             6,115                   479,500
1990      132,987      117,420            15,567                   498,521
1991      137,882      121,857            16,025                   540,258
1992      119,934      103,196            16,738                   232,942

 Total    768,804         716,459             52,345             3,265,164

   The negative farm gross income in 1986 was the result of a

   reported loss on the sale of a horse.            Some of the farm expenses

   claimed from 1986 through 1992 are as follows:

                            Mortgage                                    Repairs/
   Year    Depreciation     Interest     Taxes         Labor    Feed    Maintenance

   1986      $2,915            --        --          --         --         --
   1987       7,815         $14,074    $1,305       $1,183     $7,509      --
   1988      24,627          21,461     1,787       15,692     11,285     $696
   1989      24,966          28,372     1,582       20,161     16,338    6,273
   1990      26,024          27,583       297       19,427     11,379   14,667
   1991      25,497          22,960     1,537       21,999     15,291   15,092
   1992      27,065          24,470     2,076       24,845      9,601    7,614


                                       OPINION

   A.    Relationship Between Petitioners' Ranching Activity and Their

   Medical Corporation

          Petitioner claims that he participated in polo as a means of

   obtaining clients, and that therefore the ranching activity and

   the medical corporation should be considered as one activity for

   purposes of determining the overall profitability of the ranch.

   Respondent contends that the two activities are separate for

   purposes of section 183.
                                 8

     Petitioners argue that under Campbell v. Commissioner, 868

F.2d 833 (6th Cir. 1989), affg. in part and revg. in part T.C.

Memo. 1986-569, the entire economic relationship and its

consequences should be examined to determine whether there is an

actual profit objective.   In the Campbell case, the court held

that a taxpayer could deduct losses from a partnership where the

partnership's only business purpose was to lease an airplane to a

corporation controlled by the partners of the partnership.

Despite repeated losses, the court found a profit motive by

considering the increase of overall wealth of the partners

through the corporation.   Petitioners also cite Cornfeld v.

Commissioner, 797 F.2d 1049 (D.C. Cir. 1986), revg. and remanding

T.C. Memo. 1984-105; Horner v. Commissioner, 35 T.C. 231 (1960);

and Louismet v. Commissioner, T.C. Memo. 1982-294.

     Petitioners' reliance on these cases is inappropriate.     In

De Mendoza v. Commissioner, T.C. Memo. 1994-314, we distinguished

Campbell v. Commissioner, supra, from facts very similar to those

before us, as the latter case did not consider whether two

activities could be considered one for purposes of section 183,

but rather it considered whether a profit motive for one activity

could be derived from the income and profit motive of a related

corporation.   In Campbell, the plane leasing partnership was

conducted solely to benefit another business, and was wholly

dependent on that business, while in De Mendoza the polo activity

was in no way dependent on the legal activity.   The facts of De
                                   9

Mendoza are very similar to those before us today.       The taxpayer

in that case was an attorney who claimed that his polo activity

was conducted to obtain clients.       We found that any benefit to

the legal practice from the polo activity was at best incidental.

      We make a similar holding today.      Petitioner has failed to

establish any correlation between the ranching activity and the

medical corporation.   We think it is significant that the three

parcels of land making up petitioners' farm or ranch were

purchased separately by them, were apparently never conveyed to

the Institute to augment its assets, nor merged into the

Institute's accounts, and the losses therefrom were claimed in

petitioners' tax returns as a deduction, without reference to the

Institute.   The only connection between petitioner's ranch

activity and the medical practice of the Institute was the rather

vague assertion by petitioner that the publicity he derived from

playing polo helped him get patients for his cosmetic surgery.

Such argument was not supported by any patient of petitioner or

by any other witness or evidence herein.       To us, it is at least

as far fetched and unconvincing as was the alleged connection

between a legal practice and polo in De Mendoza v. Commissioner,

supra.

B.   The Conduct of the Ranch for Profit

      We must decide whether petitioners conducted their ranching

and ranching-related activities with a profit objective for the

1989 and 1990 tax years.   To meet his burden, Rule 142(a),
                                10

petitioner must establish that there was an activity which was

engaged in for profit within the meaning of section 183.    Section

183(a) limits any deductions attributable to an activity of a

taxpayer not engaged in for profit except as provided in section

183(b).   Section 183(b) provides that a deduction may be taken

where the taxpayer is not engaged in an activity for profit where

a deduction is otherwise allowable, to the extent that the gross

income from such activity exceeds the claimed deductions.

Section 183(c) defines an activity not engaged in for profit as

any with respect to which deductions would not be allowed under

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

     Expenses incurred in carrying on a trade or business are

allowable under section 162 if they are ordinary and necessary to

the conduct of that trade or business.    Antonides v.

Commissioner, 91 T.C. 686, 693 (1988), affd. 893 F.2d 656 (4th

Cir. 1990).   Section 212 allows deductions for expenses incurred

in connection with an activity engaged in for the production or

collection of income, or for the management, conservation, or

maintenance of property held for the production of income.

     An activity will be considered as conducted for profit if

the facts and circumstances indicate the taxpayer entered into

the activity, or continued the activity, with the actual and

honest objective of making a profit.     Antonides v. Commissioner,

supra; Dreicer v Commissioner, 78 T.C. 642, 645 (1982), affd.

without opinion 702 F.2d 1205 (D.C. Cir. 1983); Golanty v.
                                 11

Commissioner, 72 T.C. 411, 426 (1979), affd. without published

opinion 647 F.2d 170 (9th Cir. 1981).     There is no requirement

that a reasonable expectation of profit exist.      Elliot v.

Commissioner, 90 T.C. 960, 970 (1988), affd. without published

opinion 899 F.2d 18 (9th Cir. 1990).     A taxpayer's mere statement

of intent to make a profit is not controlling; rather, the

objective facts must be examined, and greater weight will be

given to these, rather than a mere statement of intent.         Dreicer

v. Commissioner, supra at 645; sec. 1.183-2(a) and (b), Income

Tax. Regs.    Petitioner bears the burden of proving that he had a

profit objective.   Rule 142(a); Surloff v. Commissioner, 81 T.C.

210, 233 (1983).

     Section 1.183-2(b), Income Tax Regs., provides nine factors

to be considered in determining whether an activity is engaged in

for profit.   They are:   (1) The manner in which the taxpayer

carries on the activity; (2) the expertise of the taxpayer or his

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

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

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) the

elements of personal pleasure or recreation that may be present.

No single factor is controlling.      Abramson v. Commissioner, 86
                                  12

T.C. 360, 371 (1986).     We will consider these factors separately

in this case.

     1.     The Manner in Which the Ranching Activities Were

Conducted

     Maintaining complete and accurate books and records may

indicate that the activity is engaged in for profit.      Elliot v.

Commissioner, supra at 971-972; sec. 1.183-2(b)(1), Income Tax

Regs.     Respondent contends that the records kept here were

inaccurate, contained omissions, and did not disclose the most

rudimentary information a prospective purchaser would want in

purchasing horses.     Petitioner argues that the records were

adequate, that from them the C.P.A. was able to prepare

petitioners' tax returns, and that they were able to assess

profitability and respond accordingly.

     The records consisted of handwritten logs kept since 1987

and typed summaries for each year.     The logs contain one or two

pages for each month, and list expenditures and the method of

payment--for instance, a charge at a gas station or cash to a

veterinarian.     At the end of the logs are summaries.   The

summaries may not have always been accurate or complete, but may

have provided at best a rough picture of the profitability of the

ranch.     We cannot judge how accurate or complete they were in

this case; they were accepted into evidence solely for showing

that petitioner kept some kind of records, not for the purpose of
                                  13

proving their contents, and petitioner testified about them only

in the most vague and general fashion.

     Abandonment of unprofitable methods, a change in operating

methods, or the adoption of new techniques to improve

profitability may indicate a profit objective.    Sec. 1.183-

2(b)(1), Income Tax Regs.   Respondent argues that petitioner did

not reduce expenses, while petitioner claims to have adopted

methods designed to reduce expenses.    For instance, after

analyzing the summaries prepared, petitioner says he realized

that he should expand his operations to improve profitability.

Petitioner added cattle, exotic goat, and guest ranch operations,

he hired Mr. White to live on the ranch and act as foreman, and

he purchased land for hay production.    The hay operation was

designed to reduce expenses, while the others were designed to

increase revenue.   Even if the expenditures petitioners sought to

reduce were in fact reduced, the ranch would not have become

profitable.   Two of the most significant expenses reported each

year were mortgage interest and depreciation.    Nothing short of

significant revenue increases would have made the venture

profitable in light of these significant expenses, and though the

added activities may have raised revenue slightly, they also

caused an increase in expenses.    Although we believe that

petitioner had a business plan to expand operations, the facts

indicate that such expansion did not constitute a plausible plan
                                 14

to increase profitability.    See De Mendoza v. Commissioner, T.C.

Memo. 1994-314.   This factor favors respondent.

     2.   Expertise of Petitioner or His Advisers

     Preparing to enter into an activity by consulting with

experts or extensive study may indicate that a taxpayer has a

profit objective.   Sec. 1.183-2(b)(2), Income Tax Regs.

     Petitioner has no formal schooling in agriculture or

equestrian activities.    His participation in equestrian

activities began during the 1970's, while his participation in

polo began around 1984.    Petitioner was very involved in the polo

community, and was even a contributing editor for Polo magazine.

Although we believe he was quite knowledgeable as to polo, or

even equestrian affairs, we do not feel that he was an expert in

making equestrian affairs profitable, and it does not appear that

he had any experience or expertise in the cattle, other animals,

hay, or guest quarters business.      Petitioners have failed to

establish that they sought expert advice to make the ranch

profitable.   This factor favors respondent.

     3.   The Time and Effort Expended by Petitioner

     A devotion of a great deal of a taxpayer's personal time to

an activity, especially where there is no recreational element,

may indicate a profit objective, and the fact that only a limited

amount of time is so devoted does not necessarily give rise to a

contrary indication.   Sec. 1.183-2(b)(3), Income Tax Regs.
                                  15

     Petitioners were employed full time by the medical

corporation, and accordingly spent only weekends and some

evenings at the ranch.     Petitioner may have not allowed polo to

interfere with his surgery schedule, and there was also an

obvious recreational element to time spent at the ranch.

     The fact that taxpayers devote a limited amount of time to

an activity may not indicate a lack of profit objective where the

taxpayers utilize the services of qualified persons to conduct

the activity.     Cornfeld v. Commissioner, 797 F.2d at 1052; De

Mendoza v. Commissioner, supra; sec. 1.183-2(b)(3), Income Tax

Regs.     Petitioners hired Mr. White, who acted as a full-time

ranch supervisor.     His duties were broad, but it was clear to us

that he managed the day-to-day activities of the ranch.     This

factor favors petitioner.

     4.     Expectation of Appreciation in Value

     An expectation that the appreciation of assets used in an

activity will produce an overall profit when netted against the

losses from that activity may indicate a profit objective.     Sec.

1.183-2(b)(4), Income Tax Regs.     There is no outright requirement

that any appreciation offset the aggregate losses, but there must

be a bona fide expectation that appreciation will produce a

profit at some time in the future.     See Allen v. Commissioner, 72

T.C. 28, 36 (1979); Engdahl v. Commissioner, 72 T.C. 659, 668

(1979).     Additionally, section 1.183-1(d)(1), Income Tax Regs.,

provides that the possible increase in the value of land used in
                                  16

a farming activity should be considered only if the income from

the farming activity exceeds the carrying cost of the land.      The

carrying cost of the land includes the mortgage interest and

taxes.    LaMusga v. Commissioner, T.C. Memo. 1982-742.

     After purchasing the ranch, petitioner says he caused fences

to be erected and roads and buildings to be built, and made

various other improvements.    Neither the fact nor the amount of

such improvements was established.     Petitioners intended to one

day retire, live on the ranch, and open a small medical practice.

Petitioner stated that the ranch would give him something to do.

We doubt that petitioners in fact expected that any appreciation

would ever produce an overall profit; no credible evidence to

that effect was presented here.    Each year from 1987 through

1992, the ranch produced losses of over $100,000.     We infer that

the losses incurred each year simply outpaced any appreciation.

Furthermore, the mortgage interest deductions claimed from 1986

through 1992 totaled $138,920, and the taxes paid for that period

totaled $8,584; the gross income from the ranching activity

totaled only $52,345.    Because the income from the ranch does not

exceed the carrying cost of the land, any potential appreciation

of the ranch cannot be considered.     At all events, petitioners

did not prove that any of the ranch assets could be expected to

appreciate to any significant extent.     This factor favors

respondent.

     5.    Petitioner's Success in Other Activities
                                  17

     A taxpayer's involvement in similar activities in the past,

especially where he has converted them from unprofitable to

profitable operations, may indicate a profit objective, despite a

currently unprofitable activity.       Sec. 1.183-2(b)(5), Income Tax

Regs.     There is no evidence that petitioner has ever operated a

ranch before, nor that he has had any profit from any ranching,

farming, or guest cottage activities.      This factor favors

respondent.

     6.     Petitioner's History of Income or Losses

     Neither startup losses nor losses that result from

unforeseen circumstances necessarily show that the taxpayer

lacked a profit objective.     Engdahl v. Commissioner, supra at

669; sec. 1.183-2(b)(6), Income Tax Regs.      However, losses

incurred over many years with little likelihood of future profits

indicate a lack of profit objective.       Golanty v. Commissioner, 72

T.C. at 426.

     Since its inception and through 1992, petitioners have

consistently reported significant expenses and negligible gross

income, thus producing losses from the ranching activity.        The

expenses claimed for the years the parties considered (1986-92)

total $768,804, while the total income over the same period was

only $52,345.     Petitioner argues that considerable expenditures

were incurred getting the ranch in working order, buying and

training the horses, and that the return for these expenditures

would not be seen until several years later.      We are not
                                   18

persuaded by this argument.      To the contrary, in the formative

years, which were 1986 and 1987, petitioner reported losses of

$50,598 and $78,430.      In 1988, the losses grew to $109,216, with

a high in 1989 of $135,742.      Although it is true that the gross

income of the ranch did grow to $15,567, $16,025, and $16,738

during the years 1990 through 1992, respectively, we find that

petitioner has failed to establish that there was any likelihood

of making the ranch profitable, and even more unlikely that

petitioner would ever recoup his total losses through 1992, which

were $716,459.      See De Mendoza v. Commissioner, T.C. Memo. 1994-

314.

       7.    The Amount of Occasional Profits, If Any

       Analysis of the amount of profit earned, especially in

relation to the losses incurred, the value of the investment, and

the value of the assets involved may be helpful in determining

profit objective.      An occasional small profit from an activity

that generates otherwise consistently large losses may not be

determinative that the activity is conducted with a profit

objective, while an occasional substantial profit may indicate a

profit objective, especially where the losses or investment are

small.      Sec. 1.183-2(b)(7), Income Tax Regs.   Since its

inception, petitioners have never earned a profit from their

ranching activity.      This factor favors respondent.

       8.    Financial Status of Petitioner
                                19

     Substantial income from other activities, particularly where

the losses from the activity produce a tax benefit, may indicate

a lack of profit objective.   Sec. 1.183-2(b)(8), Income Tax Regs.

Petitioners reported gross income from the medical corporation of

$479,500 and $498,521 for 1989 and 1990, respectively, while the

farm losses for those years were $135,742 and $117,420.    There

was no convincing reason to combine the two activities other than

to save taxes.   This factor favors respondent.

     9.   Elements of Personal Pleasure or Recreation

     The presence of recreational elements may indicate that an

activity is not engaged in for profit, although the mere fact

that personal pleasure is derived will not be sufficient to cause

the activity to be classified as not engaged in for profit if

other factors indicate that the activity was in fact engaged in

for profit.   Sec. 1.183-2(b)(9), Income Tax Regs.   Petitioner

admits that he enjoys his work on the ranch, as well as training

and riding polo ponies, but he argues that if he wanted the ranch

for purely recreational purposes, he could have built a more

elaborate ranch with more frills, as opposed to a working ranch.

We think that the fact he could have built a ranch with more

frills does not negate the recreational quality present.    This

factor favors respondent.

                    ___________________________

     Of the nine factors discussed above, only one factor favored

petitioner.   Additionally, the objective facts presented to this
                                 20

Court indicate that petitioners did not have an actual and honest

objective to make a profit by continuing the ranching activity.

We hold that petitioners have failed to prove that respondent's

determination was in error.

C.   Section 6662(a)--Accuracy-Related Penalty

      Section 6662(a) and (b)(2) imposes a penalty of 20 percent

of any part of the underpayment attributable to a substantial

understatement of income tax.    The understatement is substantial

if it exceeds the greater of 10 percent of the proper tax or

$5,000.   Sec. 6662(d)(1)(A).   The penalty will be reduced for any

portion for which there was substantial authority for the

position of the taxpayer, or where the relevant facts affecting

the treatment of the item were adequately disclosed on the

return.   Sec. 6662(d)(2)(B).

      The standard for determining whether there is in fact

substantial authority for a position is whether the weight of the

authorities supporting that position is substantial in relation

to the weight of authorities supporting contrary positions.

Schirmer v. Commissioner, 89 T.C. 277, 283 (1987); sec. 1.6661-3,

Income Tax Regs.   On brief, petitioners referred to sections 162

and 183, which they assert allow for deductions for ordinary and

necessary business expenses.    They also point out that the

Service has never challenged their business intent in prior

years, despite similar positions, and therefore their reliance on

the Service's position is warranted.
                                  21

     The regulations specifically provide that the possibility

that an item will not be raised on audit, or that there will be

no audit, is not relevant in determining whether there is

substantial authority.   Sec. 1.6662-4(d)(2), Income Tax Regs.

Petitioners' reliance on respondent's prior inaction is

unwarranted.   Petitioners did not cite any authority to bolster

their assertions that there was substantial authority for their

returns, and we find none.

     Petitioners point to Rev. Proc. 90-16, 1990-1 C.B. 477,

which describes what constitutes adequate disclosure for certain

items.   Unfortunately, these less stringent requirements are only

applicable to the specific items enumerated in that revenue

procedure.   Because none of those items were claimed by

petitioners, here the revenue procedure provides no assistance

for them.    The disclosure must enable the Service to identify the

potential controversy involved.     Schirmer v. Commissioner, supra

at 286 (citing S. Rept. 97-494 (Vol. 1), at 274 (1982)).

     Petitioners did not attach a Form 8275 to their return, nor

did they attach a statement that identified itself as a

disclosure under section 6661.    The requirement of adequate

disclosure is not satisfied merely by listing the deductions on

Schedule F attached to the tax return, and therefore we find that

there was no adequate disclosure.

     If there was reasonable cause for the underpayment, and the

taxpayer acted in good faith, the penalty will not be imposed.
                                22

Secs. 6662(d)(2)(b), 6664(c)(1).     Whether a taxpayer acted in

good faith depends upon the pertinent facts and circumstances.

Estate of Monroe v. Commissioner, 104 T.C. 352, 366 (1995); sec.

1.6664-4(b)(1), Income Tax Regs.     The most important factor is

the extent of the taxpayer's effort to assess his proper tax

liability.   Cf. Beard v. Commissioner, T.C. Memo. 1995-41; sec.

1.6664-4(b)(1), Income Tax Regs.     Petitioners have not impressed

upon this Court that there was reasonable cause or basis for the

underpayment, or that they adequately sought to determine their

proper tax liability.   We find in favor of respondent.

                                      Decision will be entered

                               for respondent.
