UNPUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

THOMAS B. DRUMMOND,

Petitioner-Appellant,

v. No. 97-2106

COMMISSIONER OF INTERNAL REVENUE,

Respondent-Appellee.

Appeal from the United States Tax Court.

(Tax Ct. No. 94-16958)

Argued: April 7, 1998

Decided: July 15, 1998

Before WIDENER and LUTTIG, Circuit Judges, and

CHAMBERS, United States District Judge for the

Southern District of West Virginia, sitting by designation.

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Affirmed in part and reversed in part by unpublished per curiam opinion.

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COUNSEL

ARGUED: Karen Mary Kennedy, JAMES P. CAMPBELL & ASSOCIATES, P.C., Leesburg, Virginia, for Appellant. Annette Marie

Wietecha, Tax Division, UNITED STATES DEPARTMENT OF

JUSTICE, Washington, D.C., for Appellee. ON BRIEF: Mark E.

Kellogg, KELLOGG, KREBS & MORAN, Fairfax, Virginia, for

Appellant. Loretta C. Argrett, Assistant Attorney General, Gilbert S.

Rothenberg, Tax Division, UNITED STATES DEPARTMENT OF

JUSTICE, Washington, D.C., for Appellee.
Unpublished opinions are not binding precedent in this circuit. See

Local Rule 36(c).

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OPINION

PER CURIAM:

Petitioner-appellant Thomas Drummond appeals a decision of the

United States Tax Court upholding the Internal Revenue Service's

assessment of income tax deficiencies and accuracy-related penalties

on his tax returns for 1989, 1990, and 1991. For the reasons stated

herein, we affirm in part and reverse in part.

Beginning in 1988, Drummond purchased a series of thoroughbred

horses to train for dressage and jumping, cross country riding, or both.

Drummond's stated goal was to train and sell accomplished show

horses. Although Drummond practiced psychology, he adjusted his

work schedule to allow him to spend between 15 and 18 hours a week

with his horses, and engaged the assistance of professionals to assist

with the horses' training. Drummond experienced numerous setbacks,

however, and had, at the time of this appeal, been unable to sell any

of the horses he had trained.1

In addition to his involvement with horses, Drummond purchased

a small herd of cattle in 1990. Drummond's stated purpose was to

expand the herd and use it to manage his horses' pasture, see J.A. at

165, though, at the time of this appeal, he had not yet done so. Drummond has, however, sold the calves produced by the herd each year

for modest amounts.

On his tax returns, Drummond has treated his horse and cattle operations as a single enterprise, motivated by the desire for profit.

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1 Subsequent to the tax years at issue in this case, Drummond did succeed in selling a horse for $30,000 that he had purchased, one month earlier, for $10,000. The profit realized by Drummond in this venture,

however, appears unrelated to any training given the horse by Drummond.

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Although he has made some money, primarily from the cattle, his

losses have in every year exceeded his profits. In determining his net

income each year, Drummond has deducted the net losses from his

horse and cattle operations from income received from other sources.

The instant litigation arose when the IRS determined deficiencies

for Drummond's 1989, 1990, and 1991 tax returns, and also assessed

certain accuracy-related penalties against him. Although the deficiencies included a variety of matters no longer at issue in this case, the

heart of the matter, for purposes of this appeal, was that the IRS considered Drummond's horse and cattle operations to constitute only

hobbies, rather than activities engaged in for profit. Because hobby

losses can be offset only against income derived from the same activity, the IRS maintained that Drummond erred in deducting the net

losses from the horse and cattle operations from his other income. The

IRS also insisted that Drummond's horse and cattle operations were

separate activities, and that the losses from the horse operations therefore could not be deducted even to the extent of the profits from the

cattle operations. Finally, the IRS assessed penalties against Drummond for negligence and for substantial underpayment of his income

taxes.

Drummond challenged these determinations in tax court. The tax

court found, inter alia, that the horse and cattle operations constituted

separate activities, that Drummond had engaged in neither out of a

desire for profit, and that the IRS had properly assessed certain penalties against him for substantially understating his income. In finding

that Drummond's activities were not conducted for profit, the tax

court relied primarily on (1) Drummond's lack of formal training, (2)

his failure to keep careful records or otherwise to conduct the activities in a business-like manner, and (3) the consistent losses Drummond incurred, and was apparently able to afford because of the

income available to him from other sources. In upholding the penalties, the tax court rejected Drummond's defense of good faith, reasonable reliance on professional advice, on the grounds that Drummond

had failed to prove that he had fully disclosed all of the information

to his tax advisor necessary for the advisor to render competent professional advice, and therefore had failed to prove that his reliance on

the advisor's advice was reasonable.

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We have carefully reviewed the tax court's opinion, the parties'

submissions in this court, and the relevant legal authorities, and have

had the benefit of oral argument. Although we believe it is a close

question, we cannot conclude that the tax court's findings as to the

nature of, and the relationship between, Drummond's horse and cattle

activities were clearly erroneous, and accordingly we affirm this part

of the tax court's decision.

We reverse, however, that court's rejection of Drummond's

defense of good-faith, reasonable reliance on professional advice. The

uncontroverted testimony of Drummond's tax advisor established,

inter alia, that he knew about Drummond's activities and discussed

them with Drummond regularly, J.A. at 73, that he was impressed

with the amount of resources -- especially time-- that Drummond

spent on his horses, J.A. at 83-84, that he knew of the payments made

to, and the reputations of, those with whom Drummond was dealing,

J.A. at 85, and that he concurred in the judgment that the activity

could properly be reported as one engaged in for profit, J.A. at 95.

Neither the tax court nor the Internal Revenue Service has cited any

evidence establishing that Drummond did not fully disclose the nature

of his horse and cattle operations to the tax advisor, or that the

accountant did not have adequate information upon which to base his

professional judgment. Accordingly, we hold the tax court's finding

that Drummond failed to establish reasonable reliance clearly

erroneous.2

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2 Drummond also appeals the tax court's decision upholding accuracyrelated penalties relating to his characterization of a gain he realized

from the sale of a drawing, and for excessive deductions taken for Drummond's contributions to his pension plan. As to both issues the tax court

rejected Drummond's defense of good faith, reasonable reliance on professional advice. As for the characterization of the gain from the sale of

the drawing, we affirm the decision of the tax court. Drummond's tax

advisor testified that he told Drummond that he could not claim the gain

as income from business unless he continued to buy and sell drawings,

see J.A. at 88-90. Despite this advice, Drummond so reported the gain

but did not continue to buy and sell drawings. Accordingly, the tax

court's rejection of Drummond's defense of good faith reliance was not

clearly erroneous.

As for the question of the deductions attributable to the pension contributions, we reverse the decision of the tax court. Although that court

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For the foregoing reasons, the judgment of the tax court is affirmed

in part and reversed in part.

AFFIRMED IN PART, REVERSED IN PART

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found that Drummond failed to prove he had fully described the nature

of his pension plan to his tax advisor, this finding cannot be reconciled

with the record. Although the advisor testified that he did not initially

know what kind of pension plan Drummond had, J.A. at 78, he also testified that he later jointly determined with Drummond that Drummond's

pension plan supported the deduction that was taken, J.A. at 81.

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