# United **States Tax Court**

T.C. Memo. 2023

- 5

PAUL C. WONDRIES AND PATRICIA WONDRIES

, Petitioner s

v

. COMMISSIONER OF INTERNAL REVENUE, Respondent

—————

Docket N o. 13345

- 19

. Filed January 9, 2023.

—————

Edward O. C. Ord and Cheng Zhang

, for petitioner s

.
Sarah A. Herson and Mark A. Nelson , for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

KERRIGAN, Chief Judge : Respondent determined the following deficiencies and penalties with respect to petitioners’ f ederal income tax for years 2015

– 17 (years in issue) :

Year Deficiency § 6662(a) Penalty

2015 $214,226 $42,845

2016 102,698 20, 540

2017 104,579 20, 916



### Served 01/09/232

[* 2 ] After concessions 1 t he issue s for consideration are whether (1) petitioners are entitled to deductions for expenses reported on the Schedule s F , Profit or Loss From Farming

, attached to their 2015, 2016, and 2017 f ederal income tax returns and (2) petitioners are liable for

accuracy

- r elated penalties pursuant to section 6662(a) for 2015 and 2016.

Unless otherwise indicated, all section references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times, all regulation references are to the Code of Federal Reg ulations, Title 26 (Treas. Reg.), in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure. We round all monetary amounts to the nearest dollar.

FINDINGS OF FACT

Some of the facts are stipulated and so found. The S tipulation of F acts and the attached E xhibits are incorporated herein by this reference. Petitioners were married and resided in California when they timely filed the ir Petition.

During the years preceding those in issue petitioner husband operated many successful business enterprises . Th ese included some 23

car dealership s, half of which he managed to convert from losing enterprises to profitable ones.
Around early 2004 petitioners sought to diversify their business int erests by acquiring a cattle ranch. They toured many properties before ultimately deciding on a n 1, 1 00

- acre ranch in Parkfield, California (ranch ). Various structures stood on the property : a main house, a guest house, a swimming pool, and a foreman’s ho use. W ells and natural springs serviced the ranch’s water needs ; petitioners also installed large storage tanks and drinking troughs for the animals. Approximately 30 miles of roads provid ed access to all parts of the ranch.

Petitioners financed the ranch’s purchase through a California bank. In support of their loan application, they included a business plan indicating that the ranch would generate sufficient income to satisfy the

1 Petitioner s conceded that they are required to include a n individual retirement account (IRA) distribution from NADART in income for 2015

. NADART is the financial services and retirement planning division of the National Auto mobile Dealers Association

. Respondent conceded the penalty pursuant to section 6662(a ) for petitioners’ 2017 under pay ment

.3

[* 3 ] mortgage payments

— primarily through cat tle sales and guided hunting expeditions

— a nd be profitable within a few years. Their secondary approach was to hold the property for investment. T he bank funded the loan, and petitioners purchased the property for $2 million

— approximately $1 million belo w the listing price.

Because they had no experience in the ranching industry, petitioners hired a foreman , Robert Palm

. Mr. Palm was familiar with the area

, having grown up there

, and knew many individuals in the industry. He also had approximately two decades of ranching experience, managing properties in California, Nevada, Oregon, Idaho, Texas , and Nebraska. Notably, he had managed profitably two ranches

— both over 1,000 acres

— close to petitioners’ ranch.

Mr. Palm began his employment with petitioners as of the property closing date. His duties included overseeing the property when petitioners were away , repair ing and replac ing ranch equipment and infrastructure , hir ing and overseeing laborers to perform more extensive tasks

, managing the cattle herd

, controlling the landscape, and tending the ranch’s crops. As part of those duties , petitioner s provided Mr. Palm with a separate checkbook and a credit card for ranch purchases.

Petitioners realized quickly that operational income from the ranch alone would be insufficient to support the mortgage payments. T hey discovered that raising cattle would be cost prohibitive given feed prices. The initial plan was to feed the cattle by having them graze in the fields a nd secondarily with barley grown on the property

.
An unexpected drought resulted in insufficient grass and barley
to feed the herd. Petitioners researched the cost of purchasing feed from third parties but found this to be infeasible given current beef prices

. Thus within a few months of purchasing the ranch, petitioners sold most of the cattle.

Petitioners also determined at this time that guided hunting would not generate a profit. Not only was the ranch too small to sustain the wild animals that hunters seek

, the insurance requirements and attendant liability risks significantly outweighed the potential revenue that providing hunting expeditions could yield.

In the light of these failed exploits, p etitioners pivoted from an operational focus to an investment one, hoping to eventually sell the property at a gain. They endeavored to improve the property by4

[* 4 ] repairing the fencing and irrigation system
, renovat ing the housing
structures and pool, clearing brush for f ire control , and maintaining the grounds surrounding the buildings. Petitioners usually ha d the foreman and third

- party contractors complete these tasks

, b ut when they visit ed the ranch

— approximately six days per month

— t hey would contribute by performing tasks around the ranch.

When petitioners take vacation time, they visit one of their other homes. They own residences in Palm Springs, California, Big Bear Lake

, California

, and Las Vegas

, Nevada

. They also travel abroad extensively, taking trips to Europe, Asia, and Africa in past years

.
Petitioner husband performed the accounting and payroll function for the ranch. He maintained a running total of expenses incurred throughout the year as well as copies of checks and re ceipts. This method of recordkeeping differs from petitioner husband’s dealership businesses

, wh ich use automated professional software to manage payroll and accounting

.
Petitioner husband engaged the accountant from his automotive businesses to periodic ally review his ranch accounting work

. Petitioner husband’s management style for the ranch is similar to his management style for the automotive businesses : H e hired experienced individuals to oversee the businesses’ day

- to

- day affairs, and he checked in with these
managers intermittently for status updates

. Since acquiring the ranch, petitioners have never realized a profit nor broke n even

. They have realized a net l oss every year since purchase and have claimed corresponding deductions. For the years in issue

p etitioners report ed the following income and expenses for the ranch :

Year Income Expense Loss

2015 $892 $474,793 ($473,901)

2016 12,485 235,580 (223,095)

2017 10,627 239,751 (229,124)

Petitioner husband wa s an employee of AGL Development during the years in issue. He accordingly reported wage income from Form W

– 2 , Wage and Tax State ment, for 2015

– 17

. Petitioners also reported income on their Schedules E, Supplemental Income and Los s, for5

[* 5 ] businesses associated with petitioner husband ’s car dealerships. Their wage and Schedule E income as well as their total income is set out below:

Year Wage Income Schedule E Income Total Income 2

2015 $4,314,921 $6,861,912 $11,099,715

2016 4,790,000 6,836,947 12,376,821

2017 3,541,246 4,981,222 9,259,687

In addition to business

- related income, petitioner husband received the following IRA distributions in 2015: (1) $56,077 from First Clearing, LLC ; (2) $13,193 from Great

- West Trust Co

. , LLC ; and (3) $7,620 from NADART

. Petitioners reported only the distri butions from First Clearing, LLC

, and Great

- West Trust Co

. , LLC.

Respondent’s revenue agent George Krmpotich examin ed petitioners’ 2015, 2016, and 2017 tax returns. On November 8, 2018, h e obtained written approval from his immediate supervisor for an

ac curacy

- relate d penal ty for 2015

. On that same day respondent sent

p etitioner s a Letter 950, commonly referred to as a 30

- day letter

, advis ing them that they had 30 days to either agree or disagree with respondent before a notice of deficiency would be issued. Respondent issued the notice of deficien cy (notice) on May 7, 2019

. Respondent determined in the notice that petitioners were required to include the $7, 62 0 IRA distribution from NADART in income for 2015 . It also stated that the ranch property was an “activity not engaged in for profit” within the meaning of section 183 during the years in issue.

2 Total Income includes all income (not exclusive of Wage Income and Schedule E Income) derived by petitioners during the taxable year as described on lines 7

– 22 of their Forms 1040 , U.S. Individual Income Tax Return

.6

[* 6 ] OPINION

The main issue in this case is whether petitioners entered into the cattl e ranching business for profi t and therefore whether the deductions were proper

. 3

I. Burden of P roof

Generally

, the Commissioner’s determinations set forth in a notice of deficiency are presumed correct, and taxpayers bear the burden of showing the determinations are erroneous. Rule 142(a); Welch

v. Helvering , 290 U.S. 111, 115 (1933). Because respondent determined that petitioners did not engage in the cattle ranching business for profit, they bear the burden of proving otherwise. P etitioners do not contend that the b urden of proof should shift to respondent under section 7491 (a).

II. Evidentiary Issue

On November 22, 2021, p et itioners filed a Motion to Strike the Testimony of George K rmpotich , a revenue agent who testified

. They argue that the APA provides grounds to strike his testimony. We disagree. Deficiency cases are subject to de novo review

, a nd so the APA does not apply to them

. See Ax , 146 T.C. at 161

. Because Mr

. Krmpotich’s testimony was consistent with a de novo proceeding

, petitioners’ Motion to Strike will be denied.

III. For

- P rofit B usiness

Taxpayers are generally allowed deductions for business

- related and investment expenses. See § § 162 , 212. Under section 183(a)

, individuals are not allowed a deduction “if such activity is not engaged

3 Pe titioner s made various arguments regarding the Administrative Procedure Act (APA)

, 5 U.S.C. §§ 551

– 59

. A deficiency case in the Tax Court is not a review of an agency action pursuant to the APA

. See Ax v. Commissioner , 146 T.C. 153 (2016).

Petitioners cont end that an audit for 20 04 determined that they intended to make a profit from their ranch. A taxpayer’s liability is based on the merits and not

on any previous record developed at the administrative level

. Green berg’s E x

press, Inc.

v

. C ommissioner

, 62 T.C. 324, 327

– 28 (1974). The acceptance or acquiescence in returns filed by a taxpayer for a previous year creates no estoppel against the Commissioner. See Dixon v. United States , 381 U.S. 68, 72

– 73 (1965). Furthermore, petitioners raised the issue regarding the 2004 audit during further trial. According
to the Court’s September 1 4
, 2021, Order, further trial was limited to issues included in the peti tioners’ pretrial memorandum

.7

[* 7 ] in for profit.” “[ I ] f such activity is not enga ged in for profit, no deduction attributable to such activity [ is ] allowed ” e xcept to the extent provided by section 183(b). § 183(a). Section 183( b) allows deductions that would have been allowable had the activity been engaged in for profit but only to the extent of gross income derived from the activity (reduced by deductions attributable to the a ctivity that are allowable without regard to whether the activity was engaged in for profit )

. Section 183(c) def ines an activity not engaged in for profit as “any activity other than one with respect to which deductions are allowable for the taxable year under section 162 or under paragraph (1) or (2) of section 212.” For expenses to be fully deductible under secti on 162 or 212, taxpa yers must show that they are engage d in the activity with the primary objective of making a profit. Westbrook v. Commissioner , 68 F .3d 868, 875 ( 5 th Cir . 199 5)

, aff’g T.C. Memo. 1993

- 634 ; Wolf

v. Commissioner , 4 F.3d 709, 713 (9th Cir. 1993)

, aff’g T

. C. Memo. 1991

- 212.

The e xpectation of a profit need not be reasonable, but the taxpayer must conduct the activity with the actual and honest objective of making a profit. Keating v. Commissioner , 544 F.3d 900, 904 (8 th Ci r. 2008), aff ’ g T.C. Memo. 2007

- 309. Greater weight is gi ven to objective facts than to the tax payer’s self

- serving statement of intent. King

v. Commissioner , 116 T.C. 198, 205 (2001 ); Treas. Reg. § 1.183

- 2(a) and (b).

The regulations provide a nonexhaustive list of nine factors that should be considered: (1) the manner in which the taxpayer carries on the activity; (2) the expertise of the taxpayer or the taxpayer’s advis e rs; (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 activities; (6) the taxpayer’s history of income or loss with respect to the activity; (7) the amount of occasional profits, if any, which are earned; (8) the fi nancial status of the taxpayer; and (9) whether elements of personal pleasure or recreation are involved. Treas. Reg. § 1.183

- 2( b). “ No one factor is determinative

, ” and it is not intended that

“ a determination is to be made on the basis that the number of factors

. . . indicating a lack of profit objective exceeds the number of factors indicating a profit objective, or vice versa .” Id.8

A. Manner in Which the Taxpayer Carries O n the Activity

At the time of purchasing the ranch, petitioners intervi ewed and hired Mr. Palm to serve as foreman of the property. Given his significant experience in the ranching industry, he was tasked with overseeing the property and solving any problems that arose when petitioners were absent

. In this way Mr. Palm serv ed in a similar role to the managers that petitioner husband employed in his automotive businesses . We believe that hiring an experienced individual such as Mr. Palm to oversee the day

- to

- day operations of the ranch is an indication that petitioners conducted the ranch in a businesslike

manner.
Additionally, petitioners maintained complete and accurate books and records for the ranch during the years in issue . At trial p etitioner husband testified that he personally performed the accounting and payroll function s

. He said that the ranch did not need the more sophisticated software used by his automotive businesses

, which the refore would have been an unnecessary expenditure . In performing this function , petitioner husband u s ed a single

- entry form of accounting and maintained copies of all receipts and invoices for ranch

- related

purposes. He also provided t he foreman with a c redit card and a checkbook designated for ranch purchases only

. To verify the accuracy of their reporting, petitioners employe d their long

- time accountant to review the books and records twice annually

.

In their business plan

, petitioners informed the bank that t hey intended to satisfy the mortgage payments by raising and selling cattle. This plan also included providing guided hunting expeditions on the property. Soon af ter purchasing the property, p etitioners realized that these plan s would not be profitable given unforeseen cost constraints. They accordingly abandoned them in favor of holding the ranch for investment purposes. Consequently , they reduced the cattle herd. They also declined to populat e the property with game animals and decided against purchasing hunters’ liability insurance.

We find that employing Mr. Palm and maintaining a reliable accounting system indicate that petitioners engaged in the ranching activity for profit. See Treas. Re g. § 1.183

- 2(b)(1) (“The fact that the taxpayer carries on the activity in a businesslike manner and maintains complete and accurate books and records may indicate that the activity is engaged in for profit.”). This finding is reinforced by petitioners’ s hift to an investment focus once discovering that the operational one would [* 8 ]9

[* 9 ] be unprofitable. See id. (“A change of operating methods, adoption of new techniques or abandonment of unprofitable methods in a manner consistent with an intent to improve p rofitability may also indicate a profit motive.”). We find that this factor weighs in petitioners’ favor.

B. The Expertise of the Taxpayer or H is Advisers

Petitioners concede that they had zero ranching experience before making the investment in the propert y. And it does not appear that they prepared for the activity by conducting extensive studies themselves. They did

, howeve r, interview several individuals and ultimately hire d Mr. Palm as foreman

. Respondent contends that the ranch’s failure as a profitable enterprise belies Mr. Palm’ s expert ise . We disagree. Mr. Palm had approximately two decades of ranching experience in the western United States before starting with petitioners

. He had managed properties in six states and specifically two very large ones close to petitioners’ property. Thus

, despite the ranch’s poor track record , we believe that Mr. Palm was as close to an expert as could be obtained.

Although petitioners instructed him to perform certain activ ities on the ranch, they deferred to his knowledge when it came to cattle management and the best practices for running the ranch. We find that hiring Mr. Palm and adhering to his counsel indicates a profit motive

. See Treas. Reg. § 1.183

- 2(b)(2) ( “Preparation for the activity by extensive study of its accepted business, economic, and scientific practices, or consultation with those who are expert therein, may indicate that the taxpayer has a profit motive where the tax payer carries on the activity in accordance with such practices.” ). This factor weighs in petitioners’ favor.

C. The Time and Effort Expended by the Taxpayer in Carrying O n the Activity

Petitioners spent little time at the ranch. Petitioner wife testified to spending only two to four days per month there while petitioner husband testified to spending only two weekends per month there. A t maximum

, then

, they spent six days per month on the ranch , which on an annual basis would be less than 20% of the year. This limited investment of time would generally weigh against their having a profit motiv e for purchasing the property. See Treas. Reg. § 1.183

- 2(b)(3) (“The fact that the taxpayer devotes much of his personal time and effort to carrying on an activity, particularly if the activity does not have10

[* 10 ] substantial personal or recreational aspects, may indicate an intention to de rive a profit.”).

P etitioners did employ Mr. Palm as foreman. He and his wife live d and work ed on the property year round during the years in issue

. As well, Mr. Palm

— as an extension of petitioners

— hired numerous individuals to help complete repairs on the property. Therefore, despite the fact that petitioners have not devoted a substantial amount of their personal time to ranch business, we do not believe this undercuts their profit motive. See id. (“ The fact that the taxpayer devotes a limited
amount of time to an activity does not necessarily indicate a lack of profit motive where the taxpayer employs competent and qualified persons to carry on such activity. ” ). We find that this factor weighs in petitioners’ favor

.
D. Expectation T hat Assets Used in Activity May Appreciate in Value

Petitioners testified that at the outset of purchasing the ranch they had two strategies in mind: an operational one and an investment

one. The operational plan was to raise and sell cattle as well as provide guided hunti ng expeditions. If this plan failed, petitioners’ secondary strategy was to improve the ranch and hold it as an investment property in hopes of one day selling it at a profit. As petitioners testified , they realized quickly that their operational plan wa s not feasible. They therefore shifted to their secondary plan and began making improvements to the existing structures and landscape to increase the investment value.

Petitioners’ situation is envisioned by the regulations. See Treas. Reg. § 1.183

- 2(b) (4) (“The term profit encompasses appreciation in the value of assets, such as land, used in the activity. Thus, the taxpayer may intend to derive a profit from the operation of the activity, and may also intend that, even if no profit from current operat ions is derived, an overall profit will result when appreciation in the value of land used in the activity is realized since income from the activity together with the appreciation of land will exceed expenses of operation.”).

A profit objective may be in ferre d from expected appreciation of the activity’s assets only where the appreciation exceeds operating

exp enses and is sufficient to recoup accumulated losses of prior years. See Golanty v. Commissioner , 72 T.C. 411, 427

– 28 (1979), aff’d without published opinion , 647 F.2d 170 (9th Cir. 1981); Hillman11

[* 11 ] v. Commissioner , T.C. Memo. 1999

- 255. These cases do not require that the taxpayer recoup all past losses. I nstead

, the question is “whether [ the taxpayer] would recoup the losses bet ween the years in issue and the ‘hoped

- for profitable future .’” Robison v. Comm issioner

, T.C. Memo. 2018

- 88 , at *21 ( quoting Helmick v. Commissioner , T.C. Memo. 2009

- 220 , slip op. at 28 )

. “An overall profit is present if net earnings and appreciation are sufficient to recoup the losses sustained in the ‘intervening years’ between a given tax year an d the time at which future profits were expected.” Id. at *20 (quoting Helmick , T.C. Memo. 2009

- 220, slip op. at 27).

Petitioners purchased the property in early 2004 for approximately $2 million

. At tri al petitioner husband testified that the property was worth between $5.5 and $6 million during the years in issue

. He also testified that as of the August 3, 2022, trial, the property was listed for $6.7 million. The question

, then

, is whether

, given th is sale price range

, petitioners could recoup the losses incurred in the years in issue and going forward to the hypothetical sale date

. During each year in issue, t he ranch averaged approximately $300,000 in losses

. Assuming that this trend continues

, petitioners could still expect to earn a profit even if we assume that the property is sold at the lower end of pe titioner husband’s estimat es

. The margin by which they earn a profit is dwindling each year

. Given that a profit can still be earned, we find that this factor weighs in petitioners’ favor.

E. The Success of the Taxpayer in Carrying on Similar or Dissimilar Activities

Petitioners have not engaged in similar activities in the past. But petitioner husband has engaged in the automotive sales and servicing business for many years. Originally starting with one dealership, petitioner husband has grown his automotive empire to include 23 dealerships in Southern California. Approximatel y 12 to 14 of these dealerships were operating at a loss when acquired. Petitioner husband

was able to turn around all of these businesses and make them profitable. O n that basis

, we believe petitioners engaged in the ranch business for profit. See Trea s. Reg. § 1.183

- 2(b)(5) ( “The fact that the taxpayer has engaged in similar [or dissimilar] activities in the past and converted them from unprofitable to profitable enterprises may indicate that he is engaged in the present activity for profit, even thoug h the activity is presently unprofitable.” ). T his factor weighs in petitioners’ favor.12

F. The Taxpayer’s History of Income or Losses with Respect to the Activity

Petitioners purchased the ranch in 2004. Since then it has never produced a profit n or broken even

. This history would be indicative that the activity is not being engaged in for profit. See Treas. Reg. § 1.183

- 2(b)(6) (“[W] here losses continue to be sustained beyond the period which customarily is necessary to bring the operation to pr ofitable status such continued losses, if not explainable, as due to customary business risks or reverses, may be indicative that the activity is not being engaged in for profit. ”).

Petitioners testified that an unforeseen drought took place after they pu rchased the property which decreased the viability of sustaining a cattle herd

, one of the principal ways in which they intended to produce revenue. Although droughts are not uncommon in the western United States, w e find that the drought was beyond their control. See i d. (“ If losses are sustained because of unforeseen or fortuitous circumstances which are beyond the control of the taxpayer, such as drought, disease, fire, theft, weather damages, other involuntary conversions, or depressed market conditio ns, such losses would not be an indication that the activity is not engaged in for profit. ”)

. That said, it is not apparent that t he losses were sustained

“ because of ” the unforeseen drought as required by the regulations. See Whatley v. Commissioner

, T.C. Memo. 2021

- 11
, at *28 (finding that a drought did not cause the cattle operation’s losses)

. The cattle herd was decreased within months of petitioners ’ purchasing the ranch in 2004

. The losses at issue occurred nearly a decade later. We are therefore unpersuaded by petitioners’ argument that the drought can be blamed for the ranch’s recent losses

.
The other anticipated method of producing revenue was providing guided hunting expeditions. The failure here seems more to be a lack of pl anning than any unforeseen circumstances. Petitioners testified that shortly after purchasing the ranch they realized that the property was too small to support the type of animals that hunters seek. They also discovered that purchasing the necessary hun ting insurance for the property would be too expensive. We do not see that this was an unforeseeable circumstance or customary business risk that arose. Instead, this appears more to be a failure in business due diligence. In the light of these considerations we find that this factor weighs against petitioners. [* 12 ]13

G. The Amount of Occasional Profits, if A ny, W hich Were Earned

Petitioners have never earned a profit from the ranch business yet have incurred significant expenses. In 2015 the ranch earned less than $1,000 yet incurred almost half a million dollars in expenses . The years 2016 and 2017 are not much better: T he ranch earned $12,485 and $10,627 while expending $235,580 and $239 ,751, respectively

. This indicates a lack of profit motive. See Treas. Reg. § 1.183

- 2(b)(7) (“The amount of profits in relation to the amount of losses incurred, and in relation to the amount of the taxpayer’s investment and the value of the assets used in the activity, may provide useful criteria in determining the taxpayer’s intent.”). This factor weighs against petitioners

.
H. The Financial Status of the Taxpayer

As mentioned

, petitioner husband has had many successful business endeavors throughout his life, primarily in the automotive industry. During the years in issue p etitioners reported total income of $11,099,715, $12,376,821, and $9,259,687 , respectively. The significant losses from the ranching activ ity served to reduce this income. Therefore

, in addition to the fact that petitioners had significant income from another source, the losses from the ranch activity generate d substantial tax benefits. This benefit is indicative of a lack of profit motive

. See Treas. Reg. § 1.183

- 2(b)(8) (“ S ubstantial income from sources other than the activity (particularly if the losses from the activity generate substantial tax benefits) may indicate that the activity is not engaged in for profit especially if there ar e personal or recreational elements involved.”). This factor weighs against petitioners

.
I. Elements of Personal Pleasure or Recreation

Petitioners assert that they did not have personal motives for purchasing the ranch. At trial they testified that they s pen t no more than two weekends per month at the property. And w hen they did visit, they did not engage in any personal or recreational activities. Instead their purpose was usually to check in with Mr. Palm and help him with any repairs

. This is indicative of a profit motivation. See Treas. Reg. § 1.183

- 2(b)(9) (“ The presence of personal motives in carrying on of an activity may indicate that the activity is not engaged in for profit, especially where there are recreational or personal el ements involved. ”).

Respondent argues that petitioners did derive pleasure from the ir trips to the property , noting that on some occasion s they invited guests [* 13 ]14

[* 14 ] to the property and generally enjoy ed enhancing it

. Petitioners did not dispute this fact. But we do not think that undercuts their position. See id. We find compelling the fact that petitioners have numerous properties in desirable locations besides the ranch

. Petitioners testified that at these homes they engage in true recreational activities such as hiking, biking, and boating. Thus despite taking some personal pleasure from the ranch property, we maintain that petitioners’ primary motivation was to earn a profit. This factor weighs in their favor.

IV. Conclusion

This is a close case. After weighing all the facts and circumstances , we conclude that petitioners engaged in their ranching activity for pr ofit. Their activities cannot be charac terized as a hobby. We do no t sus tain respondent ’ s disallowance of the loss deductions related to the ranching activity under section 183.

V. Accuracy

- Related Penalties

Respondent determined accuracy

- related penalties under section 6662(a) for the 2015 and 2016 under pay ments

. Since we have determined that petitioners did engage in a for

- profit business, we reject the penalties associated with the def icienc ies pursuant to the section 183 finding

. R espondent also determined that petitioners failed to report an IRA distribution during 2015. Petitioners conceded that they should have reported the distribution

. They nonetheless argue that the associated penalties should be voided or abated because respondent failed to satisfy section 6751

. According to our caselaw, “ the Commiss ioner bears the burden of production with respect to the liability of an individual for any penalty.” Graev v. Commissioner

, 149 T.C. 485, 493 (2017), supplementing and overruling in part 147 T.C. 460 (2016); see § 7491(c)

. The Commissioner satisfie s that burden by presenting sufficient evidence to show that it is appropriate to impose the penalty in th e absence of available defenses. Graev

, 149 T.C. at 493 (citing Higbee v. Commissioner , 116 T.C. 438, 446 (2001)). This includes satisfying section 6751(b) (1 ) , which provides that “[n]o penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate.”15

[* 15 ] The written supervisory approval is not required to take any specific form. See Palmolive Bldg. Inv s. , LLC v. Commissioner , 152 T.C. 75, 85

– 86 (2019). But i t generally must be obtained no later than (1) the date on which the IRS issues the deficiency notice, or (2) the date, if earlier, on which the IRS formally communicates to the taxpayer the Examination Division’s determination to assert a penalty. See Belair Woods, LLC v. Commissioner

, 154 T.C. 1, 15 (2020).

In Kroner v. Commissioner

, 48 F.4th 1272 (11th Cir. 2022)

, rev’g in part T.C. Memo. 2020

- 73
, the U.S. Court of Appeals for the Eleventh Circuit disagreed with the Tax Court regarding the timing of the section 6751(b) approval requi rement. The Eleventh Circuit concluded that “the IRS satisfies [s]ection 6751(b) so long as a supervisor approves an initial determination of a penalty assessment before it assesses those penalties.” Id. at 1276

.

In Laidlaw’s Harley Davidson Sales

, Inc. v. Commissioner

, 29 F.4th 1066, 1071 (9th Cir. 2022)

, rev’g and remanding 154 T.C. 68 (2020)

, the U.S. Court of Appeals for the Ninth Circuit considered the timeline for obtaining supervisory approval of “assessable penalties,” which are not subject to deficiency procedures. The Ninth Circuit held that

, for an assessable penalty

, supervisory approval is timely if secured before the penalty is assessed or “before the relevant supervisor loses discretion whether to approve the penalty assessment.” Id. at 1074.

We follow the relevant precedent of the Court of Appeals to which an appeal would generally lie. See Golsen v. Commissioner , 54 T.C. 742, 757 (1970), aff’d , 445 F.2d 985 (10th Cir. 1971). In this case the appeal would lie in the Ninth Circuit, which has not address ed this issue in a deficiency case

. Because the immediate supervisor’s signature on the 30

- day letter is timely under either standard, the Court does not address the potential conflict.

Section 6662(a) imposes a 20% accuracy

- related penalty on any portion of an underpayment of tax required to be shown on a return if, as provided by section 6662(b)(1), the underpayment is attributable to “[n]egligence or disregard of rules or regulations.” Negligence includes “any failure to make a reasonable attempt to comply” with the internal revenue laws, and “disregard” includes “any careless, reckless, or intentional disregard.” § 6662(c). Negligence also includes any failure by the taxpayer to kee p adequate books and records or to substantiate items properly. Treas. Reg. § 1.6662

- 3(b)(1)

.16

[* 16 ] Petitioners conceded that they should have included the IRA distribution from NADART as income for 2015

. The accuracy

- related penalty does not apply with respect to any portion of the underpayment for which the taxpayer shows that he or she had reasonable cause and acted in good faith. § 6664(c)(1); see Higbee , 116 T.C. at 44 6

– 47. Petitioners did not show reasonable cause. Accordingly, they are liable fo r the section 6662 (a) penalty as it pertains to the underpayment related to the IRA distribution

. We have considered all arguments made by the parties, and to the extent not mentioned or addressed, they are irrelevant or without merit.

To reflect the foregoing,

An appropriate order will be issued, and d ecision will be entered under Rule 155.