United States Tax Court

T.C. Memo. 2023-5

PAUL C. WONDRIES AND PATRICIA WONDRIES,

Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

—————

Docket No. 13345-19. Filed January 9, 2023.

—————

Edward O. C. Ord and Cheng Zhang, for petitioners.

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’ federal 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 01/09/23
2

[*2] After concessions1 the issues for consideration are whether 

(1) petitioners are entitled to deductions for expenses reported on the 

Schedules F, Profit or Loss From Farming, attached to their 2015, 2016, 

and 2017 federal income tax returns and (2) petitioners are liable for 

accuracy-related 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 Regulations, 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 Stipulation of 

Facts and the attached Exhibits are incorporated herein by this 

reference. Petitioners were married and resided in California when they 

timely filed their Petition.

During the years preceding those in issue petitioner husband 

operated many successful business enterprises. These included some 23

car dealerships, half of which he managed to convert from losing 

enterprises to profitable ones.

Around early 2004 petitioners sought to diversify their business 

interests by acquiring a cattle ranch. They toured many properties 

before ultimately deciding on an 1,100-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 house. Wells 

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 provided 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 Petitioners conceded that they are required to include an individual 

retirement account (IRA) distribution from NADART in income for 2015. NADART is 

the financial services and retirement planning division of the National Automobile 

Dealers Association. Respondent conceded the penalty pursuant to section 6662(a) for 

petitioners’ 2017 underpayment.
3

[*3] mortgage payments—primarily through cattle sales and guided 

hunting expeditions—and be profitable within a few years. Their 

secondary approach was to hold the property for investment. The bank 

funded the loan, and petitioners purchased the property for $2 million—

approximately $1 million below 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, repairing and replacing ranch equipment and 

infrastructure, hiring 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, petitioners 

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. 

They 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 and 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, petitioners pivoted from an 

operational focus to an investment one, hoping to eventually sell the 

property at a gain. They endeavored to improve the property by 
4

[*4] repairing the fencing and irrigation system, renovating the housing 

structures and pool, clearing brush for fire control, and maintaining the 

grounds surrounding the buildings. Petitioners usually had the foreman 

and third-party contractors complete these tasks, but when they visited

the ranch—approximately six days per month—they 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 receipts. 

This method of recordkeeping differs from petitioner husband’s

dealership businesses, which use automated professional software to 

manage payroll and accounting.

Petitioner husband engaged the accountant from his automotive 

businesses to periodically review his ranch accounting work. Petitioner 

husband’s management style for the ranch is similar to his management 

style for the automotive businesses: He 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 broken even. They have realized a net loss every year since purchase 

and have claimed corresponding deductions. For the years in issue 

petitioners reported 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 was an employee of AGL Development during 

the years in issue. He accordingly reported wage income from Form 

W–2, Wage and Tax Statement, for 2015–17. Petitioners also reported

income on their Schedules E, Supplemental Income and Loss, for 
5

[*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 Income2

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 distributions 

from First Clearing, LLC, and Great-West Trust Co., LLC.

Respondent’s revenue agent George Krmpotich examined

petitioners’ 2015, 2016, and 2017 tax returns. On November 8, 2018, he 

obtained written approval from his immediate supervisor for an 

accuracy-related penalty for 2015. On that same day respondent sent 

petitioners a Letter 950, commonly referred to as a 30-day letter, 

advising 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 deficiency (notice) on May 7, 2019. Respondent

determined in the notice that petitioners were required to include the

$7,620 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 cattle ranching business for profit and therefore whether the 

deductions were proper.3

I. Burden of Proof

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. Petitioners do not contend 

that the burden of proof should shift to respondent under section 

7491(a).

II. Evidentiary Issue

On November 22, 2021, petitioners filed a Motion to Strike the 

Testimony of George Krmpotich, 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, and 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-Profit Business

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 Petitioners 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 contend that an audit for 2004 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. Greenberg’s Express, Inc. 

v. Commissioner, 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 14, 2021, Order, further trial was limited to issues included 

in the petitioners’ pretrial memorandum.
7

[*7] in for profit.” “[I]f such activity is not engaged in for profit, no 

deduction attributable to such activity [is] allowed” except 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 activity that are allowable 

without regard to whether the activity was engaged in for profit).

Section 183(c) defines 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 section 162 or 

212, taxpayers must show that they are engaged in the activity with the

primary objective of making a profit. Westbrook v. Commissioner, 68 

F.3d 868, 875 (5th Cir. 1995), 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 expectation 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 (8th Cir. 

2008), aff’g T.C. Memo. 2007-309. Greater weight is given to objective 

facts than to the taxpayer’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 advisers; 

(3) the time and effort expended by the taxpayer in carrying on the 

activity; (4) the expectation that assets used in the activity may 

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

similar 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 financial 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 On the Activity

At the time of purchasing the ranch, petitioners interviewed 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 served 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 petitioner 

husband testified that he personally performed the accounting and 

payroll functions. He said that the ranch did not need the more 

sophisticated software used by his automotive businesses, which

therefore would have been an unnecessary expenditure. In performing 

this function, petitioner husband used a single-entry form of accounting 

and maintained copies of all receipts and invoices for ranch-related 

purposes. He also provided the foreman with a credit card and a 

checkbook designated for ranch purchases only. To verify the accuracy 

of their reporting, petitioners employed their long-time accountant to 

review the books and records twice annually.

In their business plan, petitioners informed the bank that they 

intended to satisfy the mortgage payments by raising and selling cattle. 

This plan also included providing guided hunting expeditions on the 

property. Soon after purchasing the property, petitioners realized that 

these plans 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 populate 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. Reg. § 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’ shift 

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 profitability may also indicate a 

profit motive.”). We find that this factor weighs in petitioners’ favor.

B. The Expertise of the Taxpayer or His Advisers

Petitioners concede that they had zero ranching experience before 

making the investment in the property. And it does not appear that 

they prepared for the activity by conducting extensive studies 

themselves. They did, however, interview several individuals and 

ultimately hired Mr. Palm as foreman.

Respondent contends that the ranch’s failure as a profitable 

enterprise belies Mr. Palm’s expertise. 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 activities 

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 taxpayer 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 

On 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. At 

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 

motive 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 have 
10

[*10] substantial personal or recreational aspects, may indicate an 

intention to derive a profit.”).

Petitioners did employ Mr. Palm as foreman. He and his wife 

lived and worked 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 That 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 hunting 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 was 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 operations 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 inferred from expected appreciation of 

the activity’s assets only where the appreciation exceeds operating 

expenses 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); Hillman 
11

[*11] v. Commissioner, T.C. Memo. 1999-255. These cases do not 

require that the taxpayer recoup all past losses. Instead, the question 

is “whether [the taxpayer] would recoup the losses between the years in 

issue and the ‘hoped-for profitable future.’” Robison v. Commissioner, 

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 and 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 trial 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 this 

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, the 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 petitioner husband’s estimates. 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. Approximately 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. On that basis, we believe petitioners engaged in the ranch 

business for profit. See Treas. 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 though the 

activity is presently unprofitable.”). This 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 nor 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 profitable 

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 purchased 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, we find that the drought was beyond their control. See 

id. (“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 conditions, such losses would not be 

an indication that the activity is not engaged in for profit.”).

That said, it is not apparent that the 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 

planning 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 hunting 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 Any, Which 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: The 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 petitioners reported total income of 

$11,099,715, $12,376,821, and $9,259,687, respectively. The significant 

losses from the ranching activity 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 generated

substantial tax benefits. This benefit is indicative of a lack of profit 

motive. See Treas. Reg. § 1.183-2(b)(8) (“Substantial 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 are 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 spent no more 

than two weekends per month at the property. And when 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 elements involved.”).

Respondent argues that petitioners did derive pleasure from their 

trips to the property, noting that on some occasions they invited guests 

[*13]
14

[*14] to the property and generally enjoyed 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 profit. Their activities cannot be characterized as a hobby.

We do not sustain 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 underpayments. Since we have 

determined that petitioners did engage in a for-profit business, we reject 

the penalties associated with the deficiencies pursuant to the section 

183 finding. Respondent 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 Commissioner 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 

satisfies that burden by presenting sufficient evidence to show that it is 

appropriate to impose the penalty in the 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. Invs., LLC v. Commissioner, 152 T.C. 

75, 85–86 (2019). But it 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 requirement. 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 addressed 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 keep 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 446–47. 

Petitioners did not show reasonable cause. Accordingly, they are liable

for 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 decision will be entered 

under Rule 155.