1 All section references are to the Internal Revenue Code (Code)

in effect for the years at issue. All Rule references are to the

Tax Court Rules of Practice and Procedure.

T.C. Memo. 1997-71

UNITED STATES TAX COURT

THOMAS B. DRUMMOND, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 16958-94. Filed February 10, 1997.

William F. Krebs and Mark E. Kellogg, for petitioner. 

Susan T. Mosley, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

CHIECHI, Judge: Respondent determined the following

deficiencies in, additions to, and accuracy-related penalties on

petitioner's Federal income tax:

Additions to Tax Accuracy-Related Penalties

Year Deficiency Sec. 6651(a)(1)1 Sec. 6662(a)

1989 $23,141.00 $1,053.80 $5,544.00

1990 30,954.00 7,738.47 5,340.60

1991 25,657.00 -- 4,778.20
- 2 -

2 The parties agree that the Court's holding on the characterization of petitioner's gain from that sale will be dispositive

of the remaining issues presented under secs. 404(h)(1)(C) and

4972(a).

The issues remaining for decision are:

(1) Was the drawing that petitioner sold during 1989

"property held by the taxpayer primarily for sale to customers in

the ordinary course of his trade or business" within the meaning

of section 1221(1)? We hold that it was not, and we further hold

that the gain that petitioner realized from the sale of that

drawing is long-term capital gain.2 

(2) Did petitioner engage in his horse activity during

1989, 1990, and 1991 and his cattle activity during 1990 and 1991

with the objective of making a profit within the meaning of

section 183? We hold that he did not.

(3) Is petitioner liable for 1989 and 1990 for the addition

to tax under section 6651(a)(1)? We hold that he is not for 1989

and that he is for 1990 to the extent stated herein.

(4) Is petitioner liable for 1989, 1990, and 1991 for the

accuracy-related penalty under section 6662(a)? We hold that he

is to the extent stated herein.
- 3 -

3 At the conclusion of the trial herein, the Court ordered the

parties to file simultaneous opening and answering briefs. Both

of petitioner's briefs failed to comply with Rule 151(e)(3). For

example, petitioner's opening brief did not contain proposed

findings of fact as required by that Rule. However, his answering brief contained what amounted to proposed findings of fact to

which respondent did not have the opportunity to object. Consequently, we did not use the proposed findings of fact contained

in petitioner's answering brief as an aid in finding the facts in

this case.

FINDINGS OF FACT3

 Some of the facts have been stipulated and are so found.

Petitioner resided in The Plains, Virginia, at the time the

petition was filed.

During all relevant periods, petitioner, who holds a bachelor's degree in philosophy, a master's degree in clinical psychology, and a Ph.D. degree in psychology, practiced as a psychologist and his income from that practice provided his support. 

Throughout the years at issue, petitioner devoted an average of

58 hours a week to his psychology practice.

From the late 1970's through sometime in 1987, petitioner

served as a director of several mental health clinics that are

part of the Prince George’s County, Maryland, health system. 

From sometime in 1987 through 1989, petitioner practiced as a

psychologist at the Saint Luke Institute, a private psychiatric

hospital in Suitland, Maryland. From 1988 through 1994, petitioner provided psychological testing and counseling services

under the name Psychological Testing Services. From 1989 through

1994, petitioner provided psychological services at the New Life
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4 For example, petitioner asked certain experts at the National

Gallery of Art in Washington, D.C. (National Gallery) to ascertain whether the drawings that he had acquired were structurally

sound, that is to say, whether they were on acid-producing paper,

which would eventually deteriorate. There are inconsistencies in

the record as to when petitioner undertook such research.

Center (New Life Center), a residential center for psychiatric

patients, which he and another psychologist founded in March

1989.

The Drawing in Question

During the 1970's, petitioner, who at all relevant times has

had an interest in and enjoyed art, purchased at least six drawings through auctions, galleries, or private sales, including one

entitled “Three Feminine Heads” (drawing in question) that he

purchased during the early 1970's for $1,300 from a gallery in

Washington, D.C., and that had been attributed to the artist

Michelangelo Anselmi (Anselmi). When petitioner acquired those

drawings, he did not intend to sell them. Drawings of the type

that petitioner purchased had often been used by their respective

artists as models for their own paintings, sculptures, and/or

frescos.

Petitioner conducted research throughout the 1970's and into

the 1980's on the drawings that he had acquired during the

1970's.4 As a result of that research, petitioner concluded that

certain drawings of the type that he had purchased either were

not attributed to particular artists or were attributed, as was

subsequently determined was the case with the drawing in ques-
- 5 -

tion, to the wrong artists and that art museum curators knowledgeable about both museum and privately-owned art collections

were qualified to determine the artists of such drawings.

Around the early 1980's, based on a visual comparison of the

drawing in question with drawings properly attributed to Anselmi,

petitioner became convinced that Anselmi had not sketched that

drawing; the curator of Italian drawings at the National Gallery

(curator of Italian drawings) became interested in the drawing in

question; that curator advised petitioner that she was fairly

certain that the drawing in question was attributable to a

follower of Correggio, who worked, as did Correggio, in Parma,

Italy, during the 16th century; petitioner lent that drawing to

the National Gallery; and the curator of Italian drawings conducted research on it and attributed it to a follower of

Correggio named Franco Parmagianino (Parmagianino).

For some undisclosed period of time after the drawing in

question was attributed to Parmagianino, the curator of Italian

drawings caused the drawing in question to receive international

exposure by having it displayed in art exhibits at the National

Gallery and in Parma, Italy. During that period, that drawing

also received international exposure through newspaper articles

about it in the United States and Italy and photographs of it in

museum art catalogues.

During 1988 or 1989, Christie's Auction House in New York

City (Christie's) advised petitioner that the drawing in question
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5 At some time prior to 1982, petitioner attempted to sell the

drawing in question through Christie's. However, upon being

advised by Christie's that that drawing had a value of $500,

petitioner decided not to auction it at that time.

could be sold at auction for approximately $100,000 and expressed

an interest in auctioning it on his behalf.5 At or about the

same time, the curator of Italian drawings informed petitioner

that the National Gallery was interested in purchasing that

drawing. Petitioner advised her that Christie's could sell the

drawing in question at auction for $100,000 and that he would be

willing to sell it to the National Gallery for an amount exceeding $100,000. Thereafter, petitioner received a letter from the

National Gallery offering to purchase the drawing in question for

$115,000. In January 1989, petitioner sold it to that museum for

that amount.

During all relevant periods, petitioner did not own or

acquire any drawings, other than the drawing in question, that

were either unattributed or misattributed and for which proper

attribution was obtained. During the 1970's, petitioner did not

attempt to sell any of the drawings that he had acquired during

those years. During the period 1985 through 1994, petitioner did

not sell any artwork or collectible, other than the drawing in

question. After the sale of the drawing in question, petitioner

did not use the proceeds from its sale to purchase other drawings

for purposes of attribution and sale.

Petitioner's Simplified Employee Pension

During 1989, petitioner informed his tax preparer, Thomas A.
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McVeigh, Jr. (Mr. McVeigh), about the sale of the drawing in

question and inquired about establishing some type of retirement

plan. Mr. McVeigh advised petitioner to consult with Earl

Schoenborn about establishing a retirement plan. The three of

them met and discussed the amount of the contribution that

petitioner could make to a retirement plan for 1989 after taking

into account the approximate amount of petitioner's income and

expenses during 1989 from various sources, including the New Life

Center and the sale of the drawing in question. 

Sometime thereafter, petitioner chose to consult with

another individual about establishing a retirement plan. Petitioner established a simplified employee pension (SEP) for 1989

to which he contributed $20,000. Petitioner's contributions to

the SEP for 1990 and 1991 were $30,000 and $26,000, respectively.

Petitioner's Horse Activity and Cattle Activity

 

Petitioner's Horse Activity

During the early 1970's, petitioner, who has at all relevant

times enjoyed equestrian activities, owned a horse, took riding

lessons, and learned how to train a horse (1) to perform at an

unspecified level in dressage and (2) to do low-level jumps,

provided that the horse had received some training in jumping.

In July 1988, petitioner, who did not have any formal

training as a horse breeder or a horse trainer, purchased for

approximately $8,000 a five-year old thoroughbred gelding named

Moonshadow (Moonshadow) that had received some training in riding
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and jumping as a result of having been used in fox hunting and

that had been exhibited in certain horse shows. When he acquired

Moonshadow, petitioner believed that it was a willing jumper. He

planned to train Moonshadow in dressage, jumping, and/or crosscountry riding, although he was aware that such activities would

expose that (as well as any other) horse to a significant risk of

injury. Although petitioner expected to spend around two years

in training a horse such as Moonshadow, he was aware that the

training period could vary depending, inter alia, on the level of

training that it had received prior to the time he purchased it

and the type of training that he chose to provide to it. Petitioner hoped to be able to sell Moonshadow after it was trained.

During the period 1988 through sometime in 1990, petitioner

spent about two-and-a-half to three hours a day, or about 15 to

18 hours a week in riding, exercising, and caring for Moonshadow. 

Petitioner spent that time during the mornings when he was not

providing services as a psychologist.

At no time did petitioner investigate or project the price

at which he would have to sell Moonshadow in order to realize a

profit from such a sale. Nor did he contemplate or inquire about

the risks associated with owning a gelding such as Moonshadow if

it were to become lame (i.e., not only could it not continue its

training in, or be used for, any of the activities that petitioner had in mind when he acquired Moonshadow, it also could not

be used for breeding). In fact, petitioner did not become aware
- 9 -

of those risks until Moonshadow became lame sometime during 1990,

approximately 18 months after petitioner had acquired it.

Petitioner had physical examinations, x-rays, and blood work

performed on Moonshadow. However, the cause of Moonshadow's

lameness was not determined. Although petitioner provided

Moonshadow with bed rest and took certain measures to alleviate

the horse's pain, he was unable to rehabilitate it. Around 1995,

petitioner donated Moonshadow to the Virginia Polytechnic Institute (VPI).

Although petitioner became aware of the risks associated

with owning a gelding after his experience with Moonshadow during

1990, he nonetheless decided to purchase another gelding because

geldings were considered to be the most valuable show horses. 

Consequently, sometime during 1990, after Moonshadow became lame,

petitioner purchased for approximately $8,000 another gelding, a

five-year old named Gator (Gator) that already had had some

minimal training. Sometime during or after the spring of 1994,

petitioner retained the services of a horse trainer who worked

with Gator on suppling exercises on the flat, lead changes, and

consistency in the show ring. At unspecified times after the

purchase of Gator, petitioner entered it in certain horse shows

not for the nominal prize money, but for the recognition that it

might gain that would make it attractive to potential buyers. 

Gator, however, exhibited certain difficulties that will prevent

it from ever becoming a show horse of great value.
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6 Any horse that petitioner acquired through the breeding of a

mare such as Jill (1) would not be ready for serious training

until the age of two at which time it could support a rider; 

(2) could not perform and compete as a show horse until the age

of three; and (3) could not become a show horse of great value

until at least the age of six.

After his experience with Moonshadow during 1990, petitioner

concluded that if he were to purchase either a mare or a stallion

and that horse were to become lame or otherwise to lack athletic

ability, it could still be used for breeding purposes. Sometime

during 1990, after Moonshadow became lame, petitioner purchased

for approximately $3,500 to $4,000 a proven broodmare, a fouryear old thoroughbred named Jill (Jill) that had had no training

except for training in accepting a rider. Thereafter, around

1990, petitioner rode Jill, concluded that it did not possess the

characteristics necessary for a show horse or a competitive

horse, which he did not realize when he purchased Jill, and

decided to use it only for breeding purposes.6

Around 1990, petitioner bred Jill to an internationally

acclaimed dressage Trakehner stallion, even though he knew that a

crossbreeding of a thoroughbred and a Trakehner would probably

require that any male offspring be gelded. During 1991, the

crossbreeding of Jill produced a colt named Zack (Zack) that was

gelded within nine months thereafter.

Around 1992, when Zack was a year old, it was trained to

accept a lightweight rider. Around 1995, when Zack was a threeyear old, it was trained to accept a rider of normal weight and
- 11 -

was trained to jump by a professional trainer that petitioner

hired. Sometime thereafter, Zack developed pedalostitis, a foot

disease that prevented it from performing athletic activities. 

Around 1995, petitioner donated Zack to VPI.

During 1992, petitioner met Sue Attisani Lyman (Ms. Lyman),

a horse trainer and breeder since 1979, and bred Jill to Ms.

Lyman's stallion for a stud fee of approximately $1,000. That

breeding produced a filly named Lily (Lily) around 1993. During

1995, when petitioner started to provide Lily with some undisclosed type of training, he discovered that it had fractured its

shoulder and hip and could not be trained as an athlete at that

time, and he therefore abandoned any attempt to train Lily at

that time. As of the time of the trial herein, petitioner

planned to breed Lily in the spring of 1996 and to sell it as a

broodmare.

Around 1993, petitioner again bred Jill to Ms. Lyman's

stallion for a stud fee of between $1,000 and $1,900. That

breeding produced a filly named Bunny (Bunny) during 1994. 

Petitioner entered Bunny (1) in a horse show as a six-week old

with its dam Jill where it performed favorably; (2) in a horse

show as a yearling where it was the winner in a particular class;

and (3) in an international horse show for young prospective show

horses where it was the champion for yearling fillies. At some

undisclosed time during 1995, petitioner entered into a contract

to sell Bunny for $8,500 that was conditioned on the purchaser's
- 12 -

ability to raise the necessary funds. Because of the purchaser's

inability to do so, the sale was not consummated. Although

during the fall of 1995 petitioner saddled Bunny and allowed it

to be ridden, he did not intend to provide other training for it

until it was three years old.

In December 1994, petitioner purchased another broodmare

that had a filly in the spring of 1995. 

In the spring of 1995, petitioner and Ms. Lyman jointly 

(1) purchased a three-year old untrained gelding named Ziggy

(Ziggy) for $10,000, a price that was substantially below its

fair market value; (2) sold it about a month later for $30,000;

and (3) split a substantial profit after accounting for their

minimal expenses (e.g., boarding, training, and veterinarian

fees) of between $500 and $1,000.

Prior to 1993 or 1994, petitioner boarded his horses at

facilities owned by others and incurred total average expenses

for each such horse of about $500 a month. Around 1993 or 1994,

petitioner began boarding the horses that he then owned in the

barn and paddocks located on real property (NLC land) that he had

acquired near Middleburg, Virginia, and that the New Life Center

was using as a residential facility for patients.

At some unspecified time during the period 1992 through

1995, petitioner asked Ms. Lyman to give him riding lessons and

to advise him on how to market his young horses. Starting in the

spring of 1994, petitioner asked Ms. Lyman from time to time to
- 13 -

train some of his horses, including Gator.

At no time did petitioner retain the services of anyone to

appraise the fair market value of his horses. Petitioner did not

project during the years at issue, or at any other time, the

future income, expenses, or profits that he expected would be

generated by his horse activity.

Petitioner’s Cattle Activity

Sometime during 1990, petitioner, who did not have any

formal training as a cattle breeder, purchased for $3,000 a herd

of cattle consisting of a bull and four cows (cows) with calf. 

During 1990 or 1991, and each year thereafter, the cows produced

calves. Petitioner kept the bull, cows, and calves (cattle) on

the NLC land. During the winter months, the cattle consumed

approximately five bales of hay that cost about $35 to $50 a

bale, and, during the remainder of the year, they consumed the

grass on the NLC land. 

Petitioner kept the calves produced by his cows for six to

seven months until they weighed around 250 pounds, at which time

he sold them for approximately $250 each.

Petitioner did not project during 1990, or at any other

time, the future income, expenses, or profits that he expected

would be generated by his cattle activity.
- 14 -

7 Those invoices, receipts, and canceled checks are not part of

the record in this case.

Petitioner’s Books and Records 

Relating to His Horse Activity

and His Cattle Activity 

 During the years at issue, petitioner did not maintain a

separate bank account for either his horse activity or his cattle

activity. During those years, petitioner retained invoices,

receipts, and canceled checks relating to the expenses that were

incurred in those activities.7 However, he did not maintain

books or records such as ledgers and registers to memorialize the

various transactions relating to those activities or to maintain

a historical record of those activities (e.g., the dates on which

horses were purchased, foals and calves were born, and calves

were sold; the specific nature of any training that the horses

that he owned received; and the specific periods during which any

such training was provided).

Petitioner's Tax Returns

For the years 1988 through 1991, petitioner, who has a

limited knowledge of the Federal income tax laws and who has not

had any formal training in accounting or tax matters, retained

the services of Mr. McVeigh, a tax return preparer since about

1982, to prepare his individual Federal income tax returns

(returns). 

Petitioner relied on Mr. McVeigh to prepare requests to

extend the time within which to file his returns for 1989 and
- 15 -

1990. Mr. McVeigh completed and filed on petitioner's behalf

Forms 4868 (Application for Automatic Extension of Time to File

U.S. Individual Income Tax Return (application for automatic

extension)) for those years that were dated April 11, 1990, and

April 5, 1991, respectively, signed by petitioner, and requested

a four-month extension of time until August 15, 1990, and August

15, 1991, respectively, within which to file his returns for

those years. Line 1 of each of those applications required

petitioner to make a reasonable estimate, based on the information available, of his tax liability for the year for which he

was seeking an extension. In arriving at the respective estimated tax liabilities for 1989 and 1990 that Mr. McVeigh showed

on line 1 of petitioner's applications for automatic extension

for those years, Mr. McVeigh believed it reasonable, and so

advised petitioner, that, given petitioner's situation, those

estimates be based on the tax liability shown in petitioner's

return for the year immediately preceding the year for which each

such application was being filed, provided that petitioner paid

each of those estimated tax liabilities by the time he filed each

such application. Since the tax liabilities shown in petitioner's 1988 and 1989 returns were $9,041 and $9,043, respectively, Mr. McVeigh entered on line 1 of petitioner's applications for automatic extension for 1989 and 1990 estimated tax

liabilities of $9,100 and $9,043, respectively. Those respective

applications also indicated that for 1989 estimated tax payments
- 16 -

8 All dollar amounts are rounded to the nearest dollar.

9 In Schedule C of his 1989 return relating to art sales, petitioner reported $100,000 as "Gross receipts or sales", $1,000 as

"Cost of goods sold and/or operations", and $99,000 as "Net

profit" with respect to the sale of the drawing in question. 

Petitioner concedes that he sold that drawing for $115,000,

purchased it for $1,300, and realized a gain of $113,700 from its

sale.

of $9,100 were made by petitioner and that for 1990 $4,908 of tax

was withheld from petitioner and $4,135 of tax was paid with his

1990 application for automatic extension.

Petitioner filed returns for 1989 and 1990 that were dated

August 14, 1990, and October 25, 1991, respectively, were received by the Internal Revenue Service (Service) on August 23,

1990, and November 1, 1991, respectively, and showed total tax

liabilities of $9,043 and $15,716, respectively.8

Petitioner took account of the following items to arrive at

the adjusted gross income of $61,892, $95,024, and $152,576 shown

in his respective returns for 1989, 1990, and 1991:

1989 1990 1991

Wages, salaries, etc. $14,923 $49,000 $86,500

Taxable interest 1,956 982 441 

Dividends 55 947 1,720

Tax refunds -- 1,315 --

Schedules C

 Net profit from

 art sales 99,0009 -- --

 Loss from commodities

 and other investments 2,925 -- --

1989 1990 1991

 Loss for 1989 and net

 profit for 1990 from

 the New Life Center 44,375 32,718 --
- 17 -

10 Although petitioner's 1991 return erroneously showed that

deduction as a deduction for "self-employed health insurance",

the parties agree that that deduction was for petitioner's 1991

SEP contribution.

 Net profit from 

 Psychological 

 Testing Services 7,372 34,930 104,371

Schedule D capital gain 18,339 -- 1,373

Schedule E loss for 1989 

 and income for 1991 2,200 -- 4,317

Schedule F loss 10,253 7,780 19,588

Deduction for one-half of 

 self-employment tax -- 176 558

Deduction for SEP 

 contribution 20,000 16,912 26,00010

With respect to the $99,000 net profit that petitioner

reported in Schedule C of his 1989 return relating to art sales,

petitioner informed Mr. McVeigh that he sold the drawing in

question during 1989 at a gain. Mr. McVeigh advised petitioner

that an important factor in characterizing that gain as selfemployment income was whether petitioner continued to purchase

and sell drawings in the future. Petitioner informed Mr. McVeigh

that he intended to do so. Based on the information that petitioner provided to Mr. McVeigh, Mr. McVeigh concluded that the

gain from the sale of the drawing in question constituted selfemployment income, and not long-term capital gain, and that it

should be reported in a Schedule C of petitioner's 1989 return

relating to art sales.

With respect to the automobile expense deductions claimed in

Schedules C of petitioner’s returns for the years at issue

relating to Psychological Testing Services, petitioner gave Mr.
- 18 -

11 The standard mileage deductions claimed in Schedules C of

petitioner's returns for 1989, 1990, and 1991 relating to Psychological Testing Services were shown as deductions for "Car and

truck expenses".

12 The deductions for certain other automobile expenses that

were claimed in Schedules C of petitioner's returns for 1990 and

1991 relating to Psychological Testing Services were shown as

deductions for insurance and interest expenses.

McVeigh information about the expenses relating to the business

use of his automobile (e.g., the type of vehicle that he used for

business purposes, the percentage of business use of that vehicle, and the miles traveled with that vehicle for business

purposes). Mr. McVeigh advised petitioner that he could claim as

an expense for the business use of his automobile either (1) a

standard mileage deduction or (2) a deduction for depreciation

and certain actual expenses (e.g., gasoline). However, in

preparing Schedules C of petitioner's returns for the years at

issue relating to Psychological Testing Services, Mr. McVeigh

erroneously claimed both a standard mileage deduction and a

deduction for depreciation and certain actual automobile expenses, as follows:

 Depreciation Standard Other 

Year Expense Mileage11 Expenses12

1989 $2,167 $956 --

1990 2,600 875 $1,530 

1991 2,550 1,856 634

Respondent determined in the notice of deficiency (notice),

and petitioner concedes, that petitioner is not entitled to

reduce his income from Psychological Testing Services for the
- 19 -

years at issue by the following automobile expenses (disallowed

automobile expenses) claimed in Schedules C of his returns for

those years: (1) All claimed depreciation expenses for those

years and (2) other expenses of $293 claimed for 1990. Petitioner was not aware of the errors relating to the disallowed

automobile expenses that appeared in his returns for the years at

issue and could not have detected them by reviewing those returns.

Based on what petitioner told Mr. McVeigh about his horse

activity and his cattle activity, including that he intended to

buy, train, and sell horses and that he had incurred certain

expenses for various stables and training centers that Mr.

McVeigh believed to be reputable, Mr. McVeigh concurred in

petitioner's conclusion, and he and petitioner jointly decided,

that the gross income, expenses, and loss from petitioner's horse

activity during 1989 and the aggregate income, expenses, and

losses from his horse activity and cattle activity during 1990

and 1991 should be reported in Schedules F of petitioner's

returns for those years and that any loss from those activities

could be used to reduce petitioner's income from other sources

that was reported in those returns.

Schedule F of petitioner's return for each of the years 1988

and 1989, during which petitioner was engaged only in his horse

activity, and not his cattle activity, reflected the following
- 20 -

13 The aggregate income reported in Schedule F of petitioner's

1993 return included an unexplained income item of $60,000 that

petitioner reported as "Other income".

14 The aggregate expenses reported in Schedule F of petitioner's

1993 return included an unexplained interest expense of $29,202.

income, expenses, and loss from that horse activity: 

Year Income Expenses Loss

1988 -- $3,648 $3,648

1989 -- 10,253 10,253

Schedule F of petitioner's return for each of the years 1990

through 1994, during which he was involved in both his horse

activity and his cattle activity, did not show separately the

income and expenses attributable to each such activity. Instead,

those schedules reflected the following aggregate income, expenses, and losses from both of those activities:

 Aggregate Aggregate Aggregate

Year Income Expenses Losses 

1990 -- $7,780 $7,780 

1991 $1,024 20,612 19,588

1992 1,017 29,708 28,691

1993 61,27513 72,32814 11,053 

1994 1,083 38,561 37,478

All of the income that petitioner reported in Schedules F of

his 1991, 1992, and 1994 returns and $1,275 of the income that he

reported in Schedule F of his 1993 return were attributable to

his cattle activity and represented income that he received

during each of those years from the sale of calves. During 1991,

petitioner incurred expenses of $1,024 in connection with his
- 21 -

15 The record does not disclose the expenses that petitioner

incurred during the years 1990, 1992, 1993, and 1994 in connection with his cattle activity.

16 At trial, the parties agreed that any deduction to which

petitioner may be entitled for each of the years 1989, 1990, and

1991 for contributions that he made to the SEP for each of those

years is limited by sec. 404(h)(1)(C) to 15 percent, and not 25

percent, of his self-employment income for each such year.

cattle activity.15 

With respect to the $20,000 contribution that petitioner

made to the SEP for 1989, petitioner informed Mr. McVeigh in

April 1990 that he had established a retirement plan to which he

timely contributed $20,000 and related the conversations that he

had had with the individual who had assisted him in establishing

that plan. Mr. McVeigh advised petitioner that the deductible

amount of that contribution was limited to a percentage not to

exceed 25 percent of petitioner's self-employment income and that

that percentage varied depending on the nature of the retirement

plan. Based on the information that petitioner gave Mr. McVeigh

about, inter alia, the retirement plan that he had established

and the sale of the drawing in question, Mr. McVeigh advised

petitioner that he was entitled to deduct for 1989 his $20,000

contribution to that plan to the extent of 25 percent of his

self-employment income for that year.16 Mr. McVeigh further

advised petitioner that, in calculating his self-employment

income for 1989 for purposes of determining the deductible

portion of his $20,000 retirement plan contribution, he should

take into account only the Schedules C of his 1989 return that
- 22 -

showed net profits (viz., $99,000 net profit from art sales and

$7,372 net profit from Psychological Testing Services), and not

the Schedules C that showed losses (viz., $2,925 loss from

commodities and other investments and $44,375 loss from New Life

Center). Consequently, petitioner deducted in his 1989 return

the entire $20,000 that he contributed to the SEP. That deduction exceeded (by $5,075) 25 percent of the aggregate amount

(viz., $59,702) of the results shown in the various Schedules C

of that return that petitioner reported as his "Business income"

(business income) on page 1, line 12 of that return.

With respect to the $30,000 contribution that petitioner

made to the SEP for 1990, petitioner deducted $16,912 in his

return for that year. That deduction equaled 25 percent of the

aggregate amount (viz., $67,648) of the results shown in the

various Schedules C of that return that petitioner reported as

his business income for 1990. With respect to the $26,000

contribution that petitioner made to the SEP for 1991, petitioner

deducted that entire amount in his return for that year. That

deduction equaled 24.91 percent of the amount (viz., $104,371)

shown in Schedule C of that return that petitioner reported as

his business income for 1991.

At the time that Mr. McVeigh prepared petitioner's returns

for the years at issue, Mr. McVeigh did not know of any adverse

tax consequences that might result if petitioner's retirement

plan contribution for each such year exceeded the amount allow-
- 23 -

able as a deduction (excess contribution). Mr. McVeigh advised

petitioner that he could make excess contributions, with the only

consequence being that he could not deduct them.

After Mr. McVeigh prepared petitioner's return for each of

the years at issue, he provided petitioner with a copy of each

such return and pointed out to him the amount of tax that each

such return showed as due. Petitioner did not review any of

those returns and was merely interested in knowing the amount of

tax due so that he could write a check for that amount.

OPINION

Petitioner bears the burden of proving that respondent's

determinations in the notice are erroneous. Rule 142(a); Welch

v. Helvering, 290 U.S. 111, 115 (1933).

Petitioner attempted to satisfy his burden of proof in this

case through his own testimony and that of Mr. McVeigh and Ms.

Lyman. We found the testimony of Mr. McVeigh and Ms. Lyman to be

credible. We found petitioner's testimony to be general, vague,

conclusory, and/or questionable in certain material respects. 

Under the circumstances presented here, we are not required to,

and we generally do not, rely on petitioner's testimony to

sustain his burden of establishing error in respondent's determinations. See Lerch v. Commissioner, 877 F.2d 624, 631-632 (7th

Cir. 1989), affg. T.C. Memo. 1987-295; Geiger v. Commissioner,

440 F.2d 688, 689-690 (9th Cir. 1971), affg. per curiam T.C.

Memo. 1969-159; Tokarski v. Commissioner, 87 T.C. 74, 77 (1986). 
- 24 -

17 Petitioner does not dispute that if the Court were to

determine that that gain is ordinary income, he would nonetheless

be liable for the excise tax imposed by sec. 4972(a), but in a

lesser amount than that determined by respondent. See supra note

16.

Gain from the Sale of 

the Drawing in Question

 

The parties agree that petitioner purchased the drawing in

question during the 1970's for $1,300, sold it during 1989 for

$115,000, and realized a gain of $113,700 from that sale. The

dispute here is whether that gain should be characterized as

ordinary income, as petitioner contends, or as long-term capital

gain, as respondent contends. The parties agree that if the

Court were to determine that that gain is long-term capital gain,

petitioner would not be entitled to deduct any amount for his

contribution to the SEP for 1989 and that he would be liable for

the excise tax imposed by section 4972(a) as determined by

respondent.17 The parties further agree that the resolution of

the dispute over the character of the gain from the sale of the

drawing in question depends on whether that drawing is "property

held by * * * [petitioner] primarily for sale to customers in the

ordinary course of his trade or business" within the meaning of

section 1221(1). If it is, the gain at issue is ordinary income,

and not capital gain. 

The purpose of section 1221(1) is to "differentiate between

the 'profits and losses arising from the everyday operation of a

business' * * * and 'the realization of appreciation in value
- 25 -

accrued over a substantial period of time'". Malat v. Riddell,

383 U.S. 569, 572 (1966) (quoting Corn Prods. Refining Co. v.

Commissioner, 350 U.S. 46, 52 (1955), and Commissioner v.

Gillette Motor Transp., Inc., 364 U.S. 130, 134 (1960)).

As used in section 1221(1), the word "primarily" means "of

first importance" or "principally." Malat v. Riddell, supra at

572. The question whether property is property described in

section 1221(1) is a factual inquiry. Pasqualini v. Commissioner, 103 T.C. 1, 6 (1994). In resolving that question, the

courts have examined various factors, including the following: 

(1) The purpose for which the property was acquired; (2) the

purpose for which it was held; (3) the frequency, continuity, and

substantiality of sales; (4) the duration of ownership; (5) the

use of the proceeds from the sale of the property; (6) the

business of the taxpayer; and (7) the time and effort that the

taxpayer devoted to sales activities relating to the asset in

question by developing or improving that asset, soliciting

customers, or advertising. See Graves v. Commissioner, 867 F.2d

199, 202 (4th Cir. 1989), affg. an Oral Opinion of this Court;

United States v. Winthrop, 417 F.2d 905, 910 (5th Cir. 1969); 

Huey v. United States, 205 Ct. Cl. 551, 504 F.2d 1388, 1392

(1974); Maddux Constr. Co. v. Commissioner, 54 T.C. 1278, 1284

(1970); Hoover v. Commissioner, 32 T.C. 618, 627 (1959). No

single factor, or combination thereof, is necessarily controlling. Graves v. Commissioner, supra at 202. The foregoing
- 26 -

18 Petitioner relies on Stockton Harbor Indus. Co. v. Commissioner, 216 F.2d 638 (9th Cir. 1954), to support his contention

that, notwithstanding the absence of any sales of drawings by

petitioner other than the drawing in question, he held the

drawing in question primarily for sale to customers in the

ordinary course of his trade or business. We find that case to

be distinguishable and petitioner's reliance on it to be misplaced. In the Stockton Harbor Indus. Co. case, the Court of

(continued...)

factors have varying degrees of relevancy depending on the facts

of a particular case, and all factors may not be relevant in a

particular case. S & H, Inc. v. Commissioner, 78 T.C. 234, 243-

244 (1982). Objective factors carry more weight than the taxpayer's subjective statement of his or her intent. Guardian

Indus. Corp. v. Commissioner, 97 T.C. 308, 316 (1991), affd.

without published opinion 21 F.3d 427 (6th Cir. 1994). 

Based on our review of the entire record before us, and in

particular the following facts, we find that petitioner has

failed to establish that he held the drawing in question primarily for sale to customers in the ordinary course of his trade or

business within the meaning of section 1221(1): (1) When petitioner acquired the drawing in question during the early 1970's,

he did not intend to sell it; (2) petitioner conducted research

throughout the 1970's and into the 1980's on the drawings that he

had acquired during the 1970's; (3) during the 1970's, petitioner

did not attempt to sell any of the drawings that he had acquired

during those years; (4) petitioner did not sell any artwork or

collectible, other than the drawing in question, during the

period 1985 through 1994;18 (5) petitioner purchased the drawing
- 27 -

18(...continued)

Appeals for the Ninth Circuit found that the taxpayer held

certain condemned real estate primarily for sale to customers in

the ordinary course of its trade or business. Id. at 651-656. 

In contrast to the instant case, the record in the Stockton

Harbor Indus. Co. case established, inter alia, that (1) the

taxpayer was a corporation organized for the purpose of dealing

in real estate; (2) it acquired the real estate in question for

the purpose of developing it as an industrial site; (3) it

advertised and attempted to sell that real estate; and (4) it

sold various parcels of that real estate prior to its condemnation. Id. at 652-655. 

in question during the early 1970's and had it attributed to the

correct artist around the early 1980's, but did not sell it until

January 1989; (6) petitioner did not use the proceeds from the

sale of the drawing in question to purchase other drawings for

purposes of attribution and sale; and (7) petitioner engaged in a

psychology practice during all relevant periods, the income from

which provided his support during those periods.

To support his position under section 1221(1), petitioner

contends that (1) during the 1970's, his research on the drawings

that he had acquired and his attempts to attribute them to the

correct artists were sporadic; (2) during 1979 or 1980, he

changed his intention with respect to certain drawings that he

had acquired during the 1970's, including the drawing in question, and decided to have those drawings attributed to the

correct artists and sold at a profit; (3) during the 1980's, his

research on those drawings and his attempts to enlist the interest of curators for purposes of attributing those drawings to the

correct artists became systematic; (4) during 1989, after the
- 28 -

19 Petitioner further contends that his position that the

drawing in question is property described in sec. 1221(1) is

supported by the following facts: Certain experts checked the

physical stability of the drawing in question; it was determined

that Anselmi had not sketched that drawing; the curator of

Italian drawings attributed that drawing to Parmagianino; and the

drawing in question received international exposure through art

exhibits, newspapers, and art catalogues. We are not persuaded

by the foregoing facts on which petitioner relies and the other

facts that we have found relating to the sale of the drawing in

question that that drawing is property described in sec. 1221(1),

and not a capital asset.

20 We note that even if we had found certain of those contentions as facts, they would not necessarily persuade us that the

drawing in question was property described in sec. 1221(1). For

example, assuming arguendo that, during 1979 or 1980, petitioner

had changed his intention with respect to certain drawings that

he had acquired during the 1970's, including the drawing in

question, and decided to have those drawings attributed to the

correct artists and sold at a profit, that would not necessarily

indicate that he held those drawings primarily for sale to

customers in the ordinary course of his trade or business, and

not for investment. See Howell v. Commissioner, 57 T.C. 546, 555

(1972). 

sale of the drawing in question, he abandoned his art activities

because (a) there was a serious crash in the art market as a

result of an economic recession during that year and (b) he was

having difficulty in enlisting the interest of curators for

purposes of attributing certain of his drawings to the correct

artists.19 At trial, petitioner presented only his own testimony

to support the foregoing allegations. We are unwilling to rely

on that testimony to establish those contentions.20 For example,

it strains credulity that, as soon as petitioner sold in January

1989 the drawing in question, which was the only drawing, artwork, or collectible that the record shows he ever sold, the art

market coincidentally and suddenly crashed, thereby materially
- 29 -

contributing to petitioner's decision to abandon his alleged

business activities involving the sale of artwork.

On the instant record, we sustain respondent's determination

that the gain that petitioner realized from the sale of the

drawing in question is long-term capital gain. 

Petitioner's Horse Activity and Cattle Activity

Section 183--In General 

Section 183(a) generally limits the amount of expenses that

a taxpayer may deduct with respect to an activity "not engaged in

for profit" to the deductions provided in section 183(b). 

Section 183(b)(1) provides that deductions that would be allowable without regard to whether such activity is engaged in for

profit are to be allowed. Section 183(b)(2) further provides

that deductions which would be allowable only if such activity is

engaged in for profit are to be allowed, but only to the extent

that the gross income derived from such activity for the taxable

year exceeds the deductions allowable under section 183(b)(1). 

An activity is "not engaged in for profit" if it is an activity

other than one with respect to which deductions are allowable for

the taxable year under section 162 or section 212(1) or (2). 

Sec. 183(c). 

In determining whether an activity is engaged in for profit,

the taxpayer must show that he or she engaged in the activity

with an actual and honest objective of making a profit. E.g., 

Hulter v. Commissioner, 91 T.C. 371, 392 (1988); Dreicer v.
- 30 -

Commissioner, 78 T.C. 642, 645 (1982), affd. without opinion 

702 F.2d 1205 (D.C. Cir. 1983). Although the taxpayer's expectation of a profit need not be reasonable, he or she must have a

good faith objective of making a profit. E.g., Dreicer v.

Commissioner, supra at 645; Dunn v. Commissioner, 70 T.C. 715,

720 (1978), affd. on another issue 615 F.2d 578 (2d Cir. 1980); 

sec. 1.183-2(a), Income Tax Regs. Petitioners bear the burden of

proving the requisite intent. E.g., Golanty v. Commissioner, 72

T.C. 411, 426 (1979), affd. without published opinion 647 F.2d

170 (9th Cir. 1981); Johnson v. Commissioner, 59 T.C. 791, 813

(1973), affd. 495 F.2d 1079 (6th Cir. 1974). Whether a taxpayer

is engaged in an activity with the requisite profit objective is

determined from all the facts and circumstances. E.g., Hulter 

v. Commissioner, supra at 393; Taube v. Commissioner, 88 T.C.

464, 480 (1987); Golanty v. Commissioner, supra at 426; sec.

1.183-2(a) and (b), Income Tax Regs. More weight is given to

objective facts than to the taxpayer's mere statement of his or

her intent. E.g., Dreicer v. Commissioner, supra at 645; sec.

1.183-2(a), Income Tax Regs. 

The regulations promulgated under section 183 list the

following nine factors that should normally be taken into account

in determining whether an activity is engaged in for profit: 

(1) The manner in which the taxpayer carried on the activity, 

(2) the expertise of the taxpayer or his advisers, (3) the time

and effort expended by the taxpayer in carrying on the activity,
- 31 -

(4) the expectation that assets used in the 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 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) the extent to which

elements of personal pleasure or recreation are involved. Sec.

1.183-2(b), Income Tax Regs. The list of factors in the regulations is not exclusive, and other factors may be considered in

determining whether an activity is engaged in for profit. No

single factor is dispositive. E.g., Golanty v. Commissioner,

supra at 426; sec. 1.183-2(b), Income Tax Regs. The determination of a profit objective does not depend on counting the number

of factors that support each party's position. E.g., Dunn v.

Commissioner, supra at 720; sec. 1.183-2(b), Income Tax Regs.

Petitioner contends that (1) during 1989, 1990, and 1991, he

was engaged in his horse activity for profit within the meaning

of section 183; (2) during 1990 and 1991, he was engaged in his

cattle activity for profit within the meaning of section 183; and

(3) during 1990 and 1991, his horse activity and his cattle

activity constituted one activity for purposes of that section. 

Respondent disagrees with each of petitioner's contentions.

We turn first to whether, during 1990 and 1991, petitioner's

horse activity and cattle activity constituted one activity or

two separate activities for purposes of section 183. Section
- 32 -

1.183-1(d), Income Tax Regs., provides that, in determining

whether several undertakings of a taxpayer constitute one activity or two or more separate activities for purposes of section

183, we must consider all of the facts and circumstances, including: (1) The degree of organizational and economic interrelationship of the undertakings, (2) the business purpose, if any,

that is served by carrying on the undertakings separately or

together, and (3) the similarity of the two undertakings.

Petitioner argues that, during 1990 and 1991, his horse

activity and his cattle activity constituted a single activity

for purposes of section 183 because he planned to expand his herd

of cattle and to use that cattle to help manage the pasture for

his horses. On the record before us, we reject petitioner's

argument. Except for petitioner's self-serving testimony on

which we are unwilling to rely, there is no evidence in the

record to support petitioner's assertion that, during 1990 or

1991, he planned to expand his herd of cattle and use them for

pasture management or that he thereafter took any measures to

implement that alleged plan. In fact, petitioner did not even

keep the cattle and the horses on the same land during 1990 and

1991; they were not kept on the same land until sometime around

1993 or 1994.

On the record before us, we find that petitioner has failed

to establish that, during 1990 and 1991, his horse activity and

his cattle activity constituted one activity for purposes of
- 33 -

21 Even assuming arguendo that we had found that, during 1990

and 1991, petitioner's horse activity and his cattle activity

constituted one activity for purposes of sec. 183, on the record

before us, we would nonetheless find that petitioner has failed

to establish that he was engaged in that activity during those

years with the requisite profit motive within the meaning of sec.

183. 

section 183.21 We shall therefore treat each such activity as a

separate activity for those purposes.

Petitioner's Horse Activity

At all relevant times, petitioner has enjoyed equestrian

activities. During the early 1970's, he owned a horse, took

riding lessons, and learned how to train a horse (1) to perform

at an unspecified level in dressage and (2) to do low-level

jumps, provided that the horse had received some training in

jumping. During 1988, petitioner, who did not have any formal

training as a horse trainer or horse breeder, acquired Moonshadow, a horse that had had some training in riding and jumping. 

He planned to train Moonshadow in dressage, jumping, and/or

cross-country riding--activities that petitioner knew would

expose that (and any other) horse to a significant risk of

injury. Petitioner hoped to be able to sell Moonshadow after it

was trained. However, the record does not establish that during

the years at issue petitioner had or attempted to acquire the

expertise that he needed to carry out the training that he

testified he envisioned for Moonshadow (and the other horses that

he acquired) or that he consulted with others who had such
- 34 -

22 Petitioner claims that during the years at issue he hired

experts to train his horses. However, the record does not

identify such experts, their qualifications, or the specific

training that they allegedly provided to petitioner's horses

during those years. What the record does show is that it was not

until 1994, after the years at issue, that petitioner asked Ms.

Lyman from time to time to train some of his horses and that it

was at some undisclosed time during the period 1992 through 1995

that petitioner asked her to advise him how to market them.

23 Petitioner suggested in his testimony that, during the period

from July 1988 until Moonshadow became lame in 1990, he worked

with Moonshadow in the ring in an effort to teach it to move

laterally and backwards. We found petitioner's testimony in this

regard to be general and vague. For example, he did not specify

the extent of, or the time he spent on, any such exercises for

Moonshadow.

24 When petitioner acquired Jill sometime during 1990 after

Moonshadow became lame, he did not realize that it did not

possess the characteristics necessary for a show horse or a

competitive horse, from which we infer that he may not have

properly investigated the potential of that horse before he

purchased it.

25 Petitioner purchased Gator, a five-year old gelding, during

1990. However, Ms. Lyman did not begin to train any of petitioner's horses until the spring of 1994. Although Ms. Lyman

provided some training to Gator, it is not clear from the record

whether that training occurred in the spring of 1994 or thereafter.

expertise.22 

Petitioner spent time in riding, exercising, and/or caring

for Moonshadow from July 1988 when he acquired it until sometime

during 1990 when it became lame. During that period, petitioner

spent about 15 to 18 hours a week in riding, exercising, and

caring for Moonshadow during the mornings when he was not providing services as a psychologist.23 Although the record establishes that during 1990 petitioner purchased Jill24 and Gator25

and rode Jill and that around 1991 Jill had a colt named Zack, it
- 35 -

shows nothing else about what, if anything, petitioner did with

or for (1) Jill and Gator during 1990 and (2) Moonshadow, Jill,

Gator, and Zack during 1991.

Petitioner did not during the years at issue (or at any

other time) project the future income, expenses, or profits that

he expected would be generated by his horse activity. Nor did he

contemplate or inquire about the risks associated with owning

Moonshadow if it were to become lame (i.e., not only could it not

continue its training in, or be used for, any of the activities

that petitioner had in mind when he acquired Moonshadow, it also

could not be used for breeding since it was a gelding).

During the years at issue, although petitioner retained

invoices, receipts, and canceled checks relating to the expenses

that were incurred in his horse activity, he did not maintain a

separate bank account for that activity or books or records, such

as ledgers and registers, to memorialize the various transactions

relating thereto or to maintain a historical record of that

activity (e.g., the dates on which horses were purchased and

foals were born, the specific nature of any training that the

horses that he owned received, and the specific periods during

which any such training was provided). In short, petitioner

failed to show that during the years at issue he maintained

complete and accurate books and records that were consistent with

a profit motive or that he carried on his horse activity in a

businesslike manner.
- 36 -

26 Although petitioner did not show separately the respective

income, expenses, and losses associated with his horse activity

and his cattle activity for 1990 through 1994, the record herein

otherwise establishes (1) that the income reflected in Schedules

F of petitioner's returns for 1991 through 1994 was solely from

his cattle activity except for an unexplained $60,000 income item

for 1993 and (2) that petitioner had expenses relating to his

cattle activity during 1991 in the amount of $1,024. Moreover,

based on the characterization of certain expenses that petitioner

claimed in Schedules F of his 1990, 1992, 1993, and 1994 returns,

it appears that at least $1,428, $17,623, $18,561, and $17,845,

respectively, of the aggregate expenses claimed therein related

to his horse activity.

In Schedules F of his returns for 1988 and 1989, petitioner

reported no income and losses of $3,648 and $10,253, respectively, from his horse activity. In Schedules F of his returns

for 1990 and 1991, petitioner reported aggregate income of $0 and

$1,024, respectively, from both his horse and cattle activities

and aggregate losses of $7,780 and $19,588, respectively, from

both of those activities.26 The aggregate losses that petitioner

reported in Schedules F of his returns for 1992 and 1994 from

those activities were $28,691 and $37,478, respectively. The

aggregate loss from those activities that he reported in Schedule

F of his 1993 return decreased from the prior year to $11,053,

presumably because of an unexplained $60,000 income item and an

unexplained $29,202 interest expense item for that year.

Petitioner had sufficient income during the years at issue

from various sources so as to enable him to maintain a comfortable standard of living, notwithstanding the losses from his

horse activity that he was able to use to reduce his tax liabil-
- 37 -

27 In his returns for 1989, 1990, and 1991, petitioner reported

taxable income, excluding the losses from his horse activity and

his cattle activity, of $92,145, $119,892, and $198,722, respectively, and the parties agree that taxable income for those

years, excluding such losses, should be increased by $49,376,

$17,882, and $7,733, respectively.

28 On the record before us, we find that Ziggy did not materially appreciate in value, if it appreciated at all, during the

period in which petitioner and Ms. Lyman owned that horse until

they sold it one month later. That is because, when they purchased Ziggy, they paid a price (i.e., $10,000) that was substantially below its fair market value.

29 Ms. Lyman testified that, as of the time of the trial, Gator

had a value of about $25,000 and Bunny was expected to have a

(continued...)

ity for those years.27

Petitioner claims that he expected the horses that he

acquired to appreciate in value after he trained them. In

support of that claim, petitioner points to the fact that during

1995 petitioner and Ms. Lyman sold Ziggy for $30,000 one month

after they acquired it for $10,000. We do not take issue with

the proposition that a particular horse, depending on its breed,

training, and other facts and circumstances, may appreciate in

value.28 However, the record contains no reliable evidence of

the appreciation, if any, in the value of the horses that petitioner acquired during the years at issue or thereafter. Petitioner did not at any time retain the services of anyone to

appraise the fair market value of his horses. The only evidence

in the record relating to the value of petitioner's horses is

petitioner's own testimony as to the value of Zack and Bunny and

Ms. Lyman's testimony as to the value of Gator and Bunny.29 With
- 38 -

29(...continued)

value of about $15,000 to $20,000 in the spring of 1996 and about

$25,000 in 1997. Petitioner disagreed with Ms. Lyman's testimony

about the value of Bunny in 1997 when he testified that, as of

the time of the trial, he expected Bunny to have a value of

between $30,000 and $50,000 in 1997. Petitioner also testified

that, as of the trial, Zack, a young horse with minimal training,

had a value of between $8,500 and $10,000.

respect to petitioner's testimony, although, as the owner of the

horses, he was qualified to testify as to their value, we are not

required to, and we do not, accept his self-serving testimony on

that point. See Harmon v. Commissioner, 13 T.C. 373, 383 (1949). 

With respect to Ms. Lyman's testimony about the value of petitioner's horses, Ms. Lyman was not qualified as an expert witness

in this case and thus was not qualified to opine on the value of

petitioner's horses.

Even assuming arguendo that petitioner did, in fact, expect

the horses that he acquired to appreciate in value, he failed to

establish that he intended in good faith that any expected

appreciation in the value of those horses when realized, would

together with any other income from his horse activity, exceed

the expenses from that activity. 

Petitioner further claims that the losses that he sustained

during the years 1988 through 1994 are attributable to Moonshadow's becoming lame during 1990 and Lily's sustaining injuries

and Zack's developing a foot disease around 1995. Losses sustained because of unforeseen or fortuitous circumstances beyond

the control of the taxpayer are generally not to be considered as
- 39 -

30 It is also noteworthy that although Moonshadow became lame in

1990, petitioner kept that horse and continued to incur expenses

with respect to it until he donated it to VPI around 1995.

a factor indicating that the activity was not engaged in for

profit. Faulconer v. Commissioner, 748 F.2d 890, 900-901 (4th

Cir. 1984); sec. 1.183-2(b)(6), Income Tax Regs. 

We note initially that, when petitioner decided to acquire

Moonshadow in 1988, he was aware that the activities of dressage,

jumping, and/or cross-country riding would expose that (and any

other) horse to a significant risk of injury. Thus, any losses

sustained as a result of injuries to his horses should not have

been unforeseen by petitioner. 

As for petitioner's contention that Moonshadow's lameness

during 1990 was responsible for the losses that he reported for

the years at issue and thereafter, petitioner claims that he was

about to offer Moonshadow for sale at the time it became lame and

that it had a value of about $25,000 at that time. The record

does not contain any reliable evidence showing (1) the value of

Moonshadow at the time it became lame, (2) the attempts, if any,

that petitioner made, or planned to make, to sell Moonshadow, or

(3) the profit that would have been generated from such a sale

taking into account the price that petitioner paid for Moonshadow

in 1988 and the expenses that he incurred from then until 1990

when Moonshadow became lame.30

With respect to petitioner's claims about the injuries to

Lilly and Zack's foot disease that occurred around 1995, we fail
- 40 -

to see how those physical problems affected the profitability of

petitioner's horse activity for any of the preceding years,

including the years at issue. 

We have considered and reject all of petitioner's other

claims and contentions with respect to his horse activity.

Based on our review of the entire record before us, we find

that petitioner has failed to establish that during the years at

issue his horse activity was an activity engaged in for profit

within the meaning of section 183. Accordingly, we sustain

respondent's determinations that the deductions that petitioner

claimed for 1989, 1990, and 1991 relating to his horse activity

are limited by section 183(a) and (b).

Petitioner's Cattle Activity

During 1990, petitioner, who did not have any formal training as a cattle breeder, purchased for $3,000 a herd of cattle

consisting of a bull and four cows with calf. The cows produced

calves during 1990 or 1991 and each year thereafter. Petitioner

kept his cattle on the NLC land. During the winter months, they

consumed approximately five bales of hay that cost about $35 to

$50 a bale, and, during the remainder of the year, they consumed

the grass on the NLC land. 

Petitioner kept the calves produced by his cows for six to

seven months until they weighed around 250 pounds, at which time

he sold them for approximately $250 each.

During 1991, petitioner received $1,024 from the sale of the
- 41 -

31 Petitioner testified that he incurred virtually no expenses

in connection with his cattle activity, other than annual expenses of approximately $175 to $250 for winter feed for the

cattle. We are unwilling to rely on that testimony. It is

inconsistent with his oral stipulation at trial that during 1991

he incurred expenses relating to his cattle activity of $1,024.

32 Petitioner concedes that he did not expect his cattle to

appreciate in value.

calves and incurred expenses in that same amount in connection

with his cattle activity. During 1992, 1993, and 1994, petitioner received $1,017, $1,275, and $1,083, respectively, from

the sale of the calves, but the record does not disclose the

expenses that he incurred during those years in connection with

his cattle activity.31

Petitioner did not project during 1990, or at any other

time, the future income, expenses, or profits that he expected

would be generated by his cattle activity. Although during 1990

and 1991 petitioner retained invoices, receipts, and canceled

checks relating to the expenses incurred in his cattle activity,

he did not maintain a separate bank account for that activity or

books or records, such as ledgers and registers, to memorialize

the various transactions relating thereto or to maintain a

historical record of that activity (e.g., the dates on which

calves were born and sold).

To support his contention that he was engaged in his cattle

activity during 1990 and 1991 with a profit motive, petitioner

relies on his receipt of income from the sale of calves during

1991 through 1994 in amounts ranging from $1,017 to $1,275.32

Receipt of income is not necessarily indicative of a profit
- 42 -

motive. In contrast, realizing a profit would be indicative of

such a motive. However, on the record before us, we find that

petitioner did not realize a profit from his cattle activity for

1990 or 1991. On that record, we are unable to determine whether

he realized a profit from that activity for 1992, 1993, and 1994.

Based on our review of the entire record before us, we find

that petitioner has failed to establish that during 1990 and 1991

his cattle activity was an activity engaged in for profit within

the meaning of section 183. Accordingly, we sustain respondent's

determinations that the deductions that petitioner claimed for

1990 and 1991 relating to his cattle activity are limited by

section 183(a) and (b).

Additions to Tax and Accuracy-Related Penalties 

Section 6651(a)(1) 

Respondent determined that petitioner is liable for each of

the years 1989 and 1990 for the addition to tax under section

6651(a)(1) because he failed to file timely his return for each

such year. For purposes of section 6651(a)(1), the determination

of the prescribed date for filing a return must be made by

reference to any extension of the time for filing the return. 

The addition to tax under section 6651(a)(1) does not apply if it

is shown that the failure to file was due to reasonable cause,

and not willful neglect. In order to prove reasonable cause, the

taxpayer must show that, despite the exercise of ordinary business care and prudence, he or she was nevertheless unable to file

the return within the prescribed time. United States v. Boyle,
- 43 -

469 U.S. 241, 246 (1985); sec. 301.6651-1(c)(1), Proced. & Admin.

Regs.

For 1989 and 1990, petitioner filed applications for automatic extension that were dated April 11, 1990, and April 5,

1991, respectively, and that requested a four-month extension of

time until August 15, 1990, and August 15, 1991, respectively,

within which to file his returns for those years. The parties

agree that petitioner also filed a second request (application

for additional extension of time) that was dated August 8, 1991,

in order to extend the period within which to file his 1990

return to October 15, 1991.

Petitioner contends that the addition to tax under section

6651(a)(1) should not be imposed for either 1989 or 1990 because

he relied on Mr. McVeigh to prepare the applications for automatic extension for those years. Respondent disagrees.

We have found as facts that petitioner relied on Mr. McVeigh

to prepare requests to extend the time within which to file his

returns for 1989 and 1990. Line 1 of each of those requests

required petitioner to make a reasonable estimate, based on the

information available, of his tax liability for the year for

which he was seeking an extension. In arriving at the respective

estimated tax liabilities for 1989 and 1990 that Mr. McVeigh

showed on line 1 of petitioner's applications for automatic

extension for those years, Mr. McVeigh believed it reasonable,

and so advised petitioner, that, given petitioner's situation,
- 44 -

those estimates be based on the tax liability shown in petitioner's return for the year immediately preceding the year for

which each such application was being filed, provided that

petitioner paid each of those estimated tax liabilities by the

time he filed each such application. Since the tax liabilities

shown in petitioner's 1988 and 1989 returns were $9,041 and

$9,043, respectively, Mr. McVeigh entered on line 1 of petitioner's applications for automatic extension for 1989 and 1990

estimated tax liabilities of $9,100 and $9,043, respectively. 

Those respective applications also indicated that for 1989

estimated tax payments of $9,100 were made by petitioner and that

for 1990 $4,908 of tax was withheld from petitioner and $4,135 of

tax was paid with his 1990 application for automatic extension.

When an accountant advises a taxpayer on a matter of tax law

in circumstances such as these, it is reasonable for the taxpayer

to rely on that advice. See United States v. Boyle, supra at

251. On the record before us, we find that petitioner's reliance

on Mr. McVeigh's advice with respect to the preparation of his

applications for automatic extension of time for 1989 and 1990

was reasonable and in good faith and constituted reasonable cause

within the meaning of section 6651(a)(1). Accordingly, we reject

respondent's determinations under section 6651(a)(1) for 1989

and, with one exception, for 1990. That exception for 1990

relates to the facts that petitioner's return for that year was

dated October 25, 1991, and was received by the Service on
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November 1, 1991. Yet, the parties agree that the application

for additional extension of time was filed in order to extend the

time within which to file his 1990 return to October 15, 1991. 

On the record before us, we sustain respondent's determination

under section 6651(a)(1) for 1990 only to the extent that petitioner filed his 1990 return after October 15, 1991. 

Section 6662(a) 

Respondent determined that petitioner is liable for the

years at issue for the accuracy-related penalty under section

6662(a) because a portion of the underpayment of tax for each of

those years was due to negligence, disregard of rules and regulations, or a substantial understatement of income tax.

Section 6662(a) imposes an addition to tax equal to 20

percent of the underpayment of tax attributable to, inter alia,

(1) negligence or disregard of rules or regulations and (2) any

substantial understatement of income tax. Sec. 6662(b)(1) and

(2). For purposes of section 6662(a), the term "negligence"

includes any failure to make a reasonable attempt to comply with

the Code, and "disregard" includes any careless, reckless, or

intentional disregard. Sec. 6662(c). Negligence has also been

defined as a lack of due care or failure to do what a reasonable 

person would do under the circumstances. Leuhsler v. Commissioner, 963 F.2d 907, 910 (6th Cir. 1992), affg. T.C. Memo.

1991-179; Antonides v. Commissioner, 91 T.C. 686, 699 (1988),

affd. 893 F.2d 656 (4th Cir. 1990). With respect to individuals,
- 46 -

33 Petitioner does not rely on sec. 6662(d)(2)(B) in order to

reduce the underpayment for each of the years at issue that

respondent determined is attributable to a substantial

understatement of income tax.

an understatement of tax is substantial if it exceeds the greater

of 10 percent of the tax required to be shown in the return or

$5,000. Sec. 6662(d)(1)(A). An understatement of tax is equal

to the amount of tax required to be shown in the return less the

amount shown therein. Sec. 6662(d)(2)(A). 

The accuracy-related penalty under section 6662(a) does not

apply to any portion of an underpayment if it is shown that there

was reasonable cause for such portion and that the taxpayer acted

in good faith. Sec. 6664(c)(1). The determination of whether a

taxpayer acted with reasonable cause and in good faith depends

upon the pertinent facts and circumstances, including the taxpayer's efforts to assess his or her proper tax liability, the

knowledge and experience of the taxpayer, and reliance on the

advice of a professional, such as an accountant. Sec.

1.6664-4(b)(1), Income Tax Regs. 

Petitioner contends that he is not liable for any of the

years at issue for the accuracy-related penalty under section

6662(a) because he relied on the advice of his accountant, Mr.

McVeigh, for the preparation of his returns for those years.33

Respondent disagrees.

A taxpayer generally cannot avoid the duty of filing an

accurate return by placing that responsibility on an agent.
- 47 -

Pritchett v. Commissioner, 63 T.C. 149, 174 (1974). A taxpayer

bears the responsibility for any negligent errors of his or her

accountant. American Properties, Inc. v. Commissioner, 28 T.C.

1100, 1116-1117 (1957), affd. per curiam 262 F.2d 150 (9th Cir.

1958). However, a taxpayer may avoid the accuracy-related penalty

under section 6662(a) for negligence or substantial understatement by showing that his reliance on the advice of a professional, such as an accountant, was reasonable and in good faith. 

Sec. 1.6664-4(b)(1), Income Tax Regs. In the case of claimed

reliance on the accountant who prepared the taxpayer's return,

the taxpayer must establish that correct information was provided

to the accountant and that the item incorrectly claimed or

reported in the return was the result of the accountant's error. 

See Ma-Tran Corp. v. Commissioner, 70 T.C. 158, 173 (1978). A

taxpayer's reliance on the advice of an accountant is not reasonable or in good faith where a cursory review of a taxpayer's

return would reveal an omission from income. Metra Chem Corp. v.

Commissioner, 88 T.C. 654, 662 (1987).

We note initially that with respect to the items that

respondent contends were due to negligence, disregard of the

rules or regulations, or a substantial understatement of income

tax, the record contains evidence only as to the items specifically identified and discussed below. The record does not

contain any evidence as to the remainder of those items (remaining items) on all of which petitioner bears the burden of proof;
- 48 -

nor does it show what information petitioner may have provided to

Mr. McVeigh, or what advice Mr. McVeigh may have given petitioner, regarding those remaining items. Accordingly, we find

that petitioner has failed to establish that any reliance by him

on Mr. McVeigh with respect to the remaining items was reasonable

and in good faith. Consequently, we sustain respondent's determinations imposing on petitioner the accuracy-related penalty

on the portion of the underpayment for each of the years at issue

that is attributable to those items.

Negligence or Disregard of 

the Rules or Regulations 

Petitioner's Underreporting of the Gain 

from the Sale of the Drawing in Question

In Schedule C of his 1989 return relating to art sales,

petitioner reported a gain of $99,000 from the sale of the

drawing in question. The parties agree that petitioner realized

a gain of $113,700 from the sale of that drawing. Although not

determined in the notice, respondent contends on brief that

petitioner's underreporting of the gain from the sale of the

drawing in question was due to negligence or disregard of rules

and regulations. This issue constitutes a new matter on which

respondent bears the burden of proof. Rule 142(a); Foster v.

Commissioner, 80 T.C. 34, 197 (1983), affd. in part and vacated

in part 756 F.2d 1430 (9th Cir. 1985).

The record does not establish what petitioner told Mr.

McVeigh about the sales price of the drawing in question, the
- 49 -

purchase price of that drawing, and the gain realized from its

sale. However, assuming arguendo (1) that petitioner had told

Mr. McVeigh that he sold the drawing in question for $115,000,

that he had purchased it for $1,300, and that he realized a gain

of $113,700 from its sale and (2) that Mr. McVeigh erroneously

reported gross receipts of $100,000 from the sale of the drawing

in question, a cost of goods sold of $1,000 for that drawing, and

a gain of $99,000 from its sale, petitioner was nonetheless

negligent in underreporting the gain from that sale in his 1989

return. Petitioner had an obligation to review that return

before filing it. See Metra Chem Corp. v. Commissioner, supra at

662. Petitioner, however, did not review it; he was merely

interested in knowing the amount of tax due so that he could

write a check for that amount. If petitioner had reviewed

Schedule C of his 1989 return relating to art sales, he would

have known that the gain from the sale of the drawing in question

was underreported. See id. at 662. 

On the record before us, we find that any reliance by

petitioner on Mr. McVeigh was not reasonable or in good faith

insofar as it relates to the underreporting of the gain from the

sale of the drawing in question (viz., $99,000, instead of

$113,700). Consequently, we find that petitioner is liable for

the accuracy-related penalty on the portion of the underpayment

for 1989 that is attributable to that underreported gain.

Petitioner's Claimed Disallowed

Automobile Expenses 
- 50 -

34 We note that this finding is based on Mr. McVeigh's testimony

as to what petitioner told him about his intention with respect

to his horse activity.

We have found that petitioner was not aware of the errors

relating to the disallowed automobile expenses that Mr. McVeigh

made in Schedules C of petitioner's 1989, 1990, and 1991 returns

relating to Psychological Testing Services and that he could not

have detected them by reviewing those returns.

On the record before us, we find that petitioner's reliance

on Mr. McVeigh with respect to the claimed disallowed automobile

expenses in petitioner's returns for the years at issue was

reasonable and in good faith. Consequently, we reject respondent's determinations imposing the accuracy-related penalty on

the portion of the underpayment for each such year that is

attributable to those disallowed expenses.

Substantial Understatement of Income Tax 

 

Petitioner's Claimed Deductions of Losses 

From His Horse Activity and His Cattle Activity

We have found that, based on what petitioner told Mr.

McVeigh about his horse activity and his cattle activity, including that he intended to buy, train, and sell horses34 and that he

had incurred certain expenses for various stables and training

centers that Mr. McVeigh believed to be reputable, Mr. McVeigh

concurred in petitioner's conclusion, and he and petitioner

jointly decided, that the gross income, expenses, and loss from
- 51 -

petitioner's horse activity during 1989 and the aggregate income,

expenses, and losses from his horse activity and cattle activity

during 1990 and 1991 should be reported in Schedules F of petitioner's returns for those years and that any loss from those

activities could be used to reduce petitioner's income from other

sources that was reported in each such return. With respect to

petitioner's horse activity, the record does not establish

whether petitioner fully disclosed to Mr. McVeigh when he prepared petitioner's returns for the years at issue all the pertinent facts that would bear on the question whether petitioner

carried on that activity with the requisite profit motive within

the meaning of section 183 (e.g., facts relating to (1) the

manner in which petitioner carried on those activities, (2) the

extent of time or effort that he devoted to those activities, 

(3) whether he had the expertise necessary to train his horses,

(4) whether he consulted with experts about training his horses,

and (5) whether he expected his horses to appreciate in value). 

With respect to petitioner's cattle activity, the record does not

establish whether petitioner informed Mr. McVeigh of any of the

pertinent facts relating to that activity.

On the record before us, we find that petitioner has failed

to establish that any reliance by him on Mr. McVeigh with respect

to the claimed deductions in petitioner's returns for the years

at issue of the losses from his horse activity and cattle activity was reasonable or in good faith. Consequently, we sustain
- 52 -

35 We note that, because respondent made determinations in the

notice that increased petitioner's self-employment income for

1990, respondent determined that petitioner is entitled to a SEP

deduction for that year in an amount in excess of the SEP deduction claimed in petitioner's 1990 return.

36 If the $99,000 net profit from the sale of the drawing in

question had not been reported in Schedule C of petitioner's 1989

return relating to art sales, that return would have reflected an

aggregate loss of $39,928 from petitioner's various Schedules C,

and, based on that return, petitioner would not have been entitled to a deduction for any portion of the $20,000 contribution

that he made to the SEP for that year.

respondent's determinations imposing the accuracy-related penalty

on the portion of the underpayment for each such year that is

attributable to such deductions.

Petitioner's Claimed Deductions

of SEP Contributions 

For each of the years 1989 and 1991, petitioner underpaid

his income tax as a result of the deductions that he claimed

(viz., $20,000 and $7,977, respectively) and that respondent

disallowed with respect to his SEP contribution for each such

year.35 For 1989, the underpayment of income tax attributable to

petitioner's disallowed SEP deduction resulted from the following

errors: (1) Including the gain from the sale of the drawing in

question in Schedule C of petitioner's return and thus including

that gain in petitioner's self-employment income;36 (2) calculating petitioner's self-employment income by aggregating the

results of only those Schedules C of petitioner's return that

showed net profits, and not those that showed losses; and 

(3) claiming a deduction for petitioner's contribution to the SEP
- 53 -

37 See supra note 16. 

38 Petitioner contradicted Mr. McVeigh's testimony when he

testified that, after the sale of the drawing in question, he did

not tell Mr. McVeigh that he intended to continue to sell drawings. We believe and accept Mr. McVeigh's testimony on this

point, and not petitioner's.

equal to 25 percent (25-percent limit), rather than 15 percent

(15-percent limit), of his self-employment income.37 For 1991,

the underpayment of income tax attributable to petitioner's

disallowed SEP deduction resulted from erroneously using the 25-

percent limit, rather than the 15-percent limit.

Erroneous Inclusion of the Gain From the 

Sale of the Drawing in Question in 

Petitioner's Self-employment Income for 1989 

 

Based on the information that petitioner provided to Mr.

McVeigh, Mr. McVeigh concluded that the gain from the sale of the

drawing in question constituted self-employment income, and not

long-term capital gain, and that it should be reported in Schedule C of petitioner's 1989 return relating to art sales. We have

found that petitioner informed Mr. McVeigh that he sold the

drawing in question during 1989 at a gain and that he intended to

continue to purchase and sell drawings in the future.38 We do

not know what else petitioner told Mr. McVeigh about the sale of

that drawing. We have found that petitioner did not sell any

drawings, artwork, or collectibles after he sold the drawing in

question in January 1989, and petitioner testified that, after

that sale, he had no intention of continuing to sell drawings.
- 54 -

On the record before us, we find that petitioner has failed

to establish that any reliance on Mr. McVeigh with respect to the

erroneous treatment of the gain from the sale of the drawing in

question as self-employment income was reasonable or in good

faith. Consequently, we sustain respondent's determination

imposing the accuracy-related penalty on the portion of the

underpayment for 1989 that is attributable to that treatment.

Erroneous Calculation of Petitioner's 

Self-employment Income for 1989 

The parties agree that if the Court were to sustain

respondent's determination that the gain from the sale of the

drawing in question constitutes long-term capital gain, that gain

should not have been included in petitioner's self-employment

income for 1989 for purposes of calculating the deductible

portion, if any, of petitioner's 1989 SEP contribution. However,

even assuming arguendo (1) that, contrary to our finding, the

gain from the sale of the drawing in question were ordinary

income, and not capital gain, and (2) that, contrary to the

agreement of the parties, the use of the 25-percent limit were

proper, the amount of the deduction that petitioner claimed in

his 1989 return for the SEP contribution nonetheless exceeded 25

percent of his self-employment income for that year. That is

because, in calculating petitioner's self-employment for 1989,

Mr. McVeigh failed to aggregate the results shown in all Schedules C of his 1989 return and instead aggregated the results of
- 55 -

39 Mr. McVeigh's error resulted in petitioner's claiming a

deduction that exceeded by $5,075 25 percent of the aggregate

results shown in the Schedules C of his 1989 return.

only those Schedules C showing net profits.

On the record before us, we find that petitioner's reliance

on Mr. McVeigh with respect to the erroneous calculation of

petitioner's self-employment income for 1989 (i.e., not

aggregating all Schedules C of petitioner's 1989 return) was

reasonable and in good faith. Consequently, we reject respondent's determination imposing the accuracy-related penalty on the

portion of the underpayment for that year that is attributable to

that error.39

Erroneous Use of the 25-Percent 

Limit for 1989 and 1991 

We have found that Mr. McVeigh advised petitioner to use the

25-percent limit, rather than the 15-percent limit. Except for

petitioner's (1) informing Mr. McVeigh in April 1990 that he had

established a retirement plan to which he timely contributed

$20,000 and (2) relating to him the conversations that he had had

with the individual who had assisted him in establishing that

plan, the record does not show what petitioner told Mr. McVeigh

about the contributions that he made to a retirement plan for

1989 and 1991. Specifically, we do not know whether petitioner

advised Mr. McVeigh that the retirement plan that he had established was a simplified employee pension.

On the record before us, we find that petitioner has failed
- 56 -

to show that any reliance on Mr. McVeigh with respect to the

erroneous use of the 25-percent limit, rather than the 15-percent

limit, in computing the deductions relating to his SEP contributions for 1989 and 1991 was reasonable or in good faith. Consequently, we sustain respondent's determinations imposing the

accuracy-related penalty on the portion of the underpayment for

each such year that is attributable to that error.

Petitioner's Failure to Pay Excise 

Tax on Excess Contributions to the SEP

Respondent determined that petitioner is liable for each of

the years at issue for the accuracy-related penalty under section

6662(a) on the underpayment of excise tax attributable to petitioner's excess contribution to the SEP for each such year on the

ground that each such underpayment is attributable to a substantial understatement of income tax within the meaning of section

6662(d). Respondent's determinations are wrong. The underpayment of excise tax for each of the years at issue is not

attributable to a substantial understatement of income tax for

each such year within the meaning of section 6662(b)(2) and (d). 

See sec. 6662(b)(4), (d)(1)(A); secs. 1.6662-4(a), 1.6664-2(b),

Income Tax Regs. Consequently, we reject respondent's determinations imposing the accuracy-related penalty on the underpayments

of excise tax for the years at issue.

To reflect the foregoing and the concessions of the parties,

Decision will be entered
- 57 -

under Rule 155.