T.C. M em o . 2 0 2 1 -1 1

UNITED STATES TAX COURT

STEPHEN W HATLEY AND LUCILE M
. W HATLEY, Pet i t i o ners v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 6 8 3 8-1 2. 1 Fi l edJ an uary2 8 , 2 0 2 1
.
Greg o ry P. Rh od es , Dav i dM . W oo l d ri d ge, Ro n al d A. Lev i t t , an dM i ch el l e Ab ro m s Lev i n , fo r p et i t i o n ers . Ch ri st o p h er A. Pav il on i s , Lau ra A. Pri ce, A. Gary Beg u n , an dDen i s e A. Di l o ret o , fo r res po n d en t
.

1 Th i s cas e i s p arto f a l arg er s eto f cas es ari s i n g fro m Bu rn i n g Bu s h , LLC. Th o se cas es are d o ck etn u m bers 6 2 6 7 -1 2 , 6 8 0 1 -1 2 , 6 8 3 5 -1 2 , 6 8 3 6 -1 2, 6 8 3 7 -1 2 , 1 9 2 4 6 -1 2 , an d1 3 5 5 3 -1 3. Th e co m m o n i ss u e i n t h em i s th e t ax co n s equ en ces o f t h e p art n ers h i p ’ s d o n at i o n o f a co n s erv at i o n eas em en t . Ina s ep arat e o p i n i o n th at we al s o rel eas e t o d ay , s ee Sel l s v . Co m m i s s i o ner, T.C. M em o . 2 0 21 -1 2 , we an al y ze t h ati s su e. W e wri t e s ep arat el y h ere ab o utan i s s u e t h atco n cern s o n l y th e Wh at l ey s an d no tthei r p art n ers i n Bu rn i ng Bu s h
. W e co ns o l i d at edth es e cas es fo r t ri al , b u t t h e p art i es b ri efed thi s i s s u e s ep arat el y . Served 01/28/21- 2
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[* 2 ] M EM ORANDUM FINDINGS OF FACT AND OPINION
HOLM ES, J u d g e: St ep h en Wh at l ey , a p ro u dAub u rn al u m n u s , i s a h i g h l y
s k i l l eden t rep ren eu r wh o m ak es th e t i g er’ s s h are o f h i s fam i l y ’ s i n co m e fro m b an ki n g . In t h e earl y

p arto f t h i s cen tu ry , h e b o u g h ta p ro p ert y i n ru ral Al ab am a
n ear h i s h o m et own an d al m a m at er. He t h en ad d ed t w o d o zen m o re acres o f l an d
an d fo rm edan LLC t o rep o rth i s u s e o f t h e p ro p ert y o n h i s retu rn s fro m

2 0 0 4 t o 2 0 0 8 . He reco rd edv ery

l arg e l o s s es fo r wh ath e d es cri b ed as a cat t l e farm
. Th i s cat t le farm , h o wev er, was wi th o u tcat t le u nt i l at l eas t2 0 08 . He n o warg ues th i s cat t le farm was al so a t ree farm . W e are l eftt o d eci d e wh eth er t h i s t ree o r cat t l e farm was a t rad e o r b us i nes s duri n g tho s e fi v e t ax y ears . If i t was , Wh at l ey co u l d
o ffs ets o m e o f h is l arg e b an k i n g i n co m e wi t h h i s s ub st an t i al farm i n g l o s s es . FINDINGS OF FACT I. Back g ro u n d Th e Wh at l ey

fam i l y h as b een i n Lee Co u n t y , Al ab am a fo r el ev en g en erat i on s , an al m os t u nb ro k en l i n e o f farm ers an dran ch ers . Yo u n g St ep h en Wh at l ey was reared i n Op el i ka. Itwas h ere t h ath i s g reat -g ran d fat h er o wn eda 2 ,0 00 -acre farmwh ere h i s fam i l y rai s edd ai ry

cat t l e, g rew ro w cro p s , an d g rew
an d g i nn edco t t o n b efo re d o wn tu rn s i n th e eco n o m y l edt o t he p ro p ert y ’ s fal l i n g- 3
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[* 3 ] o u to f t he fam i l y ’ s h an d s . What l ey ’ s d ad ’ s co u s i n al s o h ada d ai ry farm th at Wh at l ey o ft en v i s it ed . By th e ag e o f s i x h e was g et t i ng h i s h an d s d i rt y t en di n g t o t h e ro w cro p s an dp i ck i n g co t t o n . Wh en h e was 2 7 , Wh at l ey s t art edh i s fi rs tb u si n es s , a t i m b er-h arv es t i n g
o p erat i o n . He an dh i s p art n er fo rm eda co m p an y t o b u y s t an d i n g t i m

b er an dl o g
s o m e o f i t . Itp ro v ed t o b e m o re o f a l earn i ng ex p eri en ce t h an a l i vi n g an dcl o s ed aft er o n l y two y ears . It tu rn edo ut , h o w ev er, t h atWh at l ey ’ s real t al en tan dv o cat i o n was b an k in g . By th e t i m e o f t ri al , h e’ db een i n b an k i n g fo r o ver 4 3 y ears . Aft er g radu at in g fro m Aub u rn , h e s tart edatSecu ri t y Paci fi c Ban ki n Lo s An g el es . He th en m o v edt o At l an t a an dwo rk edatthe Tru s tCo m p an y o f Geo rg i a. Aft er s ev eral y ears th ere, h e m ov edb ackh o m e t o Lee Co u n ty an dwo rk edatCo lo n i al Ban k fo r 2 5 y ears . In M ay 2 0 0 6 , h e ret i red fro m

Co l o n i al Ban k. He d i dn o ts t ay

i d l e, b u t i n s t eadfo un d eda b an ko f h i s o w n --So u t h ern St at es Ban k. Hi s rep u t at i o n was g o o den o u g h th ath e eas i l y rai s ed$ 32 m i l l i o n i n equ it y . By 2 01 6 So u t h ern St at es h adb et ween $ 6 5 0 an d$ 7 0 0 m il l io n i n as set s wi t h Al ab am a b ran ch es i n Hu n t s v il l e, An n i st on , Aub u rn , Op el ik a, Bi rm i n g h am , an d Sy l acau g a, an dm o re b ran ch es i n Geo rg ia.- 4
-

[* 4 ] Wh at l ey

rem ai n s act i v el y

i n v o l v edi n So u t h ern St at es Ban k as i t s ch ai rm an , p res i den t , CEO, an dl arg es ti n d i v i du al s to ckh ol d er. He t rav el s t o m o s to f t h e b an k’ s m ark et s o n ce ev ery two week s , an dh e wo rk s ab o u t 7 0 h ou rs a week t en d i n g t o th i s th ri v i n g b u s in es s --t he s am e s t ren uo u s s ch edu l e h e s t art edas a m u ch y o u n g er m an . Hi s h ardwo rk an ds k i l l l edt o a g o o di nco m e duri n g t h e y ears ati ss u e, ev en t h e y ear o f t h e Great Reces si o n:

Year AGI Co m b i n ed b an k i n g W -2 wag es Ban k

d i v i den d s Sal e p ri ce o f

b an k s t o ck 2 0 0 4 $ 3 6 9 ,9 6 1 $ 2 3 5 ,4 6 6.5 0 -0
- $ 1 7 9 , 4 2 1 2 2 0 0 5 3 5 9 ,2 1 2 1 9 6 ,2 6 5.0 0 $ 8 ,5 4 0 1 0 0 ,8 9 7 3 2 0 0 6 1 ,4 6 9 ,5 6 7 1 2 4 ,6 4 3.8 6 1 4 ,2 8 0 7 1 6 ,8 5 9 4 2 0 0 7 3 2 2 ,0 4 3 2 2 6 ,7 4 2.4 7 -0
- -0
- 2 0 0 8 4 9 5 ,3 6 1 2 2 9 ,5 0 0.0 0 -0
- -0
-

2 Wh at l ey h adb as i s i n t h e s ol ds t o ckth atequ al edth e s al es p ri ce, th erefo re n o t ax gai n o r l o s s was reco g n i zed
.

3 Wh at l ey h adb as i s i n t h e s ol ds t o ckth atequ al edth e s al es p ri ce, th erefo re n o t ax gai n o r l o s s was reco g n i zed
.

4 Wh at l ey s o l db o t h s h ort -t erm

an d l o n g -t erm

s t o cki n 2 0 0 6 . Fo r th e s h o rt t erm s t o ck --s to ckh e h el dfo r l es s th an a y ear--h i s b as i s o f $ 2 2 1 ,7 7 6 equ al edth e s al e p ri ce, t h erefo re n o t ax g ai n o r l o s s was reco g n i zed . Fo r t he l o n g-t erm s t o ck t h ath e s o l d fo r $ 4 9 5,0 8 3--s t o ckh e h el dfo r m ore t h an o n e y ear--h e h ada b as i s o f $ 4 2 2 ,2 2 4 , res u l t i n g i n a l on g -t erm cap i t al g ai n o f $ 7 2 , 8 5 9
.- 5
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[* 5 ] II. Sh eep d o g Farm s , LLC A. Th e Pu rch as e Ev en b efo re h e s t art ed So u t h ern St at es , Wh at l ey wan t edt o fi n d an o as i s fro m b an k in g wh ere h e co u l dg etb ack t o h i s ro o ts an dwo rk the l an d . He h ap pen edup o n a 1 5 6 -acre t ract n ear Op el i k a, o n l y a s h o rtdri ve fro m

Aub u rn . Th e p rev io u s o wn er h adu s edth e l an das a t i m ber farman d ato n e p o i n t h adu s ed p arto f i t as a cat t l e farm . Th e l an dwas h eav i l y fo res t ed , wi th 7 8 acres i n p i n e an d
an o th er 5 6 i n m ix eds p eci es . Itwas n o tan act iv e o p erat i o n --an dwh en Wh at l ey b o u g h ti t , th e l an dwas s ub jectt o th e Co n s erv at i o n Res erv e Pro g ram (CRP). 5 Befo re cl o s i ng , Wh at l ey

h ada l i cen s edfo res t er co m e t o t ak e a l o o karo u n d . Th e fo res t er g av e Wh at l ey s om e g en eral ad v i ce o n h ow t o care fo r t h e t i m b er an dtry

t o
m ak e a p ro fi tfro m

i t , an ds h e al s o es t i m at edth e t i m b er’ s v al u e. Al t h o u g h Wh at l ey d efi n i t el y

rem em b eredb ei n g g i v ena v al u e fo r t h e t i m ber, h e co ul d n ’ t

5 Th e CRP au t ho ri zes th e Dep art m en t o f Ag ri cu l tu re t o co n tract wi t h el i g i b l e l an do wn ers “ wh ereb y th e l an do w n er ag rees t o rem o ve ag ri cu l tural l an d fro m farm p ro du ct i on i n ex ch an g e fo r g o v ern m en t p aym en t s .” Bi l l er v . Ven em an , 1 5 0 F. Ap p ’ x 8 3 4 , 8 3 6 (1 0t h Ci r. 2 00 5 ). Th e co n tract req u i res the l an do wn er t o p u ti n p l ace an ap p ro v edco n s erv at i o n p l an an d “ ad h ere t o cert ai n o t h er cri t eri a s et fo rt h i n v ari o u s fed eral s t atu t es an d reg u l at i o n s .” Id
. See g en eral l y 1 6 U.S.C. s ecs . 3 8 31 -3 8 3 6 ; 7 C.F.R. p t
. 1 4 1 0 . Th e CRP p ro g ram fo r Wh at ley ’ s l an d p rev en tedan y

t i m b er h arv es t i n g u n t i l 2 0 2 1 i n ex ch an g e fo r an n u al p aym en t s o f $ 2 ,8 4 1
.- 6
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[* 6 ] rem em

b er wh atthatv al ue was . 6 Wh at l ey was co n v i n cedth is was t h e p ro p ert y h e wan t ed , an d i n 2 0 0 3 h e b o ug h ti t fo r ab o u t$ 3 5 0 ,0 0 0
. Aft er h e b o u g ht t h e l an d, an d o n th e ad v i ce o f h i s l o n g ti m e CPA, J am es Kem p , Wh at l ey

fo rm edSh eep do g Farm s , LLC--a l i m i t edl i ab i l i t y co m p an y th ath e
o rg an i zedu n d er Al ab am a l aw. Fro m 2 0 0 4 -0 8 Wh at l ey

was a 9 7 % o wn er o f Sh eep d o g Farm s , h is wi fe was a 1 % o wn er, an dth ei r ch i l d ren s eem t o h av e h el d t h e res t . Bu tth o u g h h e fo rm edth e LLC, h e n ev er t ran sferred th e l an dt o i t , an d
ev en as o f t h e d at e o f t ri al t i tl e rem ai n edwi t h h i m an dh i s wi fe. Sh eep d o g Farm s was n o tt o rem ai n l an d les s fo r l o n g . In 2 0 0 4 Wh at l ey b o u g h tan ad di t i o n al 2 6 acres co n t ig u o u s t o t he 1 5 6 -acre t ract . Th i s s eco n d p ro p ert y cam e wi t h s o m e i m

p ro v em en t s --a 2 ,6 0 0 -s qu are-fo o th o m e b u il ti n 2 0 0 0 , a b arn , an da s m al l er caret ak er h o u s e. Th e m ai n h om e i s n i cel y d o n e--i th as a
m as t er b ed ro om , two ad d it i o n al b ed ro o m s wi t h a s h ared b at h , a g reatro o m , an da
s m al l fro n tro o m . Th e b arn i s 5 ,0 0 0 s quare feet , l arg e en o u g h t o b ri n g i n al l th e farm i n g equ i p m en t i f a rai n s t o rm ro l l s th ro ug h
. Th e caret ak er h o u se, h owev er, i s

6 As o f Oct ob er 2 0 1 6 th e t i m b er was v al u ed at$ 20 0 ,0 0 0. Si n ce W h at l ey d i d n o tp l an o n h arv es t i n g t i m b er u n t i l aft er 2 0 2 1 , we al l owedev i d en ce o f i t s fu tu re v al u e. Es t i m at i ng th e m ark etth atfar o uti s h ardb ecau s e t he m ark etfo r t i m b er i s v o l at i l e, b u to n e ex p ertt es t ifi edth ati n 2 0 2 2 Wh at ley ’ s t i m b er co u l db e wo rt h ab o ut$ 3 3 2 ,0 00
.- 7
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[* 7 ] aro u n d4 0 y ears o l d , i n p o o r rep ai r, an drarel y o ccup i ed . Wh at l ey

tran s ferred t i tl e t o thi s s m al l er t ractt o Sh eep d o g Farm s . B. Op erat i on Wh at l ey h ad n o fo rm al b u s i n es s p l an fo r t h e n o w -co m b i n edp ro p ert y . He d i ds p en dab o u t 7 0 0 h o u rs a y ear t h ere d uri n g th e y ears at i s s u e, wh i ch av erag es t o a b i tl es s t h an 1 4 h o u rs a week . Wh en h e was atth e farm , h i s d ay -t o-d ay act i v i t i es
v ari edi n s om e way s , b u tu s u al l y b eg an i n t h e m o rn i n g wi t h a ri d e t h ro u g h th e
wo o d s wi t h a h o tcup o f co ffee. He’ dm ak e m en t al n o t es o f an y wo rkth at was
n eed edan dth en t en dt o t h o s e ch o res . Th e farm ’ s t i m

b er o p erat i o n fo cu s ed o n m ai n t en an ce. 7 Th i s m o s tl y m ean t t h atWh at l ey h i m s el f cl eared th e ro ad s an dfi re l an es ev ery y ear. 8 On ce ev ery

few y ears Wh at l ey

“ t h i n n ed ” h i s p ro p ert y

t o al l o w ad d i t i o n al s u n l i g htt o g etd own t h ro u g h t h e fo res tt o s p eedth e g ro wt h o f t he p i n e t rees th atrem ai n ed . Becau s e o f t h e CRP, t h ere was n o t im b er h arv es t i n g . Wh at l ey

ex p lai n edthatm an ag in g p i ne

7 Wh at l ey t es t ifi edth ath e co n s u l t edwi t h o t her fo res t ers aft er h e b o u g h tth e p ro p ert y . He was u n cl ear o n wh atth ei r ad v ice was an d wh en h e g o ti t . He d i d rem em b er t h atthes e fo res t ers each h adt i m b er farm s t h ats p rawl edo v er t en s o f t h o u s an ds o f acres an dwere v ery m u ch fu l l -t i m e o p erat i o ns . 8 M ai n t en an ce al s o i ncl u d edru n n i n g a “ bu s h h o g ”--a m ach i n e t h ati s “ h o o k edup o n a p o wer t ak eo ff o n a t ract o r” t h ath as b lad es that“ g o[] b eh i n dthe t ract o r [an d ] cu t [] an y

o f t h e u n d ers t o ry

b ru s h .”- 8
-

[* 8 ] trees i s a l o n g p l ay --a p ro du ctth at i s n o rm al l y m erch an t ab l e aro un d t he 3 0
- y ear m ark
. As t o th e farm ’ s cat t l e o perat i o n , Wh at l ey ex p l ai n edth ath e’ d wan t edt o i n t ro du ce cat t l e “ fro m d ay o n e.” Wh at l ey

t es t i fi edth at h e co n s ul t edtwo cat t l e
ex p ert s fo r ad v i ce, b ut t h o s e m en m an ag edm u ch l arg er h erd s--6 0 0 an d1 ,5 0 0 h ead
res p ect i vel y --t han wh atWh at l ey co u l dreas o n ab l y

ex p ectt o p u to n h i s p ro p ert y . Wh at l ey , h o w ev er, co u l d n o trecal l wh en th i s co n s u l tat i o n t o o kp lace o r wh at ad v ice h e recei v ed . Inan y ev en t , h e d i dn ’ tactu al l y

h av e cat t l e o n h is p ro p ert y
u n t i l atl eas t2 00 8 , ri gh taft er h e l earn ed t h atth e IRS was g o i n g t o au di th i m . An d h e ex pl ai n edth atm an y of t h e act i v i ti es th ath e rep o rt edas rel at edt o cat t l e were real ly act i v i t i es th ath e u n d ert o o ki n p rep arat i o n fo r cat t l e t h atwo u l d arri v e
s o m et i m e i n th e fu tu re. Th es e i n cl u d edth e i n st al lat i o n o f s o m e fen ci n g an d rep ai rs t o the b arn . Th e ad m i ni s trat iv e s i d e o f Sh eep d og Farm s was ru n wi t h s t ri k i n g i n fo rm al i t y . Al t h o u gh i tk ep tm i n i m al b u s i n es s reco rd s l ik e y earl y tri al b al an ces
an d t ax -as s etwo rk i n g p ap ers , i t ’ s n o t cl ear wh en th es e d ocu m en t s were creat ed
. An di t k ep t n o t rad i t i o nal acco u n t i ng reco rd s --e.g . l ed g ers , b al an ce s h eet s , i n co m e
s t at em en t s , o r cas h fl o w s t at em en t s . Wh at l ey d i dtry t o i nt ro duce s om e reco rd s , b u tth ey weren ’ t en t irel y

accu rat e. Fo r ex am

pl e, Sh eep d o g Farm s fai l edt o- 9
-

[* 9 ] ex p en s e i n s u ran ce t h at i th ado n the p ro p ert y . Sh eep d og Farm s d i d n’ tev en h av e a s ep arat e b an kacco u nto r an y s ep arat e b an kreco rd s du ri n g th e y ears at i s su e. III. Rep o rt i n g , Au d i t , an dTri al A. Rep o rt i n g Wh en i tcam e t i m e t o fi l e h i s t ax retu rn s , What l ey turn edt o h is l o n g-t i m e CPA Kem

p fo r g u i d an ce. Sh eep d o g Farm s fi l edi t s o w n ret u rn as a d om es t i c LLC,
an d Wh at l ey

n eed edt o rep o rti t s act i v i t i es . Kem p ad v i s ed Wh at l ey

th atSh eep d o g Farm s was a b us i nes s . Kem p t es ti fi edth ath e b el i ev ed “ [t ] h ere was n ’ tan y qu es ti o n ab o u ti t atth e t i m e. Itwas a b u s i n es s * * * [b ] ecau s e [Wh at l ey ] h ad p ro fi t m o t i v e.” Rep o rt i n g Sh eep d o g Farm s as a b us i n es s m ean tth atKem p an dWhat l ey

h ad t o d es cri b e Sh eep d o g Farm s ’ p ri n ci p al b u s i n es s act i v i t y an dp ri n ci p al p ro du ct
. Th i s th ey d i d --t h ei r Fo rm 1 0 6 5 p art n ers hi p retu rn l i s t s th ei r p ri n ci p al b us i n es s act i vi t y as “ FARM ” an d t h ei r p ri n ci p al p ro ducto r s erv i ce as “ CATTLE.” Th i s
was rep eat edo n Sch edu l e F o f t h e Fo rm 1 06 5 , wh ere ag ai n Wh at l ey d es cri b edth e p ri n ci p al p ro ducto f Sh eep d o g Farm s as “ CATTLE.”- 1 0 -

[* 1 0 ] A cat t l e farm

wi t h o u tcat t l e an da t ree farmth at d o es n ’ t y eth arv es tt i m b er i s h i g h l y l i kel y t o p ro du ce a b u m

p er cro p o f l o ss es . W e s u m m ari ze t he What l ey s ’ ad ju s t edg ro ss i nco m e (AGI), an dSh eep d o g Farm s ’ o wn recei p t s an dl o s ses h ere:
Year AGI Sch edu l e F g ro s s recei p t s Sch edu l e F n et

l os s 2 0 0 4 $ 36 9,9 61 $ 2 ,8 41 $ 9 0 ,1 1 8 2 0 0 5 3 5 9 ,2 1 2 2 ,8 41 7 7 ,4 4 2 2 0 0 6 1 ,4 6 9,5 67 3 ,3 63 1 0 4 ,3 3 9 2 0 0 7 3 2 2 ,0 4 3 2 ,8 41 9 0 ,3 7 8 2 0 0 8 4 9 5 ,3 6 1 4 ,4 01 1 4 9 , 9 4 5 2 0 0 9 2 6 5 ,5 2 9 -0
- 1 6 2 ,7 4 7 2 0 1 0 2 8 4 ,3 8 8 3 5 ,0 99 2 0 3 ,5 5 1 2 0 1 1 2 2 5 ,5 4 6 7 ,9 41 1 7 6 ,0 0 9 2 0 1 2 3 1 4 ,9 1 1 6 ,8 81 1 2 6 ,8 3 4 2 0 1 3 2 8 7 ,1 9 6 5 ,5 36 1 3 4 ,2 6 5 2 0 1 4 8 9 0 ,1 4 7 4 ,4 28 2 4 7 ,8 4 8 To t al 5 ,2 8 3,8 61 7 6 ,1 72 1 ,5 6 3 , 4 7 6 W e al s o n o t e fo r the y ears ati s s u e th e s hare o f th es e l o s s es th atwere
n o n cas h ex p en s es , p ri m ari l y d ep reci at i o n :- 1 1 -

[* 11 ] Year To t al ex p en s es T o t al d ep reci at i o n 2 0 0 4 $ 92 ,9 5 9 $ 2 2 ,2 9 9 2 0 0 5 8 0 ,2 8 3 3 2 ,2 06 2 0 0 6 1 07 ,7 0 2 4 1 ,1 51 2 0 0 7 9 3 ,2 1 9 4 4 ,9 10 2 0 0 8 1 54 ,3 4 6 4 9 ,8 0 6 To t al 5 28 ,5 0 9 1 9 0 ,3 7 2 M an y o f t h es e d ep reci at i o n ex pen s es were d i rect l y rel at edt o th e t wo h o m es o n th e 2 6 -acre t ractthatwas i n Sh eep d o g Farm s ’ n am e:
Year M ai n res i d en ce 2 dh o m e Ai r co n d i t io n er 2 d ai r

co n d i ti o n er Fi rep l ace 2 0 0 4 $ 8 ,1 9 8 .3 0 $ 2 , 1 0 6 .4 8 $ 1,7 2 5 .0 0 $ 4 5 4 .2 5 $ 7 0 .2 2 2 0 0 5 1 1 ,5 7 4 .0 7 2 , 4 0 7 .4 1 38 2 .5 0 1 0 0 .7 3 2 4 0 .7 4 2 0 0 6 1 1 ,5 7 4 .0 7 2 , 4 0 7 .4 1 26 7 .7 5 7 0 .5 1 2 4 0 .7 4 2 0 0 7 1 1 ,5 7 4 .0 7 2 , 4 0 7 .4 1 24 9 .9 0 6 5 .8 0 2 4 0 .7 4 2 0 0 8 7 ,5 4 9 .0 3 2 , 4 0 7 .4 1 24 9 .9 0 6 5 .8 1 2 4 0 .7 4 To t al 5 0 ,4 6 9 .5 4 1 1 , 7 3 6 .1 2 2,8 7 5 .0 5 7 5 7 .1 0 1,0 3 3 .1 8 Th e ex p en s es th atWh at l ey cl ai m s o n Sh eep d o g Farm s’ Sch edu l e F th atwere n o t rel at ed t o the t w o h o m es o n th e 2 6 -acre t ract co m e fro m i t s farm i n g act i vi t i es --
m o sto f wh i ch o ccu rred o n t h e 1 5 6 -acre t ract th atSh eep do g Farm s d i dn o tactu al l y
o wn .- 1 2 -

[* 1 2 ] B. Au d itan dTri al So m et h in g ab o u tth i s s n ag g edth e Co m m i s s i o n er’ s at t en t i on , an di n Ap ri l 2 0 0 8 Wh at l ey

was n ot ifi edth atSh eep d o g Farm s was u n d er au d i tfo r t ax y ear 2 0 0 5 . Aft er h e recei v edth i s n o t i ce, Wh at l ey m ad e s ure t o g eta fo res t m an ag em en tp l an . Cat t l e t h en al s o s h o wedup o n th e p ro pert y . Th e IRS t h en
ex t en d edth e au d i tt o the Wh at l ey s an do ver t h e n ex tfew y ears ex p an d ed t h e au d i t t o i ncl ud e al l t h e t ax y ears fro m 2 0 0 4 t h ro u g h 2 0 0 8 . Th e IRS d et erm i n edt o m ak e ad ju s t m en t s t o th e Wh at l ey s’ retu rn s , an dtwo o f t h es e ad ju st m en t s l edt o th i s l i ti g at i o n --t h e Co m

m i s s i o n er’ s d i s al l o wan ce o f t h e d edu ct io n s fro m Sh eep d o g Farm s an d h is d i s al l o wan ce o f a l arg e ch ari t ab le-co n t ri bu t io n d educt i o n fo r t h e
co n tri b u t i o n o f a co n s erv at i o n eas em en t t hatth e Wh at l ey s d o n at edal o n g wi t h
s ev eral o t h er co up l es . 9 Th e Wh at l ey s t i m el y fi l eda p et i t io n , an d we t ri edth e cas e i n Bi rm i n g h am . 1 0

9 W e ad d res s thi s d edu ct i o n i n Sel l s v . Co m m i s s io n er, T.C. M em o . 2 0 2 1 -1 2
. 1 0 Th e Wh at l ey s t h en an dn o w are res i d en t s o f Al ab am a, an d ap pel l at e v en ue i s p res u m

p ti v el y i n the El ev en t h Ci rcu i t . See s ec. 7 4 8 2(b )(1 )(A). (Al l s ect i on referen ces are t o th e In t ern al Rev en u e Co d e i n effect fo r t h e y ears at i s su e.)- 1 3 -

[* 1 3 ] Th i s i s a o n e-i ss u e o p i n i o n : W e n eedt o d eci d e wh et h er What l ey ’ s farm in g act i vi t y was an act i v i t y

th at h e en g ag edi n fo r p ro fi t
. 1 1

OPINION I. Th e Co d e an dReg u l at io n s Wh et h er an act i v i t y

i s a t rad e o r b u s i nes s i s an ev erg reen s o u rce o f t ax l i ti g at i o n b ecau s e t h e rel ev an t Co d e s ect i o n s d o n’ tdraw b ri g h t l i n es . Sect i o n 1 6 2 al l o ws a d edu ct i o n fo r al l o rd i naryan dn eces s ary b us i n es s ex p en ses , b u t s ect i o n 1 8 3 b ars an y

d edu ct i o n fo r an “ act i v i t y * * * [t h at ] i s n o ten gag edi n fo r p ro fi t .” Sect i o n 1 8 3 can b e h u g el y co n s eq u en t i al fo r a t ax p ay er. If h e d oes n ’ ten g ag e i n an act i vi t y fo r p ro fi t , th enh e can d edu cts ect i o n 1 6 2 ex p en s es o nl y t o t h e ex t en to f h i s g ro s s i n co m e fro m t h e act i v i t y . Sec. 1 8 3(b )(2 ).

1 1 Th e Co m

m i s s i o n er al s o d et erm i n edthatWh at ley o wedaccu racy -rel at ed p en al t i es fo r an y

u n d ers t at em en to f h i s t ax cau s edb y h i s cl ai m s t o th e Sh eep d o g l o s s es . Th e p art i es , h o wev er, s t i p u l at edth atth ere was n o p en al t y -ap p ro v al fo rm fo r t h e Wh at l ey s fo r t h e y ears ati s s u e. Sect i o n 6 7 5 1 (b )(1 ) p ro v i des th at“ [n ] o p en al t y * * * s h al l b e as ses s edu n l es s th e i n i t i al d et erm i nat i o n o f s uch as s es s m en t i s p ers on al l y

ap p ro ved(i n wri ti n g ) b y the i m m ed i at e s up erv is or o f t he i nd i v i du al m ak i n g s u ch d et erm i n at io n .” W e h av e d efi n i t i v el y ru l edth atth i s m ean s th atth e Co m m i s s i o n er m

u s to b t ai n wri t t en s up erv i s o ry ap pro v al o f th e i n it i al p en al t y d et erm i n at i o n n o l at er t h an t h e d at e t h atth e n o t i ce o f d efi ci en cy i s i s s u edo r an an s wer o r am en d edan s wer as s ert in g th e p en al t y i s fi l ed . See Ch ai v . Co m m i s s i o n er, 8 5 1 F.3 d1 9 0 , 2 2 1 (2 dCi r. 2 0 1 7 ), aff’ g i n p art , rev ’ g i n p artT.C. M em o. 2 0 1 5 -4 2 ; s ee al s o Graev v . Co m m i s si o n er, 1 4 9 T.C. 4 8 5 , 4 9 3 (2 0 1 7 ), s up p lem en t i n g an do v erru l i n g i n p art1 4 7 T.C. 4 6 0 (2 0 1 6 ). Th i s s t i p ul at i o n th at h e d i d n’ to bt ai n thi s wri t t ens up erv i s o ry ap p ro val m ean s n o p en al t i es h ere.- 1 4 -

[* 1 4 ] Wh et h er s o m eo n e en g ag es i n an act i v i t y fo r p ro fi t s ho u l db e a s i m p l e qu es ti o n o f fact , b u t t h e qu es t i o n co m es up s o o ft en th atth e fi el dh as b eco m e
o v erg ro w n wi t h fact ors an dan al o g i es t o p reced en tan dreg u l at io n s t h atl i s tm o re fact ors --al l i n n o n ex cl us i ve l i s t s . On e o f t hes e n o n ex cl u s i v e l i s t s i s i n a Treas u ry reg u l at i o n th atwe m

u s tfo l l o w. Sec. 1 .1 8 3 -2 (a), In co m e Tax Reg s .; s ee El l i o t tv . Co m m i s s i o n er, 8 4 T.C. 2 27 , 2 3 6 (1 9 8 5 ), aff’ d wi t h o u t p ub l is h edo pi n i o n , 7 8 2 F.2 d1 0 2 7 (3 dCi r. 1 98 6 ). Th e reg u l at i o n t el l s u s th atal th o u g h th e ex p ect at i o n o f p ro fi t m i gh tn ot b e reas on ab l e, t h e fact s an d ci rcu m s tan ces m us ti n di cat e th atth e t ax p ay er en t ered i nt o the act i v i t y wi t h th e o b

ject i v e o f m ak i ng a p ro fi t . Sec. 1 .1 83 -2 (a), In co m e Tax Reg s . It gi v es u s n i n e fact o rs t o h el p u s d eci d e wh et h er an act i v i t y was en g ag edi n fo r p ro fi t:
! t h e m an n er i n wh i ch th e t ax p ay er carri es o n t he act i v i ty ;
! h is o w n ex pert i s e o r t h at o f h i s ad v i s ers ;
! t h e t i m e an deffo rth e ex p en d s o n th e act i v i t y ;
! t h e ex pect at io n t h atas s et s u sedi n th e act i v i t y m ay ap p reci at e i n v al ue;
! h is s u cces s i n carry i n g o n s i m i l ar act iv i t i es ;
! h is h is t o ry

o f i n co m e o r l o s s es wi th res p ect t o the act iv i t y ;- 1 5 -

[* 1 5 ] ! t h e am o u nto f o ccas i o n al p ro fi t s, i f an y , fro m th e act i v it y ;
! h is fi n an ci al s t atu s ; an d
! an y el em en t s o f p ers o n al p l eas u re o r recreat io n . Id . p ara. (b ). No o n e fact o r i s d et erm i n at i ve. Id
. W e are t o t ak e al l the fact s an d ci rcu m s t an ces i n t o acco un t , an dwe m ay g iv e m ore wei g h tt o s o m e t h an t o o t h ers . Id .; s ee Du n n v . Co m

m is s io n er, 7 0 T.C. 7 1 5 , 7 2 0 (1 9 7 8), aff’ d, 6 1 5 F.2 d 5 7 8 (2 d Ci r. 1 9 80 ). Th e Sev en t h Ci rcu i th as cal l ed t h is o pen -en d edt es to f o b ject iv e fact o rs o f
s ub ject i ve i n t en t“ g o o fy ” an dh as ch o s en n o tt o “ wad [e] th ro u g h th e n i n e fact o rs ,” b u ti n s t eadt o t ak e a m o re h o l i s t i c ap p ro ach . Ro b ert s v . Co m m i s si on er, 8 2 0 F.3 d 2 4 7 , 2 5 0 , 2 5 4 (7 t h Ci r. 2 0 1 6 ), rev ’ g T.C. M em o . 2 0 1 4 -7 4 . Th i s cas e, t h ou g h , i s ap p eal ab l e t o t h e El ev en t h Ci rcu i t . So we’ l l tru d g e al o n g the wel l -b lazed trai l an d ad d res s each s p eci fi c fact o r, as wel l as an y o t h er ad d i t io n al fact s we fi n di m p o rt an t t o d et erm i n e i f What l ey was en g ag edi n farm i n g fo r p ro fi t
. II. Th e Fact o rs A. M an n er i n Wh ich th e Act i v i t y Is Co ndu ct ed Th e fi rs tfact o r t el l s u s t o l o okath o w th e t ax p ay er co ndu ct s th e act i v i t y . Sec. 1 .1 8 3 -2 (b )(1 ), In co m e Tax Reg s .; s ee M cM i l l an v . Co m m i s s i o n er, T.C. M em o. 2 0 1 9 -1 0 8 , at * 3 2 . A t ax p ay er wh o carri es o n h i s act i vi t y i n a b u s i n es s l i k e- 1 6 -

[* 1 6 ] m an ner an d “ m ai n t ai n s co m p l et e an d accu rat e b o o k s an d reco rd s ” i s m o re l i kel y t o b e p ro fi t -m i n dedthan o n e wh o d o es n’ t . Sec. 1 .1 8 3 -2 (b )(1 ), In co m e Tax Reg s. An di f t h e act iv i t y i s “ carri edo n i n a m an n er s ub st an t i al ly s i m il ar t o o t h er act i vi t i es o f t he s am e n atu re wh i ch are p ro fi t ab l e,” i t ’ s m o re l i k el y t o b e a b u s i n es s t h an a p as t im e. Id . Ab an do n m en t o f u np ro fi tab l e m eth o d s l i kewi s e s h o ws an i n t en tt o i m

p ro v e p ro fi t ab i l i t y

an dm ay i n d i cat e a p ro fi tm o ti v e. Id . To d et erm in e h o w thi s fact o r wei gh s , we wi ll l o o kat
! Wh at l ey ’ s b o o k s an dreco rd s,
! h is b us i nes s p l an , ! i n dus t ry

s t an d ard s , an d
! an y ad j us t m en ts h e m ad e t o res p o n d t o th e ch ro n i c l os s es h e s u ffered
. See i d .; M cM i l l an , T.C. M em o. 2 0 1 9 -1 0 8 , at * 3 2 -* 35
.

1
. Bo o k s an dReco rd s Co m p l et e an daccu rat e b o o ks an dreco rd s refl ecta b u s i n es s l i k e m an n er. Sec. 1 .1 8 3 -2 (b )(1 ), In co m e Tax Reg s . Bu twe d o n ’ tl o o katreco rdkeep i n g ju s tfo r i t s m et i cu l o u s n es s , b utfo r wh et h er t h e t ax p ay er u s ed h is reco rd s t o h el p h i m
ev al u at e h o w h e’ s d o i ng , wh atex p en s es h e m ig h t cu t, an dh o w h e m ig h ti n creas e p ro fi ts . See Go l an t y

v . Co m m i s s i o n er, 7 2 T.C. 4 1 1 , 4 3 0 (1 9 7 9 ), aff’ dwi t h o u t p ub l i s h edo p i n i o n, 6 4 7 F.2 d1 7 0 (9 t h Ci r. 1 9 81 ).- 1 7 -

[* 1 7 ] Wh at l ey

k ep t o nl y

v ery l i m i t edb u s i n es s reco rd s fo r Sh eep d o g Farm s . Th e
reco rdh as o n l y

an n u al tri al b al an ces an d t ax -as sets h eet s fo r each y ear. It i s n o t cl ear wh en th es e reco rd s were creat ed , o r ev en wh et h er th ere were an y g en eral l ed g er o r o th er acco u n t i n g reco rd s fo r Sh eep d o g Farm s . Wh at l ey h adn o s ep arat e b an k acco u n tfo r Sh eep d og Farm s , s o th ere weren ’ t ev enb an k reco rd s. Keep i n g s o few reco rd s p rev en t ed Wh at l ey fro m s eei n g h o w wel l --o r h o w p o o rl y --h e was d o i n g . He d id n’ tkn o w th e v al u e o f h i s t i m b er wh en h e b o u g h tth e p ro p ert y an dd i dn o tk eep tracko f i t s v al u e o v er t i m e. Th e ab s en ce o f g o o d
reco rd s al s o p rev en t ed What l ey fro m rep o rt i n g cert ai n ex p en s es fo r Sh eep d o g Farm s, s uch as i n s u ran ce. He co u l dn o ttrack Sh eep d og Farm s ’ p erfo rm an ce. Th i s wei g h s ag ai n s t h i m . 2
. Bu s i n es s Pl an A b u s in es s p lan s u g g es t s t h atan act i v it y i s co n du ct edi n a b u s in es s l i k e
m an n er. Sec. 1 .1 8 3 -2 (b )(1 ), In co m e Tax Reg s .; s ee Ph i l l i p s v . Co m m i s s i o ner, T.C. M em o . 1 99 7 -1 2 8 , 7 3 T.C.M . (CCH) 2 29 6 , 2 3 0 0 (1 9 9 7 ). W h at l ey h adn o b u s i n es s p l an fo r Sh eep do g Farm s . Itwas n ’ t u n t i l J u ly 2 4 , 2 0 0 8 th ath e fi n al l y

g o t a fo res t -m an ag em en tp l an . Th is was fo u r y ears aft er t h e h e b o ug h t t h e p ro p ert y b u tl es s th an fo u r m o n t h s aft er h e l earn edo f t h e IRS au d i t
. Th i s fact o r al s o wei g h s ag ai ns t h i m .- 1 8 -

[* 1 8 ] 3
. In du s t ry St an d ard If an act i v i ty

i s co n du ct edi n th e s am e way as o t her s im i l ar act i vi t ies th atare p ro fi tab le, i tl o o k s m o re b u s i n es s l i k e. See s ec. 1
. 1 8 3 -2 (b )(1 ), In co m e Tax Reg s . Th ere i s n ’ tm

u ch i n th e reco rdab o u th o w o t h er t ree o r cat t l e farm s are o p erat ed , b u tth ere i s s o m e. M an y o f t h e ex p ert s th atWh at l ey co n s ul t edh adei t h er m o re t h an 1 2 5 ,0 0 0
acres o f t i m

b erl an do r h u n d red s o f h eado f cat t l e--i .e., th ei r o p erat i o n s were m u ch l arg er t h anh i s . Th i s s ug g es t s th at Sh eep d og Farm s --wi t h v ery l im i t edacreag e o f t i m b erl an dan dn o cat t le u n t i l atl eas t2 0 0 8 --was n o to p erat edl i k e s i m i l ar, p ro fi tab le act i vi t i es . W e d o ack n o w l ed g e th at t h e Co m m i s s io n er d i d n’ ti n t ro du ce
an y ev i d en ce as t o wh ata s m al l tree farmo r cat t l e farm wo ul dl o okl i k e o r t h ata cat t le o r t ree farmth e s i ze o f Sh eep d o g Farm s co u l dn ’ tb e p ro fi t ab l e--al t ho u g h we wi l l fi n dth at a cat t l e farm wi t h o u tcat t l e i s n o tl i k el y t o b e p ro fi t ab l e. W e’ l l b e g en ero u s an d cal l th i s fact o r n eu t ral
. 4
. Ad ju s t i n g Ap p ro ach Ch an g i ng “ o perat i n g m et h o d s , ad op t [i n g ] * * * n ew t ech n i qu es o r ab an do n [i n g ] * * * u np ro fi t ab l e m et h o d s i n a m an n er co n si st en twi t h an i n t en tt o i m p ro v e p ro fi t ab i l i t y ” al s o i n d i cat es th ata t ax p ay er co n du ct edh i s act i v i t y i n a b u s i n es s l i k e m an n er. Sec. 1 .1 8 3 -2 (b )(1 ), In co m e Tax Reg s . Th i s i s a real p ro b l em- 1 9 -

[* 1 9 ] fo r What l ey . Du ri n g al l th e y ears ati s s u e Sh eep do g Farm s o p erat edata
s ub s t an t i al l o s s . Th e fact s p ai n tn o p i ctu re o f rap i dch an ge t o i n creas e p ro fi tab il i t y , an d Sh eep d og Farm s s u ffered g reat er l o s s es as t i m e wen to n. In 2 0 0 4 --i t s fi rs ty ear o f o p erat i o n --i tp o s t ed a l o s s o f $ 9 0 ,0 0 0. In n i n e o u t o f t h e
n ex t t en y ears , Sh eep d o g Farm s rep o rt ed ev eng reat er l o ss es . 1 2 See s up ra p . 1 0
. Wh at l ey t o o kn o s i gn i fi can ts t ep s du ri n g th e y ears ati s su e t o ch an g e wh ath e was d o i n g t o cu tth es e l os s es . Th i s fact o r wei g h s ag ai n s th i m . 5
. Ot h er Fact s Th e reg u l at i o n d i rect s u s t o m ak e s u re we co n s i d er al l fact s an d ci rcu m s t an ces . Sec. 1 .1 8 3-2 (a), In co m e Tax Reg s . A few o t h er rel ev an tfact s h u d d l e b en eat h t h e “ m an n er t h e act i v i t y i s co n duct ed ” u m

b rel l a. Fi rs t , Wh at l ey fai l edt o tran sfer o w n ers h i p o f t h e 1 5 6 -acre t ract o f l an dwh ere m o s to f th e t i m b er
was g ro wi n g t o Sh eep d o g Farm s . Th is i s ev i d en ce t h ath e d i d n otru n th i s
o p erat i o n i n a b u s in es s l ik e m an n er. Ital so m ean s th atSh eep d o g Farm s cl ai m ed
ex p en s es rel at edt o l an dthati t d i d n ’ to wn .

1 2 On l y i n 2 0 0 5 d i dSh eep d o g Farm s rep o rta l o s s s m al l er t h an i n 2 0 0 4 --a m ere $ 77 ,0 0 0
.- 2 0 -

[* 2 0 ] So m e o f t h e s peci fi c ex p en s es o n Sh eep do g ’ s ret u rn s are o f d o ub t fu l l eg i t i m acy . Du ri n g th e y ears ati s s u e, fo r ex am p l e, Sh eep do g Farm s cl ai m ed $ 6 7 ,7 3 5 i n d ep reci at io n fo r t wo h o m es o n th e p ro p ert y . Iti s n o tcl ear t o u s wh y d ep reci at i o n o f Wh at l ey ’ s s eco n dh o m e--wh i ch h e s t at edwas a p ers o n al
res i den ce--an do f t h e rarel y u s edcaret ak er h o m e s h o u l db e co n si d ered b u si n es s
ex p en s es . On b al an ce, we fi ndth atWh at l ey d i d n o tco n du ctSh eep d o g Farm s i n a b u s i n es s l i k e m an n er. Th i s fact o r wei g h s s t ro n g l y ag ai ns th i m . B. Ex p ert i s e o f Tax p ay er o r Ad v i s er Th e reg u l at i o n d i rect s u s t o l o o katwh et h er an dh o w a t ax p ay er p rep ared fo r t h e act i v i t y

i n ques t i on . Sec. 1 .1 8 3 -2 (b )(2 ), In co m e Tax Reg s . Its p eci fi cal l y d i rect s u s t o ch eckfo r s i g n s t h atth e t ax p ay er p rep ared fo r th e act i v i t y b y ex t en s i v e
s tud y o f i t s “ accep t edb u s i n es s , eco n o m i c, an ds ci en ti fi c p ract i ces , o r co n s u l t at i o n wi t h th o s e wh o are ex p ertth erei n .” Id
. J u s tg et t i n g ad v i ce i s n ’ ten o u g h --i f h e
wan ts t o p ers u ad e u s h e h ad a p ro fi tm ot i v e, h e’ db et ter fo l l o wthatad v i ce o r t el l a p l au s i b l e s t o ry

ex p l ai n in g thath e’ s try i n g t o d ev el o p a n ew o r s up eri or t ech n i qu e. Id
. Wh at l ey

ci tes hi s fam i l y ’ s ag rari an h eri t ag e, b u th e h i m s el f h as n o
ex p eri en ce i n ru n n i ng a cat t l e farm . Li ke a g reat m an y Am eri can s wh o h av e d eep- 2 1 -

[* 2 1 ] ro o t s i n o u r co u n t ry , Wh at l ey h i m sel f i s n o tt o o far rem o v edfro m an ces t o rs wh o wo rk edth e l an d . Bu th i s fo reb ears ’ ex p eri en ce i s n o th i s o wn , an dth ei r
ex p ert i s e i s n o th i s . Wh at l ey al so h as n o ex p eri en ce o p erat i n g a t im b er farm l i k e t h e o n e at Sh eep d o g Farm s . W e d o ack n o wl ed g e h i s arg u m en tthath i s fo ray i n t o t h e b u s i n es s atth e ag e o f 2 7 s h o ul dwei g h i n h i s fav or. Bu twe d o n ’ t t h i nki ts h o u l d wei g h v ery

m u ch --i twas o v er 3 5 y ears ag o, an dh is b u s in es s was d i fferen t
. Sh eep d o g Farm s i s rep o rt ed l y a t i m b er farm . Th e b u s in es s Wh at l ey ran as a y o u n g
m an b o u g h tan dl o gg edt i m ber t h atwas read y

t o h arv es t . Th es e b u s i n es s es m ay b e i n the s am e g en eral fi el d , b u tt i m b er h arv es t i n g an dt im

b er g ro wi n g are n o t s i m i l ar
en o ug h fo r u s t o fi n dth atWh at l ey h ad ex peri en ce i n t h e b u s i n es s . 1 3 Peo p l e wh o are t ry i n g t o s t artup i n a n ew fi el dcan al s o l o o kt o o t h ers t o g ai n ex p ert i se, an d Wh at l ey al s o arg u es th ath e d i d t h i s . 1
. Cat t l e Op erat i o n He fi rs targ u es thath e co n s u l t edwi t h ex p eri en cedi n d i vi du al s ab o u tth e cat t le o p erat io n . Wh en th es e co n s u l t at i o n s t o okp l ace i s u ncl ear. Th e reco rd d o es n’ ts h o w wh et h er t h ey t o o k p l ace b efo re Wh at l ey s t art edb u y i n g t h e l an do r

1 3 Wh at ley

al so arg u es th ath e h as ex p eri en ce i n t h e fi el db ecau s e h e l en d s m o ney t o t i m b er farm ers th ro u g h h i s b an k. W e are u n co nv i n ced . Peo p l e d o n ’ tg o t o a m ech an ic’ s b an k er t o fi x thei r cars --t hey g o t o a m ech an i c.- 2 2 -

[* 2 2 ] wh en h e fi n al l y

g o tcat t l e o n th e l an d --wh i ch was aft er h e cam e u n d er t h e Co m m i s s i o n er’ s ey e. Wh at l ey al s o d i d n ’ ti n tro du ce an y ev i d en ce ab o u t wh at act u al ad v i ce h e recei v ed
.

2
. Ti m

b er Op erat i o n Wh at l ey d i dco ns u l ts o m e i n d i v i du al s o n h o wt o m an ag e h is t i m ber b efo re h e b o u g h tth e 1 5 6 -acre t ract . He al s o s o u g ht o t h er fo res t ers ’ ad vi ce wh i l e h e
o wn edth e farm
. An d o n ce W h at l ey kn ew h e was u n d er au d it , h e d i dg eta fo res tm an ag em en tp l an . W e d o n o tb el i ev e, h o wev er, th atth es e co ns u l tat i o n s are
en o ug h t o t i p th i s fact or i n Wh at l ey ’ s fav o r, ev en as t o Sh eep d o g Farm s ’ t i m b er
o p erat i o n s . Iti s ag ai n n o t cl ear wh atad v i ce h e recei v ed , an di t ’ s n o t ev en cl ear wh at typ e o f ad v i ce h e g o t. Th e ad v i ce we l oo kfo r i s ad v i ce o n h o w t o p ro fi tfro m d o i n g th e act iv i t y

i n ques ti o n . Hei nb o ck el v . Co m m is si o n er, T.C. M em o . 2 0 1 3
- 1 2 5 , at * 2 5 . W e fi n di tm o re l i k el y th an n o t h ere t h atth e ad vi ce W h at ley recei v ed
was ab o u th o w t o care fo r t h e t i m b er, n oth o wt o m ak e a p ro fi t fro m i t . Th i s i s an i m p o rt an td i st i n ct io n h ere, b ecau s e t h es e ad v i s ers h adv ery l arg e t i m b er farm s -- t h ey t ot al edm ore t h an 1 2 5 , 0 0 0 acres --an dwe t h i n ki t m ore l i k el y t h an n o t t h at t h ei r ad v i ce wo u l db e l es s h el p fu l i n m ak i n g a v ery s m al l o p erat i o n l i k e Wh at l ey ’ s p ro fi tab le. An di t i s n o tcl ear wh en Wh at ley g o tth i s ad v i ce. What l ey t es ti fi edi t
was aft er h e b o u g h tth e p ro p ert y . Bu twe d o n ’ tkn ow wh et h er t h atm ean s t h e- 2 3 -

[* 2 3 ] ad vi ce was recei v edi m m ed iat el y aft er th e p u rch as e o r aft er t h e t ax y ears at i s su e. W e d o b el i ev e h is t es t i m o n y th ath e co n s u l tedwi t h a fo res t er b efo re h e b o u g h tth e l an db utd o n ’ tthi nkth ati t’ s en o u gh t o t ip th i s fact or i n h i s fav o r. Th o ug h he g o tg en eral ad vi ce ab o u t h o w t o m ak e a p ro fi tan dcare fo r t i m ber, i ti s
n o tcl ear ex act l y

wh at ad v i ce t h e fo res ter g av e h i m , wh i ch m ak es i th ardfo r u s t o d et erm i n e wh eth er Wh at l ey fo ll o wedth is ad v i ce. An dg i ven h i s co n s i s ten t
s u s t ai n edl o s s es , we fi n di tm o re l i k el y th an n o tth ath e d id n ’ tfo l l o wwh at ev er ad v ice h e d i drecei ve ab o uth o wt o p ro fi tfro m h i s t i m b er o p erat i o n . Th i s fact o r wei g h s ag ai n s tWh at l ey . C. Ti m e an d Effo rt Ex p en d edo n th e Act i v i t y W e n ex tl o okat t h e t i m e an deffo rta t ax p ay er s p en ds o n t he act i v i ty . Sec. 1 .1 83 -2 (b )(3 ), In co m e Tax Reg s . W e u s u al l y l o o katth ree t h i n g s h ere--d ev o t i o n
o f a s i g n i fi can tam o u n t o f a t ax p ay er’ s p ers o n al t i m e (p art i cu l arl y i f h e g et s n o
s ub s t an t i al am o un to f p ers o n al p l eas u re o r recreat i o n fro m i t), wi t h d rawal fro m
an o th er o ccup at i o n t o d ev o te m o s to f h i s en erg i es t o th e act i v i t y , an dem p lo ym en t
o f co m p et en t an d qu al ifi edp ers o n s t o carryo n th e act i v i t y (wh i ch can b e i m p o rt an ti f a t ax p ay er h i m s el f d o es n ’ ts p en d a l o t o f t i m e o n th e act iv it y ). Id
.- 2 4 -

[* 2 4 ] Th i s i s an o t h er b i g p ro bl em fo r Wh at l ey . He d i d n ’ t l eav e h i s jo b as a b an ker t o ru n Sh eep d o g Farm s . He al s o m ad e cl ear t h atdu ri n g th e y ears ati s s u e h e d i d n’ th ire an y o ne el se t o wo rko n th e farm
. 1 4 Th i s l eav es u s t o l o o katwh et h er
m u ch o f Wh at l ey ’ s p ers on al t i m e was d ev o tedt o Sh eep d o g Farm s . W e b eg i n b y

o b serv in g t h atWh at l ey

d i d n ’ t h av e a wh o l e l o to f free t i m e. He wo rk edfu l l t i m e as a b an ker fo r al l t h e y ears at i s s u e--t rav el i n g an d wo rk i n g 7 0 h o u rs a week . Th atl efth i m wi t h o n l y

ab o u t7 0 0 h o u rs a y ear t o wo rk atth e farm --ro ug h l y

1 3
. 5 h o urs a week . W e fi n di tm o re l i k el y th an n o tth atWh at l ey
was s im pl y s pen d i ng h i s week en d s at t h e farm an d wo rk i n g o n the l an ddu ri n g t h e d ay . Wh at l ey

en j o y edwo rk i n g atth e farm
. Th i s fact o r al s o wei g h s ag ai ns t Wh at l ey . D. Ex p ect at i on Th atAs s et s M ay Ap p reci at e A t ax p ay er’ s ex p ect at i o n th atan as s etm ay ap preci at e i n v al u e can s h o w a p ro fi t m o t i v e. Sec. 1 .1 8 3 -2 (b )(4 ), In co m e Tax Reg s . Th ere are s o m e act i vi t i es i n wh i ch “ ano veral l p ro fi twi l l res u l twh en ap p reci at i o n i n th e v al ue o f l an du s edi n t h e act i v i t y

i s real i zed s in ce i n co m e fro m th e act i v it y

t o g et h er wi t h t h e ap p reci at i o n o f l an d wi l l ex ceed ex p en s es o f o perat i o n.” Id
.

1 4 Th o u g h To ry

Bl ack --a n ei g h b o r wh o cu rren t l y “ wo rk s ” (b u ti s n o tp ai d ) at Sh eep d o g Farm s --cred i b l y t es t i fi ed t h ath e l o o ks aft er th e farm wh i le Wh at l ey i s n’ t t h ere, Bl ackd i d n ’ two rkfo r Wh at l ey du ri n g th e y ears ati s s u e.- 2 5 -

[* 2 5 ] Th i s i s n o ta fact o r t h atWh at l ey can ci t e i n h i s fav o r o n t h e cat t l e s i de o f t h e farm . Bu tth e t rees were t h ere wh enh e b o u g h t i t , an dWh at ley d i dt es t i fy

th ath e
ex p ect edth em

t o g ro w i n v al ue. Bu tth ere i s ag ai n a p ro b l em fo r h i m --t h ere i s
n o t h i n g i n th e reco rdthates t ab l i s h es t h atWh at ley kn ew t he v al u e o f t h e t i m b er wh en h e b o u g ht t h e p l ace, wh ich l ead s u s t o fi n di tm ore l ik el y th an n o t t h ath e d i d
n o th av e an y

ju s ti fi ab l e h o p e t hatth ei r g ro wt h i n v al u e wo u l do ffs etth e co s t s o f wai t i n g fo r t h em

t o b e h arv es t ed
. A b i g p arto f Wh at l ey ’ s p ro b l em h ere i s th atSh eep d o g Farm s was s o
s p ect acu l arl y

u np ro fi t ab l e. Fo r t h e s ak e o f arg um en t , l et ’ s u n reas o nab l y as s u m e t h e v al u e o f t h e t im

b er was $ 0 i n 2 0 0 4
. An dl et ’ s as su m e t h e p ro ject edv al u e o f t h i s t i m b er i n 2 0 2 2 wo u l db e $ 3 3 2 ,6 2 5 --t h e h i g h es tp os s i b l e v al ue i n t h e reco rd
. Atm o s t , Wh at l ey co u l d p ro jecti n co m e o f $ 3 3 2 ,6 2 5 fro m th i s t i m b er i n 2 0 2 2 , wh i le h i s l os s es ju s tfro m th e y ears ati s su e--$ 5 1 2 ,2 2 2--al read y ex ceed ed t h at . So
ev en if we u n reas o n ab ly

as s u m e t h atWh at l ey

h ada zero b as i s i n t he t im b er an d
ex p ect edth e t i m

b er t o s el l at t h e h i g h es t p o s s i b l e v al u e t h atan y o n e es t im at ed , i t
wo u l ds t i l l p ro duce a t o t al l o s s o f atl eas t $ 1 7 9 ,5 9 7
. 1 5 See g en eral l y M et z v . Co m m i s s i o n er, T.C. M em o . 2 0 1 5 -5 4 , at* 5 0 -* 5 2 . Th i s d o es n ’ tev en i n cl u d e t h e

1 5 $ 5 1 2 ,2 2 2

! $3 3 2 ,6 2 5 = $ 1 7 9 ,5 9 7.- 2 6 -

[* 2 6 ] l o s s es fro m y ears 2 00 9 -1 4 , wh i ch wo u l di n creas e t h att o tal l o ss t o $ 1 ,2 3 0 ,8 5 1
. 1 6 Th i s al s o as s u m es th atSh eep d o g Farm s wo u l d n ’ t p ro du ce y etm o re l o s s es fro m

2 0 1 5 -2 2 , wh i ch we fi n dt o b e n o t l ik el y atal l
. Th i s fact o r wei g h s ag ai n s tWh at l ey . E. Su cces s i n Carry i n g o n Oth er Si m i l ar Act iv i t i es A t ax p ay er’ s s u cces s i n s i m i l ar act i vi t i es i n th e p as t can s ho w th ath i s
cu rren tact i v i t y

i s en g ag edi n fo r p ro fi t . Sec. 1 .1 8 3-2 (b )(5 ), In co m e Tax Reg s . Th i s i s b ecau s e “ [a] trackreco rdo f s u cces s i n o t h er b u s in es s v en tures m ay i n d i cat e t h atth e t ax p ay er h as th e en t rep ren eu ri al s k i l l s an dd et erm i n at io n t o
s u cceed in s ub s equ en t en d eav o rs .” An n u zzi v . Co m m i s s i o ner, T.C. M em o. 2 0 1 4
- 2 3 3 , at * 2 5 -* 2 6. Wh at ’ s n eed edi s s o m e s yn erg y b et ween t he p ri o r b u s in es s an d t h e cu rren tact i v i t y . See i d
. at * 2 6
. Wh at l ey ag ai n p o in t s t o h i s o l dt i m b er-h arv es t i n g b u s i nes s . An d we d o t h i n kth atWh at l ey ’ s s tart in g a b u si n es s i n h i s t wen t i es was an earl y s i g n o f t h e
en t rep ren eu ri al i n cl i n at i on th ath e h as s ho wn al l h i s l i fe. W e d o n ’ td oub t t h ati t t au g h th i m

s o m e v ery

u s efu l g en eral l es s on s ab ou th o w t o ru n a b u s i n es s . Bu tthe
s p eci fi cs o f t hatb us i nes s were t o o d i s s i m i l ar an d t o o l o n g ag o fo r u s t o fi n dth at

1 6 $ 1 ,5 6 3,4 7 6

! $ 3 3 2 ,6 2 5 = $ 1 ,2 30 ,8 5 1
.- 2 7 -

[* 2 7 ] th e s ki l l s l earn edi n t h e fo rm er s h o w b y th em sel v es th ath e i n t en dedt o m ak e a p ro fi ti n th e l at t er. Sh eep d o g Farm s i s p ri m ari l y a cat t l e farm . Wh at l ey ’ s o l d b u s i n es s h ad
n o t h i n g t o d o wi t h cat t l e atal l . An dg ro wi n g t i m b er i s d i fferen tfro m

h arv es t i n g
an d l o gg i n g i t . Bu twe d o n o twan tt o d en y s o m e reco g ni t i o n o f t h o s e
en t rep ren eu ri al s k i l l s . W e’ l l cal l thi s fact o r n eu t ral
. F. Hi s t o ry

o f In co m e an dLo s s W e m u s tal s o l o o kt o s ee wh et h er t h e t ax pay er h ada h is t o ry o f i n co m e o r l o s s wi t h thi s act i vi t y . Sec. 1 .1 8 3 -2 (b )(6 ), In co m e Tax Reg s. Lo t s o f b u s i n es s es l o s e m o ney

atth e s t art up s t ag e, an dth e reg u l at i o n reco g ni zes th ata h i s t o ry o f
s o m e l o ss es d o es n o tn eces s ari l y m ean an act i v i t y

i s n o t en g ag ed i n fo r p ro fi t . Id
. Th e reg u lat i on al s o reco g n izes t h atth ere can b e l o s s es s u s t ai n edb ecau s e o f
u n fo res een ci rcu m s tan ces b ey o n dth e co n tro l o f t h e t ax p ay er, “ s uch as d ro u g h t
* * * o r d ep res s edm ark et co n di t i o n s .” Id
. Sh eep d o g Farm s ’ l os s es , h o wev er, are s o s u st ai nedan d s o l arg e t h atwe
can n otfi n dth em

t o b e t ran s i t o ry

o r u n ex p ect ed . Th ere were l o ss es ev ery y ear fro m 2 0 04 -1 4 --an d t h e l arg es tl o s s es were fro m 2 0 0 9 -1 4 . What l ey d o es arg u e t h at t h e l o s s es fo r t he y ears ati s s u e were cau s edb y u n fo res een ci rcu m s tan ces -- s p eci fi cal l y

a d ro u g h tan da d ep res s edm ark et . He arg u es th atth e dro ug h tcau s ed- 2 8 -

[* 2 8 ] l o s s es fo r h i s cat tl e o perat i o n an dm ark etco n d it i on s cau s edl o s s es fo r h i s t i m b er o p erat i o n . W e are, h o w ev er, u npers u ad edth atth e d ro ug h tcau s edl o s ses fo r t h e cat t l e
o p erat i o n . Th e reg u lat i o n t el l s u s s p eci fi cal l y th atth e ev en t m

u s tb e “ u n fo res een
o r fo rtui t o u s .” Sec. 1 .1 8 3 -2 (b )(6 ), In co m e Tax Reg s . What l ey t es ti fi ed t h atth ere
was a d ro u g h t wh en h e b o u g h tth e l an d , wh i ch m ak es i tn ei t h er u n fo res eeab l e n or fo rtui t o u s. Th e l os s es , m o reo v er, were n ots u s t ai n ed“ b eca u se o f u n fo res een o r fo rtui t o u s ci rcu m s t an ces ” as req u i redb y th e reg u l at i o n. Id . (em

p h as i s ad d ed ). Th e l o s s es k ep to n ri s i n g ev en wh en Wh at l ey fi n al l y b o u g h tcat t l e fo r th e farm
. W e are al s o u np ers u ad edth atd ep res s edm ark et co nd i t io n s cau sedl o s s es fo r t h e t i m b er o p erat i o n . Th i s arg u m en tm ak es l i t t l e s en s e t o u s as m ark etco n d i t i o n s h ad n o t h i n g t o d o wi t h the l o s s es Wh at l ey s u s t ai n ed . Wh at l ey

d i d n’ tp l an o n
s el l i n g t i m

b er u n t i l 2 02 2 --an dwe d o n ’ ts ee h o w m ark et co nd i t i o ns i n 2 00 4 -0 8
wo u l daffect the v al u e o f u n cu tt i m b er i n 2 0 2 2
. Th i s fact o r wei g h s ag ai n s tWh at l ey . G. Am o u n t o f Occas i o n al Pro fi t s , i f An y

“ An o ccas i o n al s m al l p ro fi t fro m an act iv i t y g en erat in g l arg e l o s s es , o r fro m
an act i v i t y

i n wh i ch th e t ax p ay er h as m ad e a l arg e i n ves t m en t , wo ul dn otg en eral l y b e d et erm i n at i v e t h atthe act i v i t y i s en gag edi n fo r p ro fi t .” Sec. 1
. 1 8 3 -2 (b )(7 ),- 2 9 -

[* 2 9 ] In co m e Tax Reg s . Sub s t an t i al p ro fi t , tho u gh o n l y o ccas i o nal , wo u l ds erv e
as a s i g n th atan act i v i t y

i s en g ag edi n fo r p ro fi ti f i nv es t m en to r l o s s es are
co m p arat i v el y s m al l . Id
. Sh eep d o g Farm s i n i t s fi rs tt en y ears s ho wedn o p ro fi tan do n l y l o s ses --an d
s ub s t an t i al o n es atth at
. Th i s fact o r wei g h s h eav i l y ag ai n s tWh at l ey . H. Fi n an ci al St atu s o f t h e Tax p ay er Sub s t an t i al i n co m e fro m

s o u rces o t her t han th e act i v i t y --“ p art i cu l arl y i f t h e l o s s es fro m

th e act i v i t y

g en erat e s ub s t an t i al t ax b en efi t s ”--m ay i n d i cat e th atth e act i vi t y i s n o t en g ag edi n fo r p ro fi t. Sec. 1 .1 8 3 -2 (b )(8 ), In co m e Tax Reg s . Th i s i s
es p eci al ly tru e i f, as h ere, t h ere are p ers o nal o r recreat i o n al el em en t s i n vo l v ed . Id
. Wh at l ey h as s ubs t an ti al i n co m e fro m b an ki n g . Th e l o ss es fro m Sh eep d o g Farm s wo u l d , i f we al l o wedth em , g en erat e s ub s t an t i al t ax b en efi t s. Th e fo l l o wi n g t ab l e i ll u s t rat es th e p ot en t i al t ax b en efi t s :

Year Ban k i n g i n co m e Sh eep do g Farm s l o s s 2 0 0 4 $ 2 3 5 ,4 66 .5 0 ($ 9 0,1 1 8 ) 2 0 0 5 2 0 4 ,8 05 .0 0 (7 7,4 4 2 ) 2 0 0 6 2 1 1 ,7 82 .8 6 (1 0 4,3 3 9 ) 2 0 0 7 2 2 6 ,7 42 .4 7 (9 0,3 7 8 )- 3 0 -

[* 30 ] 2 0 0 8 2 5 0 ,0 00 .0 0 (1 4 9,9 4 5 ) To t al 1 ,1 2 8 ,7 96 .8 3 (5 1 2,2 2 2 ) Th i s fact o r wei g h s ag ai n s tWh at l ey . I. El em en t s o f Pers o n al Pl eas u re o r Recreat i o n

“ Th e p res en ce o f p ers o n al m o t i v es i n carry i n g o n o f anact i vi t y m ay i n d i cat e t h atth e act i v it y

i s n o ten g ag ed i n fo r p ro fi t , es p eci al l y wh ere t h ere are recreat i o nal
o r p ers o n al el em en t s i n v o l v ed .” Sec. 1 .1 8 3 -2 (b )(9 ), In co m e Tax Reg s . Th at d o es n’ tm ean th at a b u s in es s b eco m es a h o b by ju s tb ecau s e t h e t ax p ay er en jo y s i t --

“ s u fferi n g h as n ev er b een m ad e a p rereq u is it e t o d edu ct ib il i ty .” J ack s on v . Co m m i s s i o n er, 5 9 T.C. 3 12 , 3 1 7 (1 9 7 2 ). At th e s am e t i m e, “ wh ere t h e p os s i b i l i t y fo r p ro fi t i s s m al l (g i ven al l th e o t h er fact o rs ) an dthe p o s si b i l i t y fo r g rat i fi cat i o n i s
s ub s t an t i al , i ti s cl ear t h atth e l at t er p o s s i b i l it y co n s t i tu t es th e p ri m ary m o t i v at i o n fo r t h e act i vi ty .” Do d ge v . Co m m is s i o n er, T.C. M em o . 1 9 9 8-8 9 , 7 5 T.C.M
. (CCH) 1 9 1 4 , 1 9 1 9 (q u o t i n g Bu rg er v . Co m m i s s i on er, T.C. M em o . 1 9 8 5 -5 23 , 5 0 T.C.M . (CCH) 1 2 6 6 , 1 2 72 -7 3, aff’ d , 8 09 F.2 d 3 55 (7 t h Ci r. 1 9 8 7 )), aff’ dwi t h o u t p ub l i s h edo p i n i o n, 1 8 8 F.3 d5 0 7 (6 t h Ci r. 1 9 99 ). Th atd es cri b es wh atwas g o i n g o n h ere. Wh at l ey fo u n d1 8 2 acres o f l an d
n ear h i s h o m et own , an den jo y edg o i n g th ere as a ret reat fro m h i s g ru el i n g an d- 3 1 -

[* 3 1 ] t i m e-co n s um in g b an k i n g b u s i n es s . Th o u gh m an y p eo p le d o n o t fi n d farm i n g en

jo y ab l e, Wh at ley

d i d. Th i s fact o r al s o wei g h s ag ai ns t Wh at l ey . J
. Su m

m ary an dHo li s t i c Ap p ro ach Th e reg u l at i o n ’ s “ g o o fy ” fact o rs --n o n e o f wh i ch fav o rs Wh at l ey an do n l y t wo o f wh i ch are n eu tral --l ead u s t o fi n dth atSh eep d o g Farm s was n ot an act i v i ty
en g ag edi n fo r p ro fi t . J u d g e Po s n er’ s “ h o l i s t i c” ap p ro ach wo u l d g etu s t h ere m u ch
m o re qu i ck l y . Wh at l ey was a b an k er wo rk in g 7 0 h o u rs a week . He fo u n dth i s p ro p ert y an db o u gh ti t. Th i s l eth i m wo rko u t d o o rs --s o m et h i n g th ath e d idas a ch i l dan den

jo y ed . Bu t t h e p ro p ert y

was a cat t le farm wi t h n o cat t l e du ri n g al l b u t p arto f o n e y ear at i s s u e. It h adco n s i s t en tan d s ub st an t i al l o s s es wh i ch t o t al ed
o v er $ 1.5 m i l l i o n fro m

2 0 0 4 -1 4 . Ev en i f h e l at er cu tan d s ol dth e t i m b er, h e h ad
n o ch an ce o f tu rn in g a p ro fi t ; b u tSh eep d o g Farm s ’ ex p en se, i f al l owed , wo u l d
s ub s t an t i al l y

o ffs eth i s i nco m e fro m

o t h er s o urces . Th atd edu ct i o n i s ju s twh at
s ect i on 1 8 3 p rev en ts
. III. M o rt g ag e In teres t Ou r fi n d i ng o n t h e m ajo r i s su e creat es a m i n o r o n e. Wh at l ey an ti ci p at ed t h atwe m i g h tn otfi n dSh eep d o g Farm s t o b e a t rad e o r b u s i n es s , an darg u es i n th e al t ern at i v e t hath e can d edu ctthe i n t eres tal lo cab l e t o t h e m ai n res i d en ce o n th e- 3 2 -

[* 3 2 ] p ro p ert y

u n der s ect i o n 1 6 3
. 1 7 W e m u s t s ee wh et h er t h is al t ern at i v e th eo ry
can t ak e ro o t
. A. Th e Law As a g en eral ru l e, s ect io n 1 6 3 (a) al l o ws a d edu ct i o n o f al l i n t eres tp ai d
. Sect i o n 1 6 3 (h )(1 ) i s an ex cep t i o n t h atb ars d edu ct i o n s o f p ers o n al i nt eres t . Th e Co d e t h en h as an ex cep ti o n t o t h e ex cep t i on fo r “ qual i fi edres i d en ce i n t eres t .” Sec. 1 6 3(h )(2 )(D). “ Qu al i fi ed res i d en ce i nt eres t ” i s an y i n t eres twh i ch i s p ai do n

“ acq u i s i t i o n i n d eb t ed n es s ” o f an y “ qu al i fi edres i den ce” o f t h e t ax p ay er. Sec. 1 6 3 (h )(3 )(A)(i ). Acqu is i ti o n i n d eb t ed n es s i s an y i n d eb t ed nes s th at :
! i s i n cu rred i n acq u i ri n g , co n s t ru ct i ng , o r s ub s t an t i al l y i m p ro v i n g an y qual i fi edres i d en ce o f the t ax p ay er, an d
! i s s ecu redb y

s u ch res i d en ce. Sec. 1 6 3(h )(3 )(B)(i )(I). A “ qu al i fi edres i d en ce” i s a t ax p ay er’ s res i d en ce (o t h er t h an h is p ri n ci p al res i d en ce) wh i ch h e u s es as a d wel l i n g u n it fo r p ers o nal p u rp os es fo r m o re t han 1 4 d ay s du ri n g th e t ax y ear. Secs . 1 6 3 (h )(4 )(A)(i )(II), 2 8 0 A(d )(1 ).

1 7 W e o v erru le t h e Co m

m i s s i o n er’ s o b

ject i o n t o Wh at l ey ’ s i n tro du ct i o n o f ev i d en ce i n s up po rto f t h i s arg um en t
.- 3 3 -

[* 3 3 ] B. An al y s i s Th e Wh at l ey s ag ai n h av e a p ro bl em . W e d o n o td o ub tth atthe m ai n
res i den ce o n th e p ro p ert y i s a “ qu al i fi ed res i d en ce.” W e al s o d o n otd o ub tth atth e Wh at l ey s u s edi tfo r p ers o n al p u rp o ses m o re t han 1 4 d ay s du ri n g each y ear at i s su e. Bu ti s t he i n t eres tp ai do n i t “ acq ui s i t i o n i n d eb t ed n es s ? ” “ [A] cq u is i t i o n i n d eb t ed n es s ” req ui res th atth e i n d eb t ed n es s h av e b een i n cu rred t o acq u ire a qu al i fi edres i d en ce an d i s s ecu redb y th at res i d en ce. Wh at l ey i nt ro du cedn o p ap erwo rk ab o u tth i s d eb t . He d i dt es t i fy th ath e h adb o t h a m o rt g ag e an da l i n e o f cred i to n “ t h e farm .” Onh i s retu rn fo r 2 0 0 4 What l ey rep o rt edth e m o rt gag e i n t eres tas m o rt g ag e i n t eres tan dth e l i n e-o f-cred i ti nt eres tas “ o t h er i n teres t .” Fo r y ears 2 0 0 5 -0 8 , h e s i m

pl y d edu ct edi n t eres t p ai do n b ot h t h e m o rt gag e an dth e l in e
o f cred i t as “ ot h er i n teres t .” Th e p ro b lem i s th at o n l y

i n t eres tat tri b ut ab l e t o a qu al ifi edres i d en ce--h ere t h e m ai n h o u s e o n th e farm --i s d edu ct i b l e u n der s ect i o n 1 6 3 . Th e i nt eres t d educt i o n s th e Wh at l ey s cl ai m edo n th e ret u rn s were fo r t h e en ti re p ro p ert y . Wh at l ey t es t i fi edh o w m

u ch i n t eres th e t h o u gh twas at t ri b u tab l e t o the m ai n
res i den ce o n th e farm . Bu t h e d i dth i s wi t h ou tan y rel iab l e d o cu m en t at i o n , an dwe d o n o t fi n dh i s t es t im o ny cred i b l e. Li k e t h e t ax p ay er i n Fi n e v . Co m m i s s i o n er,- 3 4 -

[* 3 4 ] T.C. M em o. 2 0 1 3 -2 4 8 , at* 4 , Wh at l ey “ fai ledt o p res en tan y

d o cu m en t at i o n
o r o t h er cred i b l e ev i d en ce s h owi n g th ath e p ai dh o m e m o rt gag e i n t eres t .” Th e Wh at l ey s can ’ t d eductan y o f th e i n t eres tth ey

p ai d o n th ei r p ro p ert y . En t ry o f d eci s io n req u ires s o m e cal cu lat i o n an d co o rd i nat i on wi t h th e en t ry
o f d eci s i o n s i n Sel l s , s o
Deci s i o n wi ll b e en t eredu n d er Ru l e 1 5 5
.