T.C. Memo. 2021-11

UNITED STATES TAX COURT

STEPHEN WHATLEY AND LUCILE M. WHATLEY, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 6838-12.1 Filed January 28, 2021.

Gregory P. Rhodes, David M. Wooldridge, Ronald A. Levitt, and Michelle

Abroms Levin, for petitioners.

Christopher A. Pavilonis, Laura A. Price, A. Gary Begun, and Denise A.

Diloreto, for respondent.

1

 This case is part of a larger set of cases arising from Burning Bush, LLC. 

Those cases are docket numbers 6267-12, 6801-12, 6835-12, 6836-12, 6837-12,

19246-12, and 13553-13. The common issue in them is the tax consequences of

the partnership’s donation of a conservation easement. In a separate opinion that

we also release today, see Sells v. Commissioner, T.C. Memo. 2021-12, we

analyze that issue. We write separately here about an issue that concerns only the

Whatleys and not their partners in Burning Bush. We consolidated these cases for

trial, but the parties briefed this issue separately. 

Served 01/28/21
- 2 -

[*2] MEMORANDUM FINDINGS OF FACT AND OPINION

HOLMES, Judge: Stephen Whatley, a proud Auburn alumnus, is a highly

skilled entrepreneur who makes the tiger’s share of his family’s income from

banking. In the early part of this century, he bought a property in rural Alabama

near his hometown and alma mater. He then added two dozen more acres of land

and formed an LLC to report his use of the property on his returns from 2004 to

2008. He recorded very large losses for what he described as a cattle farm. This

cattle farm, however, was without cattle until at least 2008. He now argues this

cattle farm was also a tree farm. We are left to decide whether this tree or cattle

farm was a trade or business during those five tax years. If it was, Whatley could

offset some of his large banking income with his substantial farming losses. 

FINDINGS OF FACT

I. Background

The Whatley family has been in Lee County, Alabama for eleven

generations, an almost unbroken line of farmers and ranchers. Young Stephen

Whatley was reared in Opelika. It was here that his great-grandfather owned a

2,000-acre farm where his family raised dairy cattle, grew row crops, and grew

and ginned cotton before downturns in the economy led to the property’s falling
- 3 -

[*3] out of the family’s hands. Whatley’s dad’s cousin also had a dairy farm that

Whatley often visited. By the age of six he was getting his hands dirty tending to

the row crops and picking cotton. 

When he was 27, Whatley started his first business, a timber-harvesting

operation. He and his partner formed a company to buy standing timber and log

some of it. It proved to be more of a learning experience than a living and closed

after only two years.

It turned out, however, that Whatley’s real talent and vocation was banking. 

By the time of trial, he’d been in banking for over 43 years. After graduating from

Auburn, he started at Security Pacific Bank in Los Angeles. He then moved to

Atlanta and worked at the Trust Company of Georgia. After several years there,

he moved back home to Lee County and worked at Colonial Bank for 25 years. In

May 2006, he retired from Colonial Bank. 

He did not stay idle, but instead founded a bank of his own--Southern States

Bank. His reputation was good enough that he easily raised $32 million in equity. 

By 2016 Southern States had between $650 and $700 million in assets with

Alabama branches in Huntsville, Anniston, Auburn, Opelika, Birmingham, and

Sylacauga, and more branches in Georgia. 
- 4 -

[*4] Whatley remains actively involved in Southern States Bank as its chairman,

president, CEO, and largest individual stockholder. He travels to most of the

bank’s markets once every two weeks, and he works about 70 hours a week

tending to this thriving business--the same strenuous schedule he started as a much

younger man.

His hard work and skill led to a good income during the years at issue, even

the year of the Great Recession:

Year AGI

Combined

banking W-2

wages

Bank

dividends

Sale price of

bank stock

2004 $369,961 $235,466.50 -0- $179,421

2

2005 359,212 196,265.00 $8,540 100,897

3

2006 1,469,567 124,643.86 14,280 716,859

4

2007 322,043 226,742.47 -0- -0-

2008 495,361 229,500.00 -0- -0-

2

 Whatley had basis in the sold stock that equaled the sales price, therefore

no tax gain or loss was recognized.

3

 Whatley had basis in the sold stock that equaled the sales price, therefore

no tax gain or loss was recognized.

4

 Whatley sold both short-term and long-term stock in 2006. For the shortterm stock--stock he held for less than a year--his basis of $221,776 equaled the

sale price, therefore no tax gain or loss was recognized. For the long-term stock

that he sold for $495,083--stock he held for more than one year--he had a basis of

$422,224, resulting in a long-term capital gain of $72,859.
- 5 -

[*5] II. Sheepdog Farms, LLC

A. The Purchase

Even before he started Southern States, Whatley wanted to find an oasis

from banking where he could get back to his roots and work the land. He

happened upon a 156-acre tract near Opelika, only a short drive from Auburn. 

The previous owner had used the land as a timber farm and at one point had used

part of it as a cattle farm. The land was heavily forested, with 78 acres in pine and

another 56 in mixed species. It was not an active operation--and when Whatley

bought it, the land was subject to the Conservation Reserve Program (CRP).5

Before closing, Whatley had a licensed forester come to take a look around. The

forester gave Whatley some general advice on how to care for the timber and try to

make a profit from it, and she also estimated the timber’s value. Although

Whatley definitely remembered being given a value for the timber, he couldn’t

5

 The CRP authorizes the Department of Agriculture to contract with

eligible land owners “whereby the land owner agrees to remove agricultural land

from farm production in exchange for government payments.” Biller v. Veneman,

150 F. App’x 834, 836 (10th Cir. 2005). The contract requires the land owner to

put in place an approved conservation plan and “adhere to certain other criteria set

forth in various federal statutes and regulations.” Id. See generally 16 U.S.C.

secs. 3831-3836; 7 C.F.R. pt. 1410. The CRP program for Whatley’s land

prevented any timber harvesting until 2021 in exchange for annual payments of

$2,841.
- 6 -

[*6] remember what that value was.

6

 Whatley was convinced this was the

property he wanted, and in 2003 he bought it for about $350,000.

After he bought the land, and on the advice of his longtime CPA, James

Kemp, Whatley formed Sheepdog Farms, LLC--a limited liability company that he

organized under Alabama law. From 2004-08 Whatley was a 97% owner of

Sheepdog Farms, his wife was a 1% owner, and their children seem to have held

the rest. But though he formed the LLC, he never transferred the land to it, and

even as of the date of trial title remained with him and his wife. 

Sheepdog Farms was not to remain landless for long. In 2004 Whatley

bought an additional 26 acres contiguous to the 156-acre tract. This second

property came with some improvements--a 2,600-square-foot home built in 2000,

a barn, and a smaller caretaker house. The main home is nicely done--it has a

master bedroom, two additional bedrooms with a shared bath, a great room, and a

small front room. The barn is 5,000 square feet, large enough to bring in all the

farming equipment if a rain storm rolls through. The caretaker house, however, is

6

 As of October 2016 the timber was valued at $200,000. Since Whatley did

not plan on harvesting timber until after 2021, we allowed evidence of its future

value. Estimating the market that far out is hard because the market for timber is

volatile, but one expert testified that in 2022 Whatley’s timber could be worth

about $332,000. 
- 7 -

[*7] around 40 years old, in poor repair, and rarely occupied. Whatley transferred

title to this smaller tract to Sheepdog Farms. 

B. Operation

Whatley had no formal business plan for the now-combined property. He

did spend about 700 hours a year there during the years at issue, which averages to

a bit less than 14 hours a week. When he was at the farm, his day-to-day activities

varied in some ways, but usually began in the morning with a ride through the

woods with a hot cup of coffee. He’d make mental notes of any work that was

needed and then tend to those chores. 

The farm’s timber operation focused on maintenance.7 This mostly meant

that Whatley himself cleared the roads and fire lanes every year.8 Once every few

years Whatley “thinned” his property to allow additional sunlight to get down

through the forest to speed the growth of the pine trees that remained. Because of

the CRP, there was no timber harvesting. Whatley explained that managing pine

7

 Whatley testified that he consulted with other foresters after he bought the

property. He was unclear on what their advice was and when he got it. He did

remember that these foresters each had timber farms that sprawled over tens of

thousands of acres and were very much full-time operations.

8

 Maintenance also included running a “bush hog”--a machine that is

“hooked up on a power takeoff on a tractor” that has blades that “go[] behind the

tractor [and] cut[] any of the understory brush.” 
- 8 -

[*8] trees is a long play--a product that is normally merchantable around the 30-

year mark.

As to the farm’s cattle operation, Whatley explained that he’d wanted to

introduce cattle “from day one.” Whatley testified that he consulted two cattle

experts for advice, but those men managed much larger herds--600 and 1,500 head

respectively--than what Whatley could reasonably expect to put on his property. 

Whatley, however, could not recall when this consultation took place or what

advice he received. In any event, he didn’t actually have cattle on his property

until at least 2008, right after he learned that the IRS was going to audit him. And

he explained that many of the activities that he reported as related to cattle were

really activities that he undertook in preparation for cattle that would arrive

sometime in the future. These included the installation of some fencing and

repairs to the barn. 

The administrative side of Sheepdog Farms was run with striking

informality. Although it kept minimal business records like yearly trial balances

and tax-asset working papers, it’s not clear when these documents were created. 

And it kept no traditional accounting records--e.g. ledgers, balance sheets, income

statements, or cashflow statements. Whatley did try to introduce some records,

but they weren’t entirely accurate. For example, Sheepdog Farms failed to
- 9 -

[*9] expense insurance that it had on the property. Sheepdog Farms didn’t even

have a separate bank account or any separate bank records during the years at

issue. 

III. Reporting, Audit, and Trial

A. Reporting

When it came time to file his tax returns, Whatley turned to his long-time

CPA Kemp for guidance. Sheepdog Farms filed its own return as a domestic LLC,

and Whatley needed to report its activities. Kemp advised Whatley that Sheepdog

Farms was a business. Kemp testified that he believed “[t]here wasn’t any

question about it at the time. It was a business * * * [b]ecause [Whatley] had

profit motive.” 

Reporting Sheepdog Farms as a business meant that Kemp and Whatley had

to describe Sheepdog Farms’ principal business activity and principal product. 

This they did--their Form 1065 partnership return lists their principal business

activity as “FARM” and their principal product or service as “CATTLE.” This

was repeated on Schedule F of the Form 1065, where again Whatley described the

principal product of Sheepdog Farms as “CATTLE.”
- 10 -

[*10] A cattle farm without cattle and a tree farm that doesn’t yet harvest timber is

highly likely to produce a bumper crop of losses. We summarize the Whatleys’

adjusted gross income (AGI), and Sheepdog Farms’ own receipts and losses here:

Year AGI

Schedule F gross

receipts

Schedule F net

loss

2004 $369,961 $2,841 $90,118

2005 359,212 2,841 77,442

2006 1,469,567 3,363 104,339

2007 322,043 2,841 90,378

2008 495,361 4,401 149,945

2009 265,529 -0- 162,747

2010 284,388 35,099 203,551

2011 225,546 7,941 176,009

2012 314,911 6,881 126,834

2013 287,196 5,536 134,265

2014 890,147 4,428 247,848

 Total 5,283,861 76,172 1,563,476

We also note for the years at issue the share of these losses that were

noncash expenses, primarily depreciation:
- 11 -

[*11]

Year Total expenses Total depreciation

2004 $92,959 $22,299

2005 80,283 32,206

2006 107,702 41,151

2007 93,219 44,910

2008 154,346 49,806

 Total 528,509 190,372

Many of these depreciation expenses were directly related to the two homes on the

26-acre tract that was in Sheepdog Farms’ name:

Year

Main

residence 2d home

Air

conditioner

2d air

conditioner Fireplace

2004 $8,198.30 $2,106.48 $1,725.00 $454.25 $70.22

2005 11,574.07 2,407.41 382.50 100.73 240.74

2006 11,574.07 2,407.41 267.75 70.51 240.74

2007 11,574.07 2,407.41 249.90 65.80 240.74

2008 7,549.03 2,407.41 249.90 65.81 240.74

 Total 50,469.54 11,736.12 2,875.05 757.10 1,033.18

The expenses that Whatley claims on Sheepdog Farms’ Schedule F that were not

related to the two homes on the 26-acre tract come from its farming activities--

most of which occurred on the 156-acre tract that Sheepdog Farms did not actually

own.
- 12 -

[*12] B. Audit and Trial

Something about this snagged the Commissioner’s attention, and in April

2008 Whatley was notified that Sheepdog Farms was under audit for tax year

2005. After he received this notice, Whatley made sure to get a forestmanagement plan. Cattle then also showed up on the property. The IRS then

extended the audit to the Whatleys and over the next few years expanded the audit

to include all the tax years from 2004 through 2008. The IRS determined to make

adjustments to the Whatleys’ returns, and two of these adjustments led to this

litigation--the Commissioner’s disallowance of the deductions from Sheepdog

Farms and his disallowance of a large charitable-contribution deduction for the

contribution of a conservation easement that the Whatleys donated along with

several other couples.

9

The Whatleys timely filed a petition, and we tried the case in Birmingham.

10

9

 We address this deduction in Sells v. Commissioner, T.C. Memo. 2021-12. 

10

 The Whatleys then and now are residents of Alabama, and appellate

venue is presumptively in the Eleventh Circuit. See sec. 7482(b)(1)(A). (All

section references are to the Internal Revenue Code in effect for the years at

issue.)
- 13 -

[*13] This is a one-issue opinion: We need to decide whether Whatley’s farming

activity was an activity that he engaged in for profit.

11

OPINION 

I. The Code and Regulations

Whether an activity is a trade or business is an evergreen source of tax

litigation because the relevant Code sections don’t draw bright lines. Section 162

allows a deduction for all ordinary and necessary business expenses, but section

183 bars any deduction for an “activity * * * [that] is not engaged in for profit.” 

Section 183 can be hugely consequential for a taxpayer. If he doesn’t engage in an

activity for profit, then he can deduct section 162 expenses only to the extent of

his gross income from the activity. Sec. 183(b)(2). 

11

 The Commissioner also determined that Whatley owed accuracy-related

penalties for any understatement of his tax caused by his claims to the Sheepdog

losses. The parties, however, stipulated that there was no penalty-approval form

for the Whatleys for the years at issue. Section 6751(b)(1) provides that “[n]o

penalty * * * shall be assessed unless the initial determination of such assessment

is personally approved (in writing) by the immediate supervisor of the individual

making such determination.” We have definitively ruled that this means that the

Commissioner must obtain written supervisory approval of the initial penalty

determination no later than the date that the notice of deficiency is issued or an

answer or amended answer asserting the penalty is filed. See Chai v.

Commissioner, 851 F.3d 190, 221 (2d Cir. 2017), aff’g in part, rev’g in part T.C.

Memo. 2015-42; see also Graev v. Commissioner, 149 T.C. 485, 493 (2017),

supplementing and overruling in part 147 T.C. 460 (2016). This stipulation that

he didn’t obtain this written supervisory approval means no penalties here.
- 14 -

[*14] Whether someone engages in an activity for profit should be a simple

question of fact, but the question comes up so often that the field has become

overgrown with factors and analogies to precedent and regulations that list more

factors--all in nonexclusive lists. One of these nonexclusive lists is in a Treasury

regulation that we must follow. Sec. 1.183-2(a), Income Tax Regs.; see Elliott v.

Commissioner, 84 T.C. 227, 236 (1985), aff’d without published opinion, 782

F.2d 1027 (3d Cir. 1986). The regulation tells us that although the expectation of

profit might not be reasonable, the facts and circumstances must indicate that the

taxpayer entered into the activity with the objective of making a profit. Sec.

1.183-2(a), Income Tax Regs.

It gives us nine factors to help us decide whether an activity was engaged in

for profit:

! the manner in which the taxpayer carries on the activity;

! his own expertise or that of his advisers;

! the time and effort he expends on the activity;

! the expectation that assets used in the activity may appreciate in

value;

! his success in carrying on similar activities;

! his history of income or losses with respect to the activity;
- 15 -

[*15] ! the amount of occasional profits, if any, from the activity;

! his financial status; and

! any elements of personal pleasure or recreation.

Id. para. (b). No one factor is determinative. Id. We are to take all the facts and

circumstances into account, and we may give more weight to some than to others. 

Id.; see Dunn v. Commissioner, 70 T.C. 715, 720 (1978), aff’d, 615 F.2d 578 (2d

Cir. 1980). 

The Seventh Circuit has called this open-ended test of objective factors of

subjective intent “goofy” and has chosen not to “wad[e] through the nine factors,”

but instead to take a more holistic approach. Roberts v. Commissioner, 820 F.3d

247, 250, 254 (7th Cir. 2016), rev’g T.C. Memo. 2014-74. This case, though, is

appealable to the Eleventh Circuit. So we’ll trudge along the well-blazed trail and

address each specific factor, as well as any other additional facts we find important

to determine if Whatley was engaged in farming for profit. 

II. The Factors

A. Manner in Which the Activity Is Conducted

The first factor tells us to look at how the taxpayer conducts the activity. 

Sec. 1.183-2(b)(1), Income Tax Regs.; see McMillan v. Commissioner, T.C.

Memo. 2019-108, at *32. A taxpayer who carries on his activity in a businesslike
- 16 -

[*16] manner and “maintains complete and accurate books and records” is more

likely to be profit-minded than one who doesn’t. Sec. 1.183-2(b)(1), Income Tax

Regs. And if the activity is “carried on in a manner substantially similar to other

activities of the same nature which are profitable,” it’s more likely to be a business

than a pastime. Id. Abandonment of unprofitable methods likewise shows an

intent to improve profitability and may indicate a profit motive. Id. To determine

how this factor weighs, we will look at

! Whatley’s books and records,

! his business plan,

! industry standards, and

! any adjustments he made to respond to the chronic losses he suffered.

See id.; McMillan, T.C. Memo. 2019-108, at *32-*35. 

1. Books and Records

Complete and accurate books and records reflect a businesslike manner. 

Sec. 1.183-2(b)(1), Income Tax Regs. But we don’t look at recordkeeping just for

its meticulousness, but for whether the taxpayer used his records to help him

evaluate how he’s doing, what expenses he might cut, and how he might increase

profits. See Golanty v. Commissioner, 72 T.C. 411, 430 (1979), aff’d without

published opinion, 647 F.2d 170 (9th Cir. 1981).
- 17 -

[*17] Whatley kept only very limited business records for Sheepdog Farms. The

record has only annual trial balances and tax-asset sheets for each year. It is not

clear when these records were created, or even whether there were any general

ledger or other accounting records for Sheepdog Farms. Whatley had no separate

bank account for Sheepdog Farms, so there weren’t even bank records. 

Keeping so few records prevented Whatley from seeing how well--or how

poorly--he was doing. He didn’t know the value of his timber when he bought the

property and did not keep track of its value over time. The absence of good

records also prevented Whatley from reporting certain expenses for Sheepdog

Farms, such as insurance. He could not track Sheepdog Farms’ performance. 

This weighs against him.

2. Business Plan

A business plan suggests that an activity is conducted in a businesslike

manner. Sec. 1.183-2(b)(1), Income Tax Regs.; see Phillips v. Commissioner,

T.C. Memo. 1997-128, 73 T.C.M. (CCH) 2296, 2300 (1997). Whatley had no

business plan for Sheepdog Farms. It wasn’t until July 24, 2008 that he finally got

a forest-management plan. This was four years after the he bought the property

but less than four months after he learned of the IRS audit.

This factor also weighs against him.
- 18 -

[*18] 3. Industry Standard

If an activity is conducted in the same way as other similar activities that are

profitable, it looks more businesslike. See sec. 1.183-2(b)(1), Income Tax Regs. 

There isn’t much in the record about how other tree or cattle farms are operated,

but there is some. 

Many of the experts that Whatley consulted had either more than 125,000

acres of timberland or hundreds of head of cattle--i.e., their operations were much

larger than his. This suggests that Sheepdog Farms--with very limited acreage of

timberland and no cattle until at least 2008--was not operated like similar,

profitable activities. We do acknowledge that the Commissioner didn’t introduce

any evidence as to what a small tree farm or cattle farm would look like or that a

cattle or tree farm the size of Sheepdog Farms couldn’t be profitable--although we

will find that a cattle farm without cattle is not likely to be profitable.

We’ll be generous and call this factor neutral. 

4. Adjusting Approach

Changing “operating methods, adopt[ing] * * * new techniques or

abandon[ing] * * * unprofitable methods in a manner consistent with an intent to

improve profitability” also indicates that a taxpayer conducted his activity in a

businesslike manner. Sec. 1.183-2(b)(1), Income Tax Regs. This is a real problem
- 19 -

[*19] for Whatley. During all the years at issue Sheepdog Farms operated at a

substantial loss. The facts paint no picture of rapid change to increase

profitability, and Sheepdog Farms suffered greater losses as time went on. In

2004--its first year of operation--it posted a loss of $90,000. In nine out of the

next ten years, Sheepdog Farms reported even greater losses.

12

 See supra p. 10. 

Whatley took no significant steps during the years at issue to change what he was

doing to cut these losses. 

This factor weighs against him.

5. Other Facts

The regulation directs us to make sure we consider all facts and

circumstances. Sec. 1.183-2(a), Income Tax Regs. A few other relevant facts

huddle beneath the “manner the activity is conducted” umbrella. First, Whatley

failed to transfer ownership of the 156-acre tract of land where most of the timber

was growing to Sheepdog Farms. This is evidence that he did not run this

operation in a businesslike manner. It also means that Sheepdog Farms claimed

expenses related to land that it didn’t own.

12

 Only in 2005 did Sheepdog Farms report a loss smaller than in 2004--a

mere $77,000. 
- 20 -

[*20] Some of the specific expenses on Sheepdog’s returns are of doubtful

legitimacy. During the years at issue, for example, Sheepdog Farms claimed

$67,735 in depreciation for two homes on the property. It is not clear to us why

depreciation of Whatley’s second home--which he stated was a personal

residence--and of the rarely used caretaker home should be considered business

expenses. 

On balance, we find that Whatley did not conduct Sheepdog Farms in a

businesslike manner. This factor weighs strongly against him. 

B. Expertise of Taxpayer or Adviser

The regulation directs us to look at whether and how a taxpayer prepared for

the activity in question. Sec. 1.183-2(b)(2), Income Tax Regs. It specifically

directs us to check for signs that the taxpayer prepared for the activity by extensive

study of its “accepted business, economic, and scientific practices, or consultation

with those who are expert therein.” Id. Just getting advice isn’t enough--if he

wants to persuade us he had a profit motive, he’d better follow that advice or tell a

plausible story explaining that he’s trying to develop a new or superior technique. 

Id.

Whatley cites his family’s agrarian heritage, but he himself has no

experience in running a cattle farm. Like a great many Americans who have deep
- 21 -

[*21] roots in our country, Whatley himself is not too far removed from ancestors

who worked the land. But his forebears’ experience is not his own, and their

expertise is not his.

Whatley also has no experience operating a timber farm like the one at

Sheepdog Farms. We do acknowledge his argument that his foray into the

business at the age of 27 should weigh in his favor. But we don’t think it should

weigh very much--it was over 35 years ago, and his business was different. 

Sheepdog Farms is reportedly a timber farm. The business Whatley ran as a young

man bought and logged timber that was ready to harvest. These businesses may be

in the same general field, but timber harvesting and timber growing are not similar

enough for us to find that Whatley had experience in the business.

13

People who are trying to start up in a new field can also look to others to

gain expertise, and Whatley also argues that he did this.

1. Cattle Operation

He first argues that he consulted with experienced individuals about the

cattle operation. When these consultations took place is unclear. The record

doesn’t show whether they took place before Whatley started buying the land or

13

 Whatley also argues that he has experience in the field because he lends

money to timber farmers through his bank. We are unconvinced. People don’t go

to a mechanic’s banker to fix their cars--they go to a mechanic. 
- 22 -

[*22] when he finally got cattle on the land--which was after he came under the

Commissioner’s eye. Whatley also didn’t introduce any evidence about what

actual advice he received.

2. Timber Operation

Whatley did consult some individuals on how to manage his timber before

he bought the 156-acre tract. He also sought other foresters’ advice while he

owned the farm. And once Whatley knew he was under audit, he did get a forestmanagement plan. We do not believe, however, that these consultations are

enough to tip this factor in Whatley’s favor, even as to Sheepdog Farms’ timber

operations. It is again not clear what advice he received, and it’s not even clear

what type of advice he got. The advice we look for is advice on how to profit from

doing the activity in question. Heinbockel v. Commissioner, T.C. Memo. 2013-

125, at *25. We find it more likely than not here that the advice Whatley received

was about how to care for the timber, not how to make a profit from it. This is an

important distinction here, because these advisers had very large timber farms--

they totaled more than 125,000 acres--and we think it more likely than not that

their advice would be less helpful in making a very small operation like Whatley’s

profitable. And it is not clear when Whatley got this advice. Whatley testified it

was after he bought the property. But we don’t know whether that means the
- 23 -

[*23] advice was received immediately after the purchase or after the tax years at

issue. 

We do believe his testimony that he consulted with a forester before he

bought the land but don’t think that it’s enough to tip this factor in his favor. 

Though he got general advice about how to make a profit and care for timber, it is

not clear exactly what advice the forester gave him, which makes it hard for us to

determine whether Whatley followed this advice. And given his consistent

sustained losses, we find it more likely than not that he didn’t follow whatever

advice he did receive about how to profit from his timber operation. 

This factor weighs against Whatley. 

C. Time and Effort Expended on the Activity

We next look at the time and effort a taxpayer spends on the activity. Sec.

1.183-2(b)(3), Income Tax Regs. We usually look at three things here--devotion

of a significant amount of a taxpayer’s personal time (particularly if he gets no

substantial amount of personal pleasure or recreation from it), withdrawal from

another occupation to devote most of his energies to the activity, and employment

of competent and qualified persons to carry on the activity (which can be

important if a taxpayer himself doesn’t spend a lot of time on the activity). Id.
- 24 -

[*24] This is another big problem for Whatley. He didn’t leave his job as a

banker to run Sheepdog Farms. He also made clear that during the years at issue

he didn’t hire anyone else to work on the farm.

14

 This leaves us to look at whether

much of Whatley’s personal time was devoted to Sheepdog Farms. 

We begin by observing that Whatley didn’t have a whole lot of free time. 

He worked full time as a banker for all the years at issue--traveling and working

70 hours a week. That left him with only about 700 hours a year to work at the

farm--roughly 13.5 hours a week. We find it more likely than not that Whatley

was simply spending his weekends at the farm and working on the land during the

day. Whatley enjoyed working at the farm. 

This factor also weighs against Whatley.

D. Expectation That Assets May Appreciate

A taxpayer’s expectation that an asset may appreciate in value can show a

profit motive. Sec. 1.183-2(b)(4), Income Tax Regs. There are some activities in

which “an overall profit will result when appreciation in the value of land used in

the activity is realized since income from the activity together with the

appreciation of land will exceed expenses of operation.” Id.

14

 Though Tory Black--a neighbor who currently “works” (but is not paid) at

Sheepdog Farms--credibly testified that he looks after the farm while Whatley

isn’t there, Black didn’t work for Whatley during the years at issue.
- 25 -

[*25] This is not a factor that Whatley can cite in his favor on the cattle side of the

farm. But the trees were there when he bought it, and Whatley did testify that he

expected them to grow in value. But there is again a problem for him--there is

nothing in the record that establishes that Whatley knew the value of the timber

when he bought the place, which leads us to find it more likely than not that he did

not have any justifiable hope that their growth in value would offset the costs of

waiting for them to be harvested. 

A big part of Whatley’s problem here is that Sheepdog Farms was so

spectacularly unprofitable. For the sake of argument, let’s unreasonably assume

the value of the timber was $0 in 2004. And let’s assume the projected value of

this timber in 2022 would be $332,625--the highest possible value in the record. 

At most, Whatley could project income of $332,625 from this timber in 2022,

while his losses just from the years at issue--$512,222--already exceeded that. So

even if we unreasonably assume that Whatley had a zero basis in the timber and

expected the timber to sell at the highest possible value that anyone estimated, it

would still produce a total loss of at least $179,597.

15

 See generally Metz v.

Commissioner, T.C. Memo. 2015-54, at *50-*52. This doesn’t even include the

15

 $512,222 ! $332,625 = $179,597. 
- 26 -

[*26] losses from years 2009-14, which would increase that total loss to

$1,230,851.

16

 This also assumes that Sheepdog Farms wouldn’t produce yet more

losses from 2015-22, which we find to be not likely at all. 

This factor weighs against Whatley. 

E. Success in Carrying on Other Similar Activities

A taxpayer’s success in similar activities in the past can show that his

current activity is engaged in for profit. Sec. 1.183-2(b)(5), Income Tax Regs. 

This is because “[a] track record of success in other business ventures may

indicate that the taxpayer has the entrepreneurial skills and determination to

succeed in subsequent endeavors.” Annuzzi v. Commissioner, T.C. Memo. 2014-

233, at *25-*26. What’s needed is some synergy between the prior business and

the current activity. See id. at *26.

Whatley again points to his old timber-harvesting business. And we do

think that Whatley’s starting a business in his twenties was an early sign of the

entrepreneurial inclination that he has shown all his life. We don’t doubt that it

taught him some very useful general lessons about how to run a business. But the

specifics of that business were too dissimilar and too long ago for us to find that

16

 $1,563,476 ! $332,625 = $1,230,851.
- 27 -

[*27] the skills learned in the former show by themselves that he intended to make

a profit in the latter. 

Sheepdog Farms is primarily a cattle farm. Whatley’s old business had

nothing to do with cattle at all. And growing timber is different from harvesting

and logging it. But we do not want to deny some recognition of those

entrepreneurial skills. We’ll call this factor neutral. 

F. History of Income and Loss

We must also look to see whether the taxpayer had a history of income or

loss with this activity. Sec. 1.183-2(b)(6), Income Tax Regs. Lots of businesses

lose money at the startup stage, and the regulation recognizes that a history of

some losses does not necessarily mean an activity is not engaged in for profit. Id. 

The regulation also recognizes that there can be losses sustained because of

unforeseen circumstances beyond the control of the taxpayer, “such as drought

* * * or depressed market conditions.” Id. 

Sheepdog Farms’ losses, however, are so sustained and so large that we

cannot find them to be transitory or unexpected. There were losses every year

from 2004-14--and the largest losses were from 2009-14. Whatley does argue that

the losses for the years at issue were caused by unforeseen circumstances--

specifically a drought and a depressed market. He argues that the drought caused
- 28 -

[*28] losses for his cattle operation and market conditions caused losses for his

timber operation.

We are, however, unpersuaded that the drought caused losses for the cattle

operation. The regulation tells us specifically that the event must be “unforeseen

or fortuitous.” Sec. 1.183-2(b)(6), Income Tax Regs. Whatley testified that there

was a drought when he bought the land, which makes it neither unforeseeable nor

fortuitous. The losses, moreover, were not sustained “because of unforeseen or

fortuitous circumstances” as required by the regulation. Id. (emphasis added). 

The losses kept on rising even when Whatley finally bought cattle for the farm.

We are also unpersuaded that depressed market conditions caused losses for

the timber operation. This argument makes little sense to us as market conditions

had nothing to do with the losses Whatley sustained. Whatley didn’t plan on

selling timber until 2022--and we don’t see how market conditions in 2004-08

would affect the value of uncut timber in 2022. 

This factor weighs against Whatley.

G. Amount of Occasional Profits, if Any

“An occasional small profit from an activity generating large losses, or from

an activity in which the taxpayer has made a large investment, would not generally

be determinative that the activity is engaged in for profit.” Sec. 1.183-2(b)(7),
- 29 -

[*29] Income Tax Regs. Substantial profit, though only occasional, would serve

as a sign that an activity is engaged in for profit if investment or losses are

comparatively small. Id.

Sheepdog Farms in its first ten years showed no profit and only losses--and

substantial ones at that. 

This factor weighs heavily against Whatley.

H. Financial Status of the Taxpayer

Substantial income from sources other than the activity--“particularly if the

losses from the activity generate substantial tax benefits”--may indicate that the

activity is not engaged in for profit. Sec. 1.183-2(b)(8), Income Tax Regs. This is

especially true if, as here, there are personal or recreational elements involved. Id.

Whatley has substantial income from banking. The losses from Sheepdog

Farms would, if we allowed them, generate substantial tax benefits. The following

table illustrates the potential tax benefits:

Year Banking income Sheepdog Farms loss

 2004 $235,466.50 ($90,118) 

 2005 204,805.00 (77,442) 

 2006 211,782.86 (104,339) 

 2007 226,742.47 (90,378) 
- 30 -

[*30] 2008 250,000.00 (149,945) 

 Total 1,128,796.83 (512,222) 

This factor weighs against Whatley.

I. Elements of Personal Pleasure or Recreation

“The presence of personal motives in carrying on of an activity may indicate

that the activity is not engaged in for profit, especially where there are recreational

or personal elements involved.” Sec. 1.183-2(b)(9), Income Tax Regs. That

doesn’t mean that a business becomes a hobby just because the taxpayer enjoys it--

“suffering has never been made a prerequisite to deductibility.” Jackson v.

Commissioner, 59 T.C. 312, 317 (1972). At the same time, “where the possibility

for profit is small (given all the other factors) and the possibility for gratification is

substantial, it is clear that the latter possibility constitutes the primary motivation

for the activity.” Dodge v. Commissioner, T.C. Memo. 1998-89, 75 T.C.M.

(CCH) 1914, 1919 (quoting Burger v. Commissioner, T.C. Memo. 1985-523, 50

T.C.M. (CCH) 1266, 1272-73, aff’d, 809 F.2d 355 (7th Cir. 1987)), aff’d without

published opinion, 188 F.3d 507 (6th Cir. 1999).

That describes what was going on here. Whatley found 182 acres of land

near his hometown, and enjoyed going there as a retreat from his grueling and
- 31 -

[*31] time-consuming banking business. Though many people do not find

farming enjoyable, Whatley did. 

This factor also weighs against Whatley. 

J. Summary and Holistic Approach

The regulation’s “goofy” factors--none of which favors Whatley and only

two of which are neutral--lead us to find that Sheepdog Farms was not an activity

engaged in for profit. Judge Posner’s “holistic” approach would get us there much

more quickly. Whatley was a banker working 70 hours a week. He found this

property and bought it. This let him work outdoors--something that he did as a

child and enjoyed. But the property was a cattle farm with no cattle during all but

part of one year at issue. It had consistent and substantial losses which totaled

over $1.5 million from 2004-14. Even if he later cut and sold the timber, he had

no chance of turning a profit; but Sheepdog Farms’ expense, if allowed, would

substantially offset his income from other sources. That deduction is just what

section 183 prevents. 

III. Mortgage Interest

Our finding on the major issue creates a minor one. Whatley anticipated

that we might not find Sheepdog Farms to be a trade or business, and argues in the

alternative that he can deduct the interest allocable to the main residence on the
- 32 -

[*32] property under section 163.

17

 We must see whether this alternative theory

can take root.

A. The Law

As a general rule, section 163(a) allows a deduction of all interest paid. 

Section 163(h)(1) is an exception that bars deductions of personal interest. The

Code then has an exception to the exception for “qualified residence interest.” 

Sec. 163(h)(2)(D). “Qualified residence interest” is any interest which is paid on

“acquisition indebtedness” of any “qualified residence” of the taxpayer. Sec.

163(h)(3)(A)(i). Acquisition indebtedness is any indebtedness that:

! is incurred in acquiring, constructing, or substantially improving any

qualified residence of the taxpayer, and

! is secured by such residence. 

Sec. 163(h)(3)(B)(i)(I). A “qualified residence” is a taxpayer’s residence (other

than his principal residence) which he uses as a dwelling unit for personal

purposes for more than 14 days during the tax year. Secs. 163(h)(4)(A)(i)(II),

280A(d)(1). 

17

 We overrule the Commissioner’s objection to Whatley’s introduction of

evidence in support of this argument. 
- 33 -

[*33] B. Analysis

The Whatleys again have a problem. We do not doubt that the main

residence on the property is a “qualified residence.” We also do not doubt that the

Whatleys used it for personal purposes more than 14 days during each year at

issue. 

But is the interest paid on it “acquisition indebtedness?” “[A]cquisition

indebtedness” requires that the indebtedness have been incurred to acquire a

qualified residence and is secured by that residence. Whatley introduced no

paperwork about this debt. He did testify that he had both a mortgage and a line of

credit on “the farm.” On his return for 2004 Whatley reported the mortgage

interest as mortgage interest and the line-of-credit interest as “other interest.” For

years 2005-08, he simply deducted interest paid on both the mortgage and the line

of credit as “other interest.” 

The problem is that only interest attributable to a qualified residence--here

the main house on the farm--is deductible under section 163. The interest

deductions the Whatleys claimed on the returns were for the entire property. 

Whatley testified how much interest he thought was attributable to the main

residence on the farm. But he did this without any reliable documentation, and we

do not find his testimony credible. Like the taxpayer in Fine v. Commissioner,
- 34 -

[*34] T.C. Memo. 2013-248, at *4, Whatley “failed to present any documentation

or other credible evidence showing that he paid home mortgage interest.” 

The Whatleys can’t deduct any of the interest they paid on their property.

Entry of decision requires some calculation and coordination with the entry

of decisions in Sells, so

Decision will be entered under

Rule 155.