T.C. M em o . 2 0 1 8 -4 8

UNITED STATES TAX COURT

DAVID W ILLIAM S, Pet i ti o n er v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t N UTRATECH, LTD, GLOBALTREX, LLC, TAX MATTERS PARTNER, Pet i t i o n er v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo s . 2 1 6 3 7 -1 5 , 2 4 25 6 -1 5
. Fi l edAp ri l 9 , 2 0 1 8
. W i l l i am R. Lei g h to n , fo r p et i t i o n ers . Sh ei la R. Pat t i s o n an dRo b ert a L. Sh u m way , fo r res p o n d en t
.

M EM ORANDUM FINDINGS OF FACT AND OPINION NEGA, Jud g e: By a n ot i ce o f d efi ci en cy (n o t ice) d at ed M ay

2 2 , 2 0 1 5 , res p o n d en t d et erm i nedd efi ci en ci es i n th e Fed eral i n co m e t ax o f p et i t i o ner Dav i d- 2
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[* 2 ] W i ll i am s fo r t ax y ears 2 0 10 an d2 0 1 1 (y ears ati s s u e) an d accu racy -rel at ed p en al t i es u n d er s ect i o n 6 6 6 2 (a) 1 as fo l l ows :

Year Defi ci en cy Pen al ty s ec. 6 6 62 (a) 2 0 1 0 $ 7 2,8 6 5 $ 1 4,5 7 3 2 0 1 1 4 3 ,5 6 0 8 ,7 1 2 In th atn o ti ce res p o n den td i s al l o wed , i n t er al i a, p o rt i o n s o f d edu ct i o n s o f $ 1 3 7 ,7 6 1 an d$ 1 1 0 ,8 1 4 t h atM r. W i l l iam s h adcl ai m edo n h i s Sch edu l es F, Pro fi t
o r Lo ss Fro m

Farm i n g , fo r t h e res p ect i v e y ears ati s s u e. OnAu g u s t2 0 , 2 0 1 5 , M r. W i ll i am s t im el y

fi l eda p et i t i o n wi th th is Co u rt fo r red et erm i n at io n . By n o t ices o f fi n al p art n ers h i p ad m i n i s trat i v e ad ju s t m en td at edJ u ne 2 9 , 2 0 1 5 , res p on den td i s al l o wedp o rt i o n s o f d ep reci at i o n d edu ct i on s o f $ 1 2 2,7 9 7 an d $ 1 5 7 ,4 3 3 th atNu traTech LTD (Nu traTech ) h adcl ai m edo n i t s Sch edu les F fo r t h e
res p ect i ve y ears ati s s u e. 2 OnSep t em b er 2 3, 2 0 1 5 , Gl o b al Trex LLC (Gl o b al Trex ),

1 Un l es s o th erwi s e i nd i cat ed , al l s ect i o n referen ces are t o th e In t ern al Rev enu e Co de i n effect fo r t h e y ears ati s s u e, an dal l Ru l e referen ces are t o th e Tax Co u rtRu l es o f Pract i ce an dPro cedu re.

2 In th o s e res pect i v e n o t i ces , as a res u l to f res p o n d en t ’ s d i s al l o wan ce o f p o rt i on s o f Nu traTech ’ s d ep reci at i o n d educt i o n s cl ai m ed o n i t s Sch edu l es F fo r th e y ears ati s s u e, res p o n d en td et erm i n edth atNu traTech ’ s n etearn i n g s fro m s el fem pl o y m en th adi n creas edb y

$ 1 ,2 2 8 an d$ 1 ,5 7 4 fo r t h e res p ect iv e y ears ati s s u e.- 3
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[* 3 ] th e t ax m at t ers p art n er fo r Nu traTech , fi l eda p et i t i o n fo r read ju s t m en to f p art n ers hi p i t em s u n der s ect i o n 6 2 2 6
. 3 Th es e cas es were co n s ol i d at edfo r t ri al , b ri efi n g , an do p i n i o n . Aft er
co n ces si o n s b y

M r. W i l l i am s an dGl o b al T rex , th e fo l l o w i ng i s s ues rem ai n fo r d eci s i o n : (1 ) wh et h er M r. W i l l i am s ’ an dNu traTech ’ s Sch edu l e F act i v i t ies du ri n g the y ears ati s s u e co ns t itut edact i v i t i es n o ten g ag ed i n fo r p ro fi twi th i n t h e m ean i n g o f
s ect i on 1 8 3 an d

3 Part n ers h i p p ro v i s i o n s o f t h e Tax Equ i ty an d Fi s cal Res p o n s i b i li ty Acto f 1 9 8 2 (TEFRA), Pub. L. No
. 9 7 -2 4 8 , 9 6 St at . 3 24 , b eg i n wi th th e p res um p t i o n th at TEFRA ap pl ies t o an y

en t i ty th ati s req ui redt o fi le a p art n ers h i p retu rn . Sec. 6 2 3 1 (a)(1 )(A). Bu t th ere i s an ex cep t i o n fo r s m al l p art n ers hi p s . A “ s m al l p art n ers hi p ” i s an y

p art n ers h i p h av i n g 1 0 o r fewer p artn ers each o f wh om i s an i n d i v i du al (o th er t h an a n o n res i d en t al i en ), a C co rp o rat i o n , o r an es t at e o f a d eceas edp art n er. Sec. 6 2 3 1 (a)(1 )(B)(i ). As i s i m p li ci t i n th i s ex cep ti o n , a p art n ers hi p wi ll n o t b e co n s i d eredt o b e a “ s m al l p art n ers h i p ” i f an y p art n er du ri n g th e t ax y ear i s a p as s th ro u g h p art n er. See Bren n an v . Co m m i s s i o n er, T.C. M em o . 2 0 1 2 -1 8 7 , aff’ d s ub n o m . As h l an dv . Co m m i s s i o n er, 5 8 4 F. Ap p ’ x 5 7 3 (9 th Ci r. 2 0 1 4 ); s ec. 3 0 1 .6 2 3 1 (a)(1 )-1 (a)(2 ), Pro ced
. & Ad m i n Reg s . A p as s th ro u g h p art n er i s a p art ners h i p , es t at e, t ru s t , S co rp o rat i on , n o m i nee, o r o th er s i m il ar p ers o n th ro u g h wh om

o th er p ers o n s h o l dan i n t eres ti n th e p art n ers h i p an d i n cl u d es d i s reg ard ed en t i ti es s u ch as s i n gl e-m em ber LLCs . See s ec. 6 2 3 1 (a)(9 ); 6 6 1 1 , Lt d . v . Co m

m i s s i o n er, T.C. M em o. 2 0 13 -4 9 ; Ti g ers Ey e Trad i ng , LLC v
. Co m m i s s i o n er, T.C. M em o . 2 0 0 9 -1 2 1
. Becau s e Nu traTech h adGl o b al Trex , a s i n g l e-m em b er LLC, as o n e o f i t s p art n ers , th e s m al l p art n ers hi p ex cep t i o n o f s ec. 6 3 2 1 (a)(1 )(B)(i ) d o es n o tap p l y an d Nu traTech i s s ub

jectt o the u n i fi edau d i t an dl i t i g at i o n p ro cedu res o f s ecs . 6 2 2 1 -6 2 3 4 , co m

m o n ly referred t o as th e TEFRA p ro v i s i o n s .- 4
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[* 4 ] (2 ) wh et h er M r. W i l l i am s i s l i ab le fo r accu racy -rel at edp en al t i es u n d er
s ect i on 6 6 6 2 (a) fo r each o f t h e res p ect i v e y ears ati s s u e. FINDINGS OF FACT So m e o f t h e fact s are s t i p u l at edan dare s o fo u nd . Th e s t i p u l at io n o f fact s
an d th e at t ach edex h i b i t s are i n co rp o rat edh erei n b y th is referen ce. M r. W il l i am s
res i dedi n Tex as wh en th e p et i t i o n was fi ledatd o ck etNo . 2 16 3 7 -1 5. Nu traTech
was fo rm edan do p erat edi n Tex as , an d i t s p ri n ci p al p l ace o f b u s i n es s was al s o i n Tex as wh en th atth e p et i t i o n was fi l edatd o ck etNo . 2 4 25 6 -1 5
. Nu traTech i s a l i m i t ed p art n ers h i p . Gl o b al T rex , a s i n g l e-m em b er LLC,
s erv es as i t s g en eral an dt ax m at t ers p art n er. M r. W i l l i am s wh o l l y o wn s Gl o bal T rex an di s t h e o nl y o th er p art n er i n Nu traTech
. I. M r. W i l li am s ’ Back g ro u n d M r. W i l li am s g rew up o n h i s fam i l y ’ s ran ch i n the Tex as Pan h an d l e. On th ei r p ro p ert y

M r. W i l l i am s ’ fam i ly

rai s ed cat t l e an d farm edco rn , m ai ze, s u g ar,
an d b eet s. Beg i n ni ng i n jun i o r h i g h , M r. W i l l i am s wo rk edfo r h i s fat h er o n th ei r p ro p erty p ri m ari l y rai s i n g h o g s an dfeed i n g cat t le. Atn o t i m e was M r. W i l l i am s i n v o l v ed i n th e fi n an ci al as p ect s o f h i s fam i l y ’ s ran ch
. Aft er g radu at i n g fro m

h i g h s ch o o l , M r. W il l iam s l eftth e fam il y ’ s ran ch t o at t en d t h e Un i v ers i ty

o f Ho u s t o n . Aft er o n e y ear h e t ran sferred t o So ut h w es t- 5
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[* 5 ] Tex as St at e Un i v ers i ty i n San M arco s (So u th wes tTex as St at e) wh ere h e
o b t ai n edh i s B.A. d eg ree i n b u s i n es s ad m i n i st rat i o n . Wh i l e p u rs u i n g h i s d eg ree at So u thwes t Tex as St at e, M r. W i l l i am s t o o k acco u n t i n g co u rs es b utd i dn o tt ak e an y
co u rs es i n ran ch i n g , farm i n g , o r an i m al h u sb an dry . Fro m 1 97 9 t h ro u g h 1 9 8 2 M r. W i l l i am s at t en d edTex as Ch iro p ract ic Co l l eg e i n Pas ad en a, Tex as , wh ere h e o b t ai n edh i s ch i ro p ract i c d eg ree an d a B.S. d eg ree i n b i o ch em i s try . In1 98 2 M r. W i ll i am s o p en ed h i s o wnch i ro p ract ic p ract i ce i n Kerrv i l le, Tex as (Kerrv i l l e). In 1 9 8 5 M r. W i l l iam s s o l d h i s ch i ro p ract i c p ract i ce. Atal l rel ev an tt im es aft er h e s o l dh i s p ract i ce, M r. W i l li am s co n t i n u edt o l i v e i n th e Kerrv i l l e area. II. M r. W i l li am s ’ Vari o u s Bu s in es s Ven tu res Ata t i m e n o tes t ab l i s h edb y th e reco rd , b u taft er M r. W i l l iam s s o l dh i s ch i ro p ract i c p ract ice i n 1 9 8 5, h e b ecam e v ery i n t eres t edi n res earch i n g an dwri t i n g
o n th e t o p i c o f al t ern at iv e h eal th rem ed i es . Th i s n ew p as s io n l ed h i m t o p ub l i s h a
n ews p ap er cal l ed“ Al t ern at iv es ”. Si n ce 2 0 0 3 , an dth ro u gh 2 0 1 4 , M r. W i ll i am s h as o p erat edh i s res earch an d p ub l i s h i n g b u s i n es s as a d i sreg ard eden t i ty d o i n g b u s i n es s as Gl o b al Search LLC- 6
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[* 6 ] (Gl o b al Search ). Du ri n g t h o s e y ears , M r. W i l li am s rep o rt edGl o b al Search ’ s
n etp ro fi t s o n h i s Sch edu l es C, Pro fi to r Lo s s Fro m Bu s i n es s , as fo l l o ws : 4 Year Gro s s i nco m e To t al ex p en s es Netp ro fi t(l o s s ) 2 00 3 $ 1 , 0 4 5 , 11 1 $ 43 8 ,9 7 2 $ 6 0 6 ,1 3 9 2 00 4 1 , 2 7 9 , 21 2 5 7 3 ,2 1 8 7 0 5 ,9 9 4 2 00 6 4 38 ,3 4 2 3 8 9 ,8 0 0 4 8 ,5 4 2 2 00 7 4 49 ,7 0 8 4 1 3 ,2 1 0 3 6 ,4 9 8 2 00 8 4 63 ,9 6 4 4 2 3 ,9 2 8 4 0 ,0 3 6 2 00 9 4 83 ,3 1 5 3 5 5 ,0 7 6 1 2 8 ,2 3 9 2 01 0 4 77 ,5 1 0 1 8 2 ,8 5 7 2 9 4 ,6 5 3 2 01 1 4 82 ,7 6 3 2 1 5 ,9 7 2 2 6 6 ,7 9 1 2 01 2 4 99 ,1 7 7 1 3 5 ,8 4 1 3 6 3 ,3 3 6 2 01 3 5 08 ,7 7 7 2 0 3 ,6 5 1 3 0 5 ,1 2 6 2 01 4 5 15 ,1 6 3 2 5 7 ,3 9 6 2 5 7 ,7 6 7 To t al 6 ,6 43 ,0 4 2 3 , 5 89 ,9 2 1 3 , 0 53 ,1 2 1 Du ri n g th e y ears ati ss u e, M r. W i l l i am s d ev o tedap p ro x i m at el y 3 2 h ou rs a weekt o Gl o b al Search
. 5

4 M r. W i ll iam s ’ Fo rm 1 0 4 0 , U.S. In d i v i du al Tax Return (retu rn ), fo r h i s t ax y ear 2 0 0 5 i s n o t i n th e reco rdb efo re u s.

5 Onth e reco rdb efo re u s , i ti s u n cl ear h o w m an y h ou rs p er weekM r. W i ll i am s d ev o t edt o Gl o b al Search fro m 2 0 0 3 th ro u g h 2 0 0 4 , 2 0 06 th ro u g h 2 0 0 9 , an d 2 0 1 2 th ro u g h 2 0 14
.- 7
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[* 7 ] M o reo v er, s i n ce at l eas t2 0 0 0 an dth ro ug h 2 0 12 M r. W i l l i am s h as o perat ed h i s fi rearm s b u s i n es s , S & B Cy cl es , as a s o l e p ro p ri et o rs h ip . He rep o rt ed S & B Cy cl es ’ n etp ro fi t s an d l o s s es o n h i s Sch edu l es C as fo l l o ws : 6

Year Gro s s i nco m e To t al ex p en s es Netp ro fi t(l o s s ) 2 00 0 -0
- $1 ,4 4 3 ($ 1 ,4 4 3 ) 2 00 1 ($ 3 ,5 5 1 ) 9 8 9 (4 ,5 4 0 ) 2 00 2 1 ,0 7 4 3 , 4 0 1 (2 ,3 2 7 ) 2 00 3 (2 9 1) 7 , 4 4 4 (7 ,7 3 5 ) 2 00 4 1 ,2 7 8 2 , 1 0 3 (8 2 5 ) 2 00 6 -0
- 7 , 0 0 7 (7 ,0 0 7 ) 2 00 7 7 ,0 0 5 1 3,7 03 (6 ,6 9 8 ) 2 00 8 4 ,3 1 3 3 2,5 51 (2 8,2 3 8 ) 2 00 9 3 ,4 2 2 3 7,5 52 (3 4,1 3 0 ) 2 01 0 -0
- -0
- -0
- 2 01 1 3 1,8 5 1 2 , 7 2 2 2 9 ,1 2 9 2 01 2 6 3,7 6 0 2 , 2 6 6 6 1 ,4 9 4 To t al 10 8 ,8 6 1 1 1 1 ,1 8 1 (2 ,3 2 0 ) III. Th e Ran ch Pro p ert y OnJ an u ary

1 4 , 2 0 0 0 , M r. W i l l i am s p u rch as eda 5 0 7 .2 7 -acre t ract o f l an d
n i n e m i l es n o rt h wes t o f Kerrv il l e i n Gi l l es pi e Co u n ty , Tex as (t ract I). OnJ u n e 2 8 ,

6 See s up ra n o t e 4
.- 8
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[* 8 ] 2 0 0 0 , Nu traTech p u rch as eda 5 7 7-acre t ract o f l an d(t ract II) t h atwas
co n ti g u o us t o tract I. OnAp ri l 1 5 , 2 0 0 2 , M r. W i l li am s tran s ferred h i s i n t eres ti n tract I t o Nu traTech
. 7 OnAu gu s t3 0 , 2 0 0 6 , Nu traTech p u rch as eda 5 0 .6 8 -acre tract o f l an d n i n e m i l es n o rt h wes to f Kerrv i l l e i n Gi l l es p i e Co u nt y , Tex as (t ract III). (W e wi l l refer t o tract I, II, an dIII co l l ect i vel y as th e ran ch p ro p erty .) A. Ran ch Pro p ert y Des cri pt i o n Th e ran ch p ro p ert y

i s a 1 ,1 3 8
. 3 5 -acre t ract 8 o f ru ral ag ri cu l tu ral /recreat i o n al l an dco m p ri s i n g ro l l i n g h i l l s an dcreekb o tt o m v al l ey s wi th el ev at i o n s ran g i n g b et ween 1 ,9 0 0 an d 2 ,1 9 0 feet . Itco n t ai n s 1 .3 m i l es o f fro n t ag e al o n g s p ri n g -fed W es tGo atCreek . Th atcreekp ro v i d es ru n n i n g wat er y ear ro u n dan di s d amm ed i n tw o pl aces creat in g a 4 .2 5 -acre l ak e an da 1 -acre l ak e i n t h e cen t er an d
s o u th eas tp arto f the p ro p erty , res p ect iv el y . Atth e t i m e o f acq u i s i ti o n, h o wev er,
s o m e o f t h e creek b ed s were fu l l o f g rav el an dth e s p ri n g s were n o t ru nn i n g p ro p erl y .

7 OnAp ri l 1 5 , 2 0 0 2 , M r. W i l l i am s al s o tran s ferred h i s u n di v id edi n t eres ti n a 2 .7 -acre t ract o f l an d n i n e m i l es n ort h wes t o f Kerrv i l le i n Gi l l es p i e Co un ty , Tex as , t o Nu traTech . Th e reco rdd o es n o trefl ectwh en M r. W i l l i am s acq u iredh i s u n d i v i d edi n t eres ti n th attract o f l an d
.

8 Th e p art i es s t i p u lat e t hatth e ran ch p ro p ert y i s 1 , 1 38 .3 5 acres . W e n o t e t h at th e s u m o f t h e acreag e o f t ract I, II, III, an dthe u n d iv i d edi n t eres t d o es n o tequ al 1 ,1 38 .3 5 . Si n ce, h owev er, t h e acreag e o f t h e p ro p ert y i s n o ta m at eri al i ss u e i n th es e cas es , we wi l l u s e t h e s t i p u lat edacreag e am o un t
.- 9
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[* 9 ] Veg et at i o n o n th e ran ch p ro p ert y co n s i st s o f n at iv e g ras s es , a m o d erat e t o h eav y co v er o f ced ar t rees al on g th e h i l l s, jun i p ers , an da m od erat e co v er o f o ak trees sp readth ro u g h o u tth e ran ch p ro pert y . Th e s u rface o f t h e ran ch p ro p erty
co n tai n s l i t t l e t o p so i l. Fu rth er, wh en th e ran ch p ro p erty was p u rch as ed , th e o n l y
s tru ctu res o n th e p ro pert y were a l i v es to ckb arn , a l iv es t o ck s h ed , an d a m o b i l e h o m e t h atwere al l b u il t i n 1 9 7 7 . On ly cert ai n p o rt io ns o f t h e ran ch p ro p ert y were fen cedi n . Atth e t im e o f p u rch as e, t h e ran ch p ro pert y h adan ag ri cu l tu ral t ax
ex em p t i o n . Duri n g th e y ears ati s s u e, t h atag ri cu l tu ral t ax ex em p t i on rem ai n edi n p l ace. B. St ru ctu res Ad d ed t o th e Ran ch Pro p erty Th e fo l l o w i n g s tru ctu res h av e b een ad d edt o t h e ran ch p ro p ert y : (1 ) a s h o p b u i l d i n g wi th two at t ach eds h ed s ; (2 ) an equ i p m en ts h ed ; (3 ) a fo rem an h o u s e; (4 ) fo u r carp o rt s ; (5 ) a m o b i l e h o m e; (6 ) a s ho o t i n g p av i l i o n ; (7 ) a b u t ch er s h o p ; (8 ) a- 1 0 -

[* 1 0 ] creekh o u se; 9 (9 ) a b arn ; 1 0 (1 0 ) a m an u factu red h o m e; an d(1 1 ) t wo o ffi ce b u i l d i n g s . 1 1 C. Th e In i t i al Cat t l e Op erat i o n Pl an Wh en M r. W i l l i am s an dNu traTech acq u i redth e ran ch p ro p ert y , M r. W i ll i am s i nt en d edt o l iv e o n t h e p ro p ert y , n o tt o rai s e cat t le. In i t i al l y , M r. W i ll i am s was i n fav o r o f p urch as i ng a s m al l er t ract o f l an d, ap pro x i m at el y 2 5 -5 0
acres , thath adru nn i n g wat er th ro u g h th e p ro p ert y . M r. W i l li am s co n cl u ded , h o wev er, t h ats u ch a p ro p ert y wo u l d n otb e av ai l ab l e i n th e area; an d h e d eci d ed th ati f h e wan t edru n n i n g wat er t h ro u g h h is p ro p erty , h e wo u l d n eed t o p u rch as e a l arg er t ract o f l an d . Th erefo re, aft er t h e ran ch p ro p ert y was acq u i red , M r. W i ll i am s ap p ro ach edh i s n ei gh b o rs t o d i s cu s s h o w th ey h adg en erat edp ro fi t s fro m th ei r res p ect iv e p ro pert i es . Fro m th o s e d i s cu s si on s , M r. W i l l i am s l earn edth at

9 In 2 0 0 2 M r. W i l l i am s co m p l et edco ns tru ct i o n o f t h e creek h ou s e, an dh as l i vedi n i tev er s in ce. M r. W il l i am s , h o wev er, recen t ly co n s tru ct eda n ew h o m e o n th e ran ch p ro p ert y . As o f th e t i m e o f t ri al i n th es e cas es , M r. W i ll i am s i s i n th e p ro ces s o f m o vi n g i n t o th ath o m e.

1 0 In 2 0 02 M r. W i l l i am s co m p let edco n s tru ct i on o f t h e b arn . It i s n o ta l i ves to ckb arn th atwo u l db e u sedfo r a cat t l e o p erat i o n . In s tead , i ti s a s t o rag e b arn th ati s i n s ul at ed , cl im at e co n tro l l ed , an dh as b een fi n i s hedo u tfo r s h o wro o m o r en t ert ai n m en t p u rp o s es .

1 1 In 2 0 09 Nu traTech co m p l et edco n st ru ct i o n o f th e t wo o ffi ce b ui ld i n g s . Si n ce t h en , Nu traTech h as ren t edth o s e o ffi ce b u il di n g s t o M r. W i ll i am s fo r u s e i n h i s Sch edu l e C b u s i n es s .- 1 1 -

[* 1 1 ] th ey

g en erat ed p ro fi t s fro m

p ers o n al l y

rai s in g cat t le, o r l eas i n g th ei r l an dfo r
o th ers t o rai s e th ei r cat t l e. Th ereaft er, M r. W i l l i am s d eci d edth ath e wo u l d ru n a feed er s t ock er cat tl e o perat io n (cat t l e o p erat i o n ) o n th e ran ch p ro p ert y . 1 2 Atn o t i m e, i n cl u d i n g b efo re h e s t art ed th e cat t l e o p erat i o n, d i dM r. W i ll i am s creat e a fo rm al b u s in es s p l an , p rep are an y fi n an ci al s t at em en t s fo r t h e cat t le o p erat io n , 1 3 co n su l t wi th an y ex p ert s i n t h e fi el do f rai s i n g cat t le, 1 4 o r ch eck wi th th e Gi l l es p ie Co u n ty Ex t en s i on Serv i ce t o d et erm i n e h o wm an y an i m al u n i t s
co u ldb e s u s t ai n edo n th e ran ch p ro p ert y . 1 5 Nev ert h el es s , b efo re b eg in n i n g th e

1 2 Th ere are t w o d i fferen t ty p es o f cat t l e o p erat i o ns : (1 ) feed er s t o ck er an d (2 ) co w/ cal f. Th e fi rs t , a feed er s t o ck er cat t l e o p erat i o n , req u i res o ne t o p u rch as e cal v es th atwei g h 3 0 0 t o 4 0 0 p o u n d s each wi th th e i n t en t i on t o rai s e an dfeed th o s e cal v es o n th e ran ch o wn er’ s l an du n t i l th ey reach s lau g h t er wei g h t , wh i ch i s ap p ro x i m at el y 9 0 0 t o 1 ,0 0 0 p o u n d s each . Itt ak es ap pro x i m at el y s i x m o n th s fo r th e cal v es t o reach s l au gh ter wei g h t
. Th e s eco n d , a co w/ cal f cat t l e o p erat io n , req u i res o n e t o b reedcal v es o n h i s o r h er p ro p erty u n ti l th e cal v es reach 3 0 0 t o 4 0 0 p o u n d s an d th en s el l th em t o an i nd i v idu al l o o k i n g t o p u rch as e cal v es fo r h is o r h er feed er s t o ck er cat t l e o p erat i o n.

1 3 Atn o t i m e d i dM r. W i l l i am s b o rro w m o n ey t o fi n an ce t h e o p erat i o n o f t h e Sch edu l e F act i v i t i es .

1 4 M r. W i l li am s d i s cu s s edth e p ro sp ect i v e cat t l e o p erat i o n wi th h i s b ro th er, wh o o wn eda ran ch i n th e Tex as Pan h an d le an d h adex p eri en ce i n ran ch i n g act i vi t i es . W e n o te t h ath i s b ro th er’ s ran ch i s i n a d i fferen tp art o f Tex as wi th a l an d s cap e v ery

d i fferen tfro m

th e ran ch p ro p ert y

i n th es e cas es . 1 5 Th e Gi l l es p i e Co u n ty

Ex t en s i o n Serv i ce ag en t s g en eral l y kn ow h o wm an y an i m al u n i t s can b e s u s t ai n edo n cert ai n p arcel s o f l an db ecau s e t h e t errai n an dth e g ras s es th atg ro wi n Tex as can v ary fro m co u n ty t o co un ty .- 1 2 -

[* 1 2 ] cat t l e o p erat i o n M r. W i l l i am s es t i m at edth at th e ran ch p ro p erty co u l ds u s t ai n ap p ro x i m at el y 5 0 -6 0 h eado f cat t l e an dwo ul d t ak e ap p ro x i m at el y fo u r t o fi v e y ears t o b eco m e p ro fi t ab l e. M r. W il l iam s b as edth ates t i m at e o n th e factth ath e b el i ev edeach co w wo ul dreq u ire 2 0 -2 5 acres o f l an d
. 1 6 Ata t i m e n o tes t ab l i s h edb y th e reco rd , M r. W i l l i am s b ro u g hta few h ead o f cat t le o n t o th e ran ch p ro p ert y t o b eg i n th e cat t le o p erat i o n . 1 7 Th ereaft er, M r. W i ll i am s i ncrem en t al l y

acq u iredcat t l e fo r t h ato p erat i o n o n th e ran ch p ro p ert y . Atn o t im e d i dM r. W i l l i am s ad v ert i s e t h e cat t l e o p erat i o n u n d er a t rad e n am e o r b u s i n es s n am e. Du ri ng th e y ears ati s s u e M r. W i l l i am s d ev o t ed ap pro x i m at el y s i x t o ei g h th o u rs a weekwo rk i n g o n th e ran ch p ro p ert y m ov i n g cat t l e fro m

o n e p as tu re t o an ot h er, rep ai ri ng p eri m et er fen ci n g , an d rep ai ri n g b ro ken g at es .

1 6 W i th res p ectt o ren d eri n g th e ran ch p ro p ert y s u i t ab le fo r t he cat t l e o p erat i o n , M r. W i l l i am s d et erm i n edth ath e n eed edt o b u il d ad equ at e p eri m et er fen ci n g , cl ear t h e ced ar t rees an djun i p ers , an d cl ear t h e creek b ed s .

1 7 Onth e reco rd befo re u s , i ti s u n cl ear ex act l y h o w m an y

h eado f cat t l e M r. W i ll i am s acq u i red , wh en h e acq u i redth em , o r h o wm an y were o n th e ran ch p ro p erty i n a g i v en y ear. Th e earl i es ti n d i cat i o n th atwe h av e i n the reco rdb efo re u s i s th ato n h i s 2 00 7 Sch edu l e F, M r. W i l l i am s rep o rt edth at h e p u rch as ed“ fo u r b redAn g u s co ws ” o n Sep t em b er 2 8 , 2 0 0 7 . M r. W i l l iam s t es t ifi ed , h o wev er, th at h e m ay hav e p u rch as edcat t l e b efo re 2 0 0 7 an dfai l edt o rep o rtth o se cat t le o n h i s retu rn s . M o reo ver, M r. W i ll iam s al s o t es t i fi edth ath e h as h adan y wh ere fro m 1 5 t o 2 5 cat t l e o n t h e ran ch p ro p ert y du ri n g a g i v en y ear. Atth e t i m e o f t ri al i n th es e cas es , M r. W i l l i am s h adap p ro x i m at el y 1 9 h eado f cat t l e o n the ran ch p ro p erty .- 1 3 -

D. Em p lo y ees o n the Ran ch Pro p ert y Beg i n n in g i n 2 0 0 6 M r. W i l l i am s h i red two em pl o y ees t o h el p h i m . Fro m 2 0 0 6 thro u g h 2 0 0 8 M r. W i ll i am s em p l o y edRu s sel l Ev eret t , a co m m erci al wel d er. Du ri n g h i s t i m e atth e ran ch p ro p ert y , M r. Ev eret tb u i l tan drep ai redth e p eri m et er fen ci n g , erect edm et al b ui l d i n gs , an dreb ui l tth e l i v es t o ck p en s o n th e ran ch p ro p erty . 1 8 Fro m

2 00 6 thro ug h 2 0 1 2 M r. W i l l i am s em p l o y ed Fred dy

Garci a. M r. W i ll i am s d i d n o tch eckM r. Garci a’ s b ack g ro u n db efo re o fferi n g h i m em p l o ym en t
o n th e ran ch p ro p erty . M r. Garci a, h o wev er, rep res en t edt o M r. W i l l i am s th ath e h ad p rev i o u s cat t l e ran ch i n g ex p eri en ce o n h i s fam i l y ’ s farm i n M ex i co . Th ereaft er, M r. W i ll i am s h i redM r. Garci a, wh o , du ri n g h is t i m e atthe ran ch p ro p erty , rai s edM r. W i l l i am s ’ cat t l e, k ep ttracko f t he cat t l e reco rd s , an d b u i l t p eri m et er fen ci n g o n the ran ch p ro p ert y . 1 9 In2 0 1 2 M r. Garci a ab rupt l y l eftth e [* 13 ]

1 8 Onth e reco rd befo re u s , i ti s u n cl ear h o w m an y h o u rs a weekM r. Ev eret t wo rk edo n th e ran ch p ro p ert y , o r h o w o ft en M r. Ev eret tco m m u ni cat edwi th M r. W i ll i am s wi th res p ectt o d eci s i o n s reg ard i ng th e ran ch p ro p erty .

1 9 Onth e reco rd befo re u s , i ti s u n cl ear h o w m an y h o u rs a weekM r. Garci a wo rk edo n th e ran ch p ro p ert y o r h o w o ft en M r. Garci a co m m u n i cat edwi th M r. W i ll i am s wi th res p ectt o d eci s i o n s reg ard i ng th e ran ch p ro p erty .- 1 4 -

[* 1 4 ] ran ch p ro p erty an dt o o k wi th h i m M r. W i l l i am s ’ cat t l e reco rd s fo r 2 00 6 th ro u g h 2 0 1 2
. 2 0 IV. Th e M od i fi edCat t l e Op erat i o n Pl an In 2 0 1 3 M r. W i l l i am s d eci d edt o tran s i t i o n th e i n i t i al cat t l e o p erat i o n t o a
co w/ cal f cat t le o p erat i on . M r. W i ll i am s d eci d edt o i m p l em en t th e m od i fi edcat t l e
o p erat i o n b ecau s e h e h aden co u n t ereda s eri es o f p ro bl em s o n the ran ch p ro p ert y , i n cl u d i n g feral h o g s, fi res , an dth e i n ab i l i ty t o b u i l dad equ at e p eri m et er fen ci n g o n th e ran ch p ro p ert y , th ath e b el i ev edwere d et ri m en tal t o th e s u cces s o f t h e o ri g i n al cat t le o p erat io n . 2 1

2 0 M r. Garci a was res p o n s i b l e fo r k eep i n g tracko f th e cat t l e reco rd s du ri n g h i s em p lo ym en tfro m

2 0 0 6 th ro u g h 2 0 1 2 . Th e p u rp o s e o f t h e cat tl e reco rd s was t o rem ai n i n co m

p l i an ce wi th Tex as St at e an dFed eral l aws . 2 1 Th e m o d i fi edcat t le o p erat i o n d i d n otreq u i re ad equ at e p eri m et er fen ci n g b ecau s e cat t le g en eral l y d o n o twan d er o ff t h e p ro p erty th ey are b orn o n . In co n tras t , i n a feed er s t ock er cat t l e o perat i o n th e cat tl e, wh i ch are n o tb o rn o n th e p ro p erty , wi l l i m

m ed i at el y l eav e i ti f i tl ack s ad equ at e p eri m et er fen ci n g . Aft er ex p eri en ci n g y ears o f l o s s es , i n 2 0 1 0 M r. W i l l i am s l eas ed1 , 0 7 0 acres o f t h e ran ch p ro p ert y

t o M i k e Po wers fo r o ne y ear.- 1 5 -

[* 1 5 ] V. Ran ch Pro p ert y ’ s Fi nan ci al Perfo rm an ce Nei ther M r. W i l l iam s n o r Nu traTech h as ev er earn eda p ro fi tfro m th e cat t le
o p erat i o n . M r. W i l li am s rep o rt edth e fo l l o wi n g n etl os s es o n h i s Sch edu l es F: 2 2

Year Gro s s i nco m e To t al ex p en s es Netp ro fi t(l o s s ) 2 00 0 -0
- $ 1 25 ,6 4 3 ($ 1 2 5 ,6 4 3 ) 2 00 2 $4 3 ,6 8 8 1 4 4 ,6 1 6 (1 0 0 ,9 2 8 ) 2 00 3 1 4,9 7 3 1 8 3 ,6 9 8 (1 6 8 ,7 2 5 ) 2 00 4 7 ,9 5 1 1 6 8 ,0 8 9 (1 6 0 ,1 3 8 ) 2 00 6 1 ,1 6 3 1 5 3 ,1 1 2 (1 5 1 ,9 4 9 ) 2 00 7 -0
- 1 7 9 ,9 8 2 (1 7 9 ,9 8 2 ) 2 00 8 1 ,8 9 5 1 8 3 ,8 9 2 (1 8 1 ,9 9 7 ) 2 00 9 2 5 1 1 8 9 ,3 1 3 (1 8 9 ,0 6 2 ) 2 01 0 -0
- 1 3 8 ,0 7 6 (1 3 8 ,0 7 6 ) 2 01 1 -0
- 1 1 0 ,8 1 7 (1 1 0 ,8 1 7 ) 2 01 2 -0
- 6 8 ,3 9 4 (6 8 ,3 9 4) 2 01 3 1 0 0 2 9 ,1 7 8 (2 9 ,0 7 8) 2 01 4 2 ,0 0 0 8 4 ,8 1 9 (8 2 ,8 1 9) 2 01 5 -0 - 3 ,1 2 0 (3 ,1 2 0 ) To t al 7 2 ,0 21 1 , 7 62 ,7 4 9 (1 ,6 9 0 ,7 2 8 )

2 2 M r. W i l l i am s ’ 2 0 0 1 Sch edu l e F i s n o ti n th e reco rdb efo re u s. See s up ra n o t e 4
.- 1 6 -

[* 1 6 ] In ad d i t i o n , Nu traTech rep o rt edn etl o ss es o f $ 1 79 ,1 1 0 an d $ 2 3 1 ,9 20 o n i t s 2 0 1 0 an d2 0 1 1 Sch edu l es F, res p ect i v el y . VI. M r. W i l li am s ’ an d Nu traTech ’ s Retu rn s fo r Tax Years 2 0 1 0 an d2 0 1 1 M r. W i l li am s ’ l o n g t i m e cert ifi edp ub l i c acco un t an t (C.P.A.), 2 3 Stu art Wri g h t , p rep aredh is return s fo r t ax y ears 2 0 1 0 an d 2 0 1 1 , as wel l as Nu traTech ’ s Fo rm s 1 0 6 5 , U.S. Retu rn o f Part n ers hi p In co m e (p art n ers h i p retu rn ), fo r t ax y ears 2 0 1 0 an d2 0 1 1
. 2 4 (W e wi ll refer t o th e 2 0 1 0 retu rn , th e 2 01 1 retu rn , th e 2 01 0 p art n ers hi p return , an dth e 2 0 1 1 p art ners hi p return , co l l ect i vel y , as M r. W i l l i am s ’
res p ect i ve ret u rn s . ) M r. Wri g h tp rep aredM r. W i l l i am s ’ res p ect i v e ret u rn s u s i n g i n fo rm at i o n th ath e recei v ed fro m M r. W i l l i am s ’ b o o kk eep er, M yrt a Go n zal es . 2 5 M s . Go n zal es h as b een M r. W il l i am s ’ b o o kk eep er s i n ce 2 0 0 7 an d d oes th e b o o kk eep i n g fo r al l o f M r. W i ll i am s ’ act i v it i es , i n cl u d i n g M r. W il l iam s’ Sch edu l e F act i vi t i es .

2 3 M r. Wri g h t ’ s en g ag em en twi th M r. W i l l i am s d idn o t i n cl u d e au d i t in g s erv i ces .

2 4 Nu traTech was fo rm edi n 1 9 9 9 . Ho w ev er, o nl y Nu traTech ’ s 2 0 10 an d 2 0 1 1 p art n ers h i p retu rn s are i n th e reco rdb efo re u s .

2 5 M s . Go n zal es is n o tl icen s ed as a C.P.A. i n t h e Un i t edSt at es . Attri al M r. W i ll i am s t es t i fi edth atM s . Go n zal es was l i cen s edas a C.P.A. i n M ex i co , b u tth ere i s n o th i n g el s e i n th e reco rdt o co n fi rm o r d en y th atas s ert i on . Acco rd i n g l y , th e Co u rtd ecl i n es t o fi n d t h i s t es t i m o n y as a fact
.- 1 7 -

[* 1 7 ] Du ri n g th e y ears ati ss u e M s . Go n zal es ’ b o o kk eep i ng res p o n s i b i l i t i es i n cl u d edco l l ect i n g an do p en i ng th e m ai l thatwas d el i v eredt o th e ran ch p ro p ert y , p ay i n g b il l s th at arri v edi n M r. W il l iam s’ m ai l , cat eg o ri zi n g th e i n co m e an d
ex p en s e rep o rt s fo r t h e y ears ati s s u e, an d co m m u n icat i n g wi th M r. Wri g h t. Th ereaft er, M s . Go n zal es fax edM r. Wri g h ti tem izedrep ort s thats h o w edM r. W i ll i am s ’ an dNu traTech ’ s res p ect i v e cat eg o ri zedi n co m e an dex p en s e rep o rt s fo r th e t ax y ears ati s su e. Atn o t i m e d i d M s . Go n zal ez p rep are fo rm al fi n an ci al
s t at em en t s fo r p u rp o s es o f an al y zi n g M r. W i l l i am s ’ Sch edu l e F act i v i t i es . M s . Go n zal es , h o wev er, d i dn ots en dt o M r. Wri g h tth e s o u rce d o cu m en t s t o al l o w h im t o co rro b o rat e t h e i n fo rm at i o n o n th e res pect i v e i n co m e an dex p en s e rep ort s th at
s h e h adfax edt o h i m

fo r each o f t h o s e t ax y ears . M o reo v er, atn o t i m e d i ds h e o r M r. W i l l i am s ev er p h y s i cal ly m eetwi th M r. Wri g h t
. Befo re p rep ari n g M r. W i l l i am s’ res p ect i v e retu rn s, M r. Wri g h t n ev er d i s cu s s edwi th M r. W i l l iam s h i s en ti t lem en tt o the l o s s d edu ct i on s o n h i s
res p ect i ve Sch edu l es F. Aft er M r. Wri g htfi n i s h edp rep ari n g M r. W i l l i am s ’
res p ect i ve ret u rn s , h e s en tthem b ackt o M r. W i l l iam s fo r h is s i gn atu re. Up o n recei v i ng th os e res pect i v e ret u rn s , M r. W i ll i am s rev i ewedth e fi rs tfew p ag es o f each retu rn b y

h im s el f. Atn o t i m e aft er recei v i n g t h o se res p ect iv e retu rn s d i dM r. W i ll i am s as kfo r o r recei v e an y ad v i ce fro m

M r. Wri g h t
.- 1 8 -

[* 1 8 ] VII. Res p o nd en t ’ s Ex am i n at i o n o f M r. W i l l i am s ’ Retu rn s OnFeb ru ary 2 6 , 2 0 1 4, res p o n d en t’ s ex am i n er Ch adGal en t in e recei v ed wri t ten s up erv is o ry

ap p ro v al t o i m

p o s e accu racy -rel at edp en al t i es u n d er s ect i o n 6 6 6 2 (a) wi th res p ectt o th e Sch edu l es C an d F act i v i t i es th atM r. W il l i am s rep o rt edo n h i s 2 0 1 0 an d2 0 1 1 retu rn s . OPINION I. Sect io n 1 8 3 Sect io n 1 6 2 (a) al l o ws a t ax p ay er t o d edu ct“ al l th e o rd i n ary an dn eces s ary
ex p en s es p ai d o r i n cu rreddu ri n g the t ax ab l e y ear i n carry in g o n an y trad e o r b u s i n es s ”. In g en eral , h o wev er, a t ax p ay er m ay n otd edu ctex p en s es i n cu rredi n
co n nect io n wi th act i v i ti es n o t en g ag edi n fo r p ro fi t , s u ch as act i v i ti es p ri m ari l y carri ed o n as s p ort , as a h o b b y , o r fo r recreat i o n , t o o ffs et t ax ab l e i n co m e fro m
o th er s o u rces . Sec. 1 8 3 (a) an d(b ); s ec. 1 .1 83 -2 (a), In co m e Tax Reg s . Sect i o n 1 8 3 (c) d efi n es an “ act iv i ty n o ten g ag edi n fo r p ro fi t ” as “ an y act i v i ty o th er t h an
o n e wi th res p ectt o wh i ch d edu ct i o n s are al l o wab l e fo r t h e t ax ab l e y ear u n der
s ect i on 1 6 2 o r u n der p arag rap h (1 ) o r (2 ) o f s ect i o n 2 1 2 .” Th e Co urto f Ap p eal s fo r t h e Fi ft h Ci rcu i t , t o wh i ch ap p eal i n th es e cas es wo u l dg en eral l y l i e, h as h el d th atfo r a d edu ct i o n t o b e al l o wed u n d er s ect i o n 1 6 2 o r 2 1 2 (1 ) o r (2 ), a t ax p ay er
m u stes t ab l i s h th ath e en g ag edi n th e act i v i ty wi th th e p ri m ary

p u rp o s e an di n t en t- 1 9 -

[* 1 9 ] o f real i zi n g an eco n o m i c p ro fi ti n d ep en d en to f t ax s av i n g s . W es tbro o kv . Co m m i s s i o n er, 6 8 F.3 d8 6 8 , 8 7 5 (5 th Ci r. 1 99 5 ), aff’ g , T.C. M em o . 1 9 93 -6 3 4
. Th e ex p ect at io n o f p ro fi tn eedn o th av e b een reas o n ab le; h o wev er, t h e t ax p ay er m

u s t h av e en t eredi n t o th e act i v i ty , o r co n t i n u ed i t , wi th t h e o b ject i v e o f
m ak i n g a p ro fi t. Hu l t er v . Co m m i ss i o n er, 9 1 T.C. 3 7 1 , 3 9 3 (1 9 8 8 ); s ec. 1 .1 8 3
- 2 (a), In co m e Tax Reg s . Wh eth er t h e t ax p ay er h adth e req u is it e p ro fi to bject i v e i s d et erm i n edb y

l oo k i n g atal l th e fact s an dci rcu m s t an ces . Go l an ty v . Co m m i s s i o n er, 7 2 T.C. 4 11 , 4 2 6 (1 9 7 9 ), aff’ d wi th o u t p ub l is h edo pi n i o n , 6 4 7 F.2 d1 7 0 (9 th Ci r. 1 9 8 1); s ec. 1 .1 8 3 -2 (a), In co m e Tax Reg s . W e g i v e g reat er wei g h t t o o b

ject i ve fact s th an t o a t ax p ay er’ s s tat em en t o f i n ten t
. Th o m as v . Co m m i s s i o n er, 8 4 T.C. 1 24 4 , 1 2 6 9 (1 9 85 ), aff’ d , 7 9 2 F.2 d1 2 5 6 (4 th Ci r. 1 9 8 6 );
s ec. 1 .1 8 3-2 (a), In co m e Tax Reg s . Inth e cas e o f Nu traTech , we g au g e t h e p ro fi t i n t en tfro m

th ato f M r. W il l i am s , the m an ag i n g m em ber o f i t s g en eral p art n er, Gl o bal T rex . See Taub e v . Co m m is s i o n er, 8 8 T.C. 4 6 4 , 4 7 9 -4 8 1 (1 9 8 7 ). Ev i d en ce fro m y ears o u t s id e th e y ears at i s s u e i s rel ev an t t o th e ex t en ti tcreat es i n feren ces reg ard i n g th e t ax p ay er’ s req u i s i t e p ro fi to b j ect i v e i n t h e s ub

jecty ears . See, e.g ., Sm it h v . Co m

m i s si o ner, T.C. M em o . 1 9 93 -1 4 0
. Pu rs uan tt o s ect i o n 1 8 3 (d ), an act i v it y i s p res u m edt o b e en g ag ed i n fo r p ro fi t i f t h e act i v i ty

p ro du ces g ro s s i n co m e i n ex ces s o f d educt i o n s fo r an y th ree o f- 2 0 -

[* 2 0 ] th e fi v e co n s ecu t i ve y ears wh i ch en d wi th th e t ax ab l e y ear, u n l es s th e Co m m i s s i o n er es tab l i s hes t o th e co n trary . See W ad l o w v . Co m m is si o n er, 1 1 2 T.C. 2 4 7 , 2 5 0 (1 9 9 9 ). M r. W i ll i am s ’ Sch edu l e F act i v i t i es fai l edt o p ro du ce g ro s s i n co m e i n ex ces s o f d edu ct io n s atan y t i m e du ri n g t h ei r o p erat i o n . No r d oes th e
reco rdes t ab li s h t h atNu traTech ’ s Sch edu l e F act i v i t i es ev er p ro du cedg ro ss i n co m e i n ex ces s o f d edu ct io n s fo r p u rp o ses o f i n vo k i n g th e p res u m p t i on . Acco rd in g ly , th e p res u m

p t i o n d o es n o t ap p l y

i n t h es e cas es . Th e Co m m is s i o n er’ s d et erm i n at i o n s i n a n o t i ce are g en eral l y p res u m ed
co rrect , an dth e t ax p ay er o rd i n ari l y b ears th e b u rd en o f p ro v i n g th o s e d et erm i n at i o n s erro n eo u s . Ru l e 1 4 2 (a); W el ch v . Hel veri n g , 2 9 0 U.S. 1 1 1 , 1 1 5 (1 9 3 3). If, h o wev er, t he t ax p ay er p ro du ces cred i bl e ev i d en ce wi th res pect t o an y fact ual i s s u e rel ev an tt o as cert ai n i n g h i s t ax l i ab i l i ty an dm eet s cert ai n o th er req u i rem en t s , th e b u rd en o f p ro o f s h i ft s fro m th e t ax pay er t o th e Co m

m i s s io n er as t o that fact ual i s s u e. Sec. 7 4 91 (a)(1 ) an d (2 ). Becau s e we d eci d e t h e s ect i o n 1 8 3 i s su e o n th e p rep o n d eran ce o f th e ev i d en ce, t h e b u rd en o f p ro o f i s i rrel ev an t . See Kn u d s en v . Co m

m i s s i o n er, 1 3 1 T.C. 1 85 , 1 8 8 -1 89 (2 0 0 8 ). Sect io n 1 .1 8 3 -2 (b ), In co m e Tax Reg s ., p ro v id es a n o n ex cl u s i ve l i s to f fact ors t o co n si d er i n ev al uat i n g a t ax p ay er’ s p ro fi to b ject i v e, s u ch as : (1 ) t h e
m an n er i n wh i ch th e t ax pay er carri edo n the act i vi ty ; (2 ) t h e ex p ert i s e o f t h e- 2 1 -

[* 2 1 ] t ax p ay er o r h i s o r h er ad v i s ers ; (3 ) t h e t i m e an deffo rtex p en d edb y th e t ax p ay er i n carry i n g o n th e act i v i ty ; (4 ) t he ex p ect at i o n th atthe as s et s u s edi n th e act i vi ty m ay ap p reci at e i n v al u e; (5 ) t h e s u cces s o f t he t ax p ay er i n carry i ng o n
o th er s i m i l ar o r d i s s i m il ar act i vi t i es ; (6 ) th e t ax p ay er’ s h i s t o ry o f i n co m e o r l o s s wi th res p ect t o th e act i v i ty ; (7 ) t h e am o u n to f o ccas i o n al p ro fi t s earn ed , i f an y ; (8 ) th e fi nan ci al s t atu s o f th e t ax p ay er; an d(9 ) wh et h er el em en t s o f p ers on al p l eas u re
o r recreat i o n were i nv o l v ed . No s i n g l e fact or i s d et erm i n at iv e o f t h e t ax p ay er’ s i n t en t i o n t o m ak e a p ro fi t , an dm o re wei g h tm ay b e g i v en t o s om e fact o rs th an
o th ers . Go l an ty

v . Co m m i s s i o n er, 7 2 T.C. at 4 2 6 ; s ee Du n n v . Co m m i s s i o n er, 7 0 T.C. 7 1 5 , 7 2 0 (1 9 7 8 ), aff’ d o n an o ther i ss u e, 6 1 5 F.2 d5 7 8 (2 d Ci r. 1 9 8 0 ); s ec. 1 .1 83 -2 (b ), In co m e Tax Reg s . W e ex am i n e each o f th es e fact ors i n turn . A. M an n er i n Wh ich Act i v i ty Is Co n duct ed Th e fact th atth e t ax p ay er carri es o n an act iv i ty i n a b u s in es s l i k e m an n er
m ay i n d i cat e a p ro fi tm ot iv e. Sec. 1 .1 8 3 -2 (b )(1 ), In co m e Tax Reg s. Th is d et erm i n at i o n req u i res th atwe co n s i d er wh ether t h e t ax p ay er: (1 ) m ai nt ai ned
co m p l et e an daccu rat e b o o k s an dreco rd s ; (2 ) co n du ct edth e act i v i ty i n a m an n er
res em b l i n g th at i n wh i ch s u cces s fu l p ract i t i o n ers co n du cts i m i lar b u s i n es s act i vi t i es ; (3 ) ch an g ed o p erat i ng m et h o d s , ad o p t edn ew t ech n i qu es , o r ab an do n m en to f u np ro fi t ab l e act i v i ti es i n a m an n er co n s i st en twi th an i n t en tt o- 2 2 -

[* 2 2 ] i m p ro v e p ro fi t ab i li ty ; an d(4 ) p rep areda b u si n es s p l an . Id
. ; s ee Keat i n g v . Co m m i s s i o n er, T.C. M em o . 2 0 0 7 -3 0 9 , 2 0 07 W L 2 9 6 2 7 74 , at* 4 (“Nu m ero u s
co u rto p i n i o n s m en t io n t h ata b u s i nes s l i k e o p erat i o n o ft en wo u l di nv o l v e a b u s i n es s p l an .”). M r. W i l li am s co n ten d s th ath e o p erat edth e Sch edu le F act i v it i es i n a b u s i n es s l i k e m an n er b ecau se h e k ep ts ep arat e b o o k s an dreco rd s fo r th e ran ch i n g
o p erat i o n , u s edan o u t si d e b o o kk eep er t o trackth e rev en ue an dex pen s es , creat ed
an i n fo rm al b u si n es s p l an b efo re h e s t art edthe o p erat i o n , an dm ad e ch an g es i n
res p o n s e t o i s s u es th ataro s e. In res p o n s e, res p o nd en t co nt en d s t h atM r. W i l l i am s ’ b o o k s an dreco rd s s erv edn o p arti n co n tro l l in g co s ts o r i n creas i ng p ro fi t ab i l i ty , M r. W i l l i am s d i d n o tcreat e a wri t t en b us i n es s p l an , an d M r. W i ll i am s fai l edt o
m ak e ch an ges i n a t i m el y m an n er i n res p o n se t o i s s u es th at aro s e. Al th ou g h M s . Go n zal ez creat ed i t em i zedi n co m e an dex p en s e s p read s h eet s fo r t h e Sch edu l e F act i v i t i es duri n g the y ears at i ss u e t o ai d M r. Wri g h t i n p rep ari n g M r. W il l iam s ’ res p ect i v e ret urn s , M r. W i l li am s d i dn otu s e t h os e
s p read s h eet s o r th e u nd erl y i ng s o u rce d o cu m en t s t o m i n i m i ze l o s ses an d/ o r g en erat e p ro fi t . See M cKeev er v . Co m m i s s io n er, T.C. M em o . 2 0 0 0 -2 8 8 , 2 0 0 0 W L 1 2 9 7 7 1 0 , at * 1 1 (ex p l ai ni ng th att o i n d i cat e p ro fi tm o t iv e t ax p ay ers m u s tu se th ei r b oo k s an dreco rd s t o try t o redu ce l os s es an dach i ev e p ro fi t ab i l i ty ). In fact- 2 3 -

[* 2 3 ] M r. W i l l i am s n ev er req u es t edM s. Go n zal ez t o p rep are fi n an ci al s tat em en t s fo r t h e p u rp o s e o f an al y zi n g th e Sch edu l e F act i v i t i es . In ad d i t i o n , M r. W il l i am s d i d n o th av e a wri tt en b u si nes s p l an . He d i dn o t
m ai n t ai n b u d g et s o r p rep are eco n o m i c fo recas t s . In fact th e reco rdi s d ev o i do f
an y cred i b l e ev i d en ce t h atM r. W il l iam s en gag edi n an y m ean i n g fu l fi n an ci al
m an ag em en twi th res p ect t o th e Sch edul e F act i v i t ies . See Fo s ter v
. Co m m i s s i o n er, T.C. M em o . 2 0 1 2 -2 0 7 , 2 0 12 W L 3 0 0 0 3 50 , at* 5 . Al th o ug h M r. W i ll i am s t es t i fi edth ath e k ep ttrack o f h i s Sch edul e F act i v i ti es ’ i n co m e an d
ex p en s es , al o n g wi th th e u n d erl y in g s o u rce d o cu m en t at i o n , th e ev i d en ce d em o n s trat es th ath i s reco rd k eep in g was n ot h i ng m o re t h an a co ns ci o u s at t en t i o n t o d et ai l . See Go l an ty

v . Co m m i s s i o n er, 7 2 T.C. at4 3 0
. Fu rt her, wh i l e a t ax p ay er n eedn o tm ai n t ai n a s op h i s t i cat edco s tacco u n t i n g
s y s t em , the t ax p ay er s ho u l dk eep reco rd s t hatm ak e i n fo rm edb u s i n es s d eci s i o n s p o s s i b l e. See Bu rg er v . Co m m i s s i o n er, 8 0 9 F.2 d3 5 5 , 3 5 9 (7 th Ci r. 1 9 8 7 ), aff’ g T.C. M em o . 1 98 5 -5 2 3 . Fo r a t ax p ay er’ s b o o k s an dreco rd s t o i n d i cat e a p ro fi t
m o ti v e, t h e b oo k s an d reco rd s s h o u l d en ab l e t h e t ax p ay er t o cu tex p en s es , g en erat e o r i n creas e p ro fi t s , o r ev al u at e t h e o v eral l p erfo rm an ce o f t h e o p erat i o n . See Ab b en e v . Co m

m i s s i on er, T.C. M em o . 1 99 8 -3 3 0 , 1 9 9 8 W L 6 4 3 6 4 7 , at* 6
. M r. W i l l i am s d i d n o tu s e h i s o r Nu traTech ’ s reco rd s t o d o an y o f t h es e t h in g s , an d- 2 4 -

[* 2 4 ] h e d i dn o tp ro v e t hatth e reco rd s k ep twere s u ffi ci en tt o en ab l e h i m t o
m an ag e t h e fi n an ci al as p ect s o f t h e ran ch i n g act i v i ti es . See Keat i ng v . Co m m i s s i o n er, T.C. M em o . 2 0 0 7 -3 0 9 , 2 0 07 W L 2 9 6 2 7 74 , at* 5 . M r. W i ll i am s ’ fi nan ci al m an ag em en twas l i m i t edt o h av i n g M s . Go n zal ez k eep reco rd s an d p ro v id e t h em

t o M r. Wri g h tfo r t ax p u rp o s es . Perh ap s the m o s ti m

po rt an ti n d i cat i o n o f wh et h er an act iv i ty i s b ei n g carri ed
o n i n a b u s i n es s l i k e m an n er i s wh et h er t h e t ax p ay er i m p l em en t s m et h o d s fo r
co n tro l l in g l o s s es , i n cl u d in g effo rt s t o redu ce ex p en s es an dg en erat e i n co m e. See Do d g e v . Co m

m i ss i o n er, T.C. M em o . 1 9 9 8 -8 9 , 1 9 9 8 W L 8 81 7 5 , at* 5 , aff’ d wi th o u tp ub l i s hedo p i n i o n , 1 8 8 F.3 d 5 07 (6 th Ci r. 1 9 9 9 ). M r. W i ll i am s co n t en d s th ath e ch an g edh is o p erat i n g m et h o d s , ad o p tedn ew t ech n i qu es , an dab an d o n ed
u np ro fi t ab l e m et h o d s th at co n tri b u t edi n i ti al l y t o h is l o s s es . Th e reco rd , h o wev er, d o es no ts up p o rts u ch a co n cl u s i o n . Fo r ex am p l e, M r. W il l i am s s t art edh is cat t l e
o p erat i o n i n 2 0 0 0 , an db y th e en do f 2 0 0 4 , fi v e y ears aft er h e s t art edh i s o perat i o n
an d wh en h e h adp ro

j ect edp ro fi t ab i li ty , M r. W i l l i am s h adrep o rt ed t o t al n etl o s s es
o f $ 5 55 ,4 3 4 o n h i s 2 00 0 -0 4 Sch edu l es F. 2 6 Des p it e t h e am o u n t o f l o s ses , M r. W i ll i am s d i d n o th i re a ran ch h an du n t i l 2 0 0 6 t o h el p h i m o n t h e ran ch p ro p ert y .

2 6 Th i s am o u n t d o es n o t i n cl u d e n etl o ss es fro m M r. W il l i am s ’ 2 0 0 1 Sch edu l e F b ecau se t h ats ch edu l e i s n o ti n th e reco rdb efo re u s . See s up ra n o t e 2 2
.- 2 5 -

[* 2 5 ] Fu rt h er, i twas n otu n t i l 2 0 1 3 , o v er a d ecad e aft er h e s tart edh i s cat t le
o p erat i o n an dap p ro x i m at el y two y ears aft er t h e y ears ati s su e, t h atM r. W i l l i am s d eci d ed to tran s i t i o n h i s cat t l e o p erat i o n fro m a s t ock er feed er cat tl e o p erat i o n t o a
co w/ cal f cat t le o p erat i on . Atthatp o i n t , M r. W i l l i am s h ad rep o rt edn etl o s s es o f $ 1 ,5 7 5 ,7 1 1 an dNu traTech ’ s l o s s es (t o th e ex t en to f th e ev i den ce i n th e reco rd ) t o t al ed$ 4 1 1 ,0 3 0
. 2 7 Acco rd i ng l y , th i s fact o r fav o rs res p on d en t
. B. Ex p ert i s e o f Tax p ay er o r Hi s Ad v is ers Prep arat i o n fo r anact i v i ty b y th e ex t en s iv e s tud y

o f i t s accep t edb u s i n es s , eco n om i c, an d s ci en t i fi c p ract i ces , o r co n s u l t at i o n wi th th o s e wh o are ex p ert s th erei n , m ay

i n d i cat e a p ro fi tm o t i v e. Sec. 1 .1 8 3 -2 (b )(2 ), In co m e Tax Reg s .; s ee En g dah l v . Co m

m i s s io n er, 7 2 T.C. 6 5 9 , 6 68 (1 9 7 9 ). M r. W i l li am s p res en t ed n o ev i d en ce t h ath e co n du ct eda b as i c i n v es t i g at i o n
o f t h e p o t en t i al p ro fi tab i l i ty o f t h e Sch edu le F act i v it i es . In s t ead , h e rel i edo n h i s
o wnfam i l i ari ty

an dex p ert i s e wi th res p ectt o ran ch in g an dth ato f h i s n ei g h b o rs
an d b ro th er. W i th res p ectt o h i s o wnb ack g ro u n d , M r. W i l l i am s h as n ev er recei v edan y

fo rm al edu cat io n i n farm i n g , ran ch i n g , o r an i m al h u s b an dry . Ev en wh en acco u n t i n g fo r h i s ex p eri en ce o n h i s fam i l y ’ s ran ch , atn o t im e was h e

2 7 See s up ra n o t e 4
.- 2 6 -

[* 2 6 ] i n v o l v edi n th e fi n an ci al as p ect s o f t h ato p erat i o n . W it h res p ectt o h i s d i s cu s s i o n s wi th h i s b ro th er an dn ei g h bo rs , th ere i s n o ev i d en ce i n th e reco rdt o
s u g g es tth ath e d i scu ss edwi th th es e i n d i v i dual s h o w t o ru n a p ro fi t ab l e ran ch
. 2 8 M o reo v er, atn o p o i n td i dM r. W i l l iam s co ns u ltwi th ex p ert s o n th e o p erat i o n o f th e ran ch i n g act iv i t i es o r ch eckwi th th e Gi ll es pi e Co u n ty Ex t en s i on Serv i ce t o d et erm i n e h o wm an y

an i m al u n i t s co u l db e s u s t ai n edo n th e ran ch p ro p ert y . 2 9 M r. W i ll i am s h i reda b o o kk eep er t o k eep reco rd s , b u t , as d i s cu s s eds up ra, h e d i dn o t
u s e t h o s e reco rd s t o cu tex p en ses , g en erat e o r i n creas e p ro fi t s , o r ev al u at e t h e
o v eral l p erfo rm an ce o f t h e ran ch i n g act i v i ti es . Acco rd i ng l y , th i s fact o r fav o rs res p on d en t
. C. Tax p ay er’ s Ti m e an dEffo rtDev o t edt o th e Act i v i ty Th e fact th ata t ax p ay er d ev o t es m u ch o f h i s p ers o n al t i m e an deffo rtt o carry i n g o n an act i v i ty m ay i n d i cat e an i n t en ti o n t o d eri v e a p ro fi t , p art i cu l arl y i f th e act i v i ty

d o es n o th av e s ub s tan t i al p ers o n al o r recreat i o nal as p ect s . Sec. 1 .1 8 3
- 2 (b )(3 ), In co m e Tax Reg s . If, h o wev er, a t ax p ay er s p en ds l i t t l e t im e o n t h e act i vi ty b u th i res a co m

p et en tan dqu al i fi edp ers o n t o carry o n t h e act i v i ty , a p ro fi t
m o ti v e m ay

s t i l l b e i n d i cat ed . Id
.

2 8 See s up ra n o t e 1 4
. 2 9 See s up ra n o t e 1 5
.- 2 7 -

[* 2 7 ] M r. W i l li am s co n ced es th ath e s p en t a l i m i t edam o u nto f t i m e wo rk i n g o n th e ran ch p ro p ert y

b u tco n t en d s th ath i s em pl o ym en t o f M r. Garci a, a co m pet en t
an d qu al i fi edp ers o n , i n d i cat es th ath e h adan i n t en ti o n t o m ak e a p ro fi tth ro u g h th e ran ch i n g act iv i t i es . Co nv ers el y , res p o n d en tco n t en ds th atM r. W i l l i am s d i d
n o tes t ab l i s h th atM r. Garci a was a co m p et en tan dqu al i fi edp ers o n. See Bu rru s v . Co m m i s s i o n er, T.C. M em o . 2 0 0 3 -2 8 5 , s l i p o p . at3 2 -3 3
. Du ri n g th e y ears ati ss u e, M r. W i l l i am s d ev o tedap p ro x i m at el y s ix t o ei g h t h o u rs p er weekt o wo rk i n g o n th e ran ch p ro pert y . Co n v ers el y , du ri n g th ats am e t i m e, M r. W i ll i am s d ev o t edap p ro x i m at el y 3 2 h o u rs p er weekt o Gl o b al Search , h i s s u cces s fu l Sch edu l e C b u si n es s . Gi v en th e fact th atM r. W i l l iam s d ev o t eds o l i tt l e t i m e t o th e Sch edu l e F act i v i ti es du ri n g th e y ears at i s su e, t h e d et erm i n at i on
o f wh eth er th i s fact o r s up po rt s th e ex i s ten ce o f a p ro fi tm o ti v e h i n g es up on th e
co m p et en cy an dqu al i fi cat i o n s o f M r. Garci a. See i d
. In th es e cas es , M r. W i l l i am s fai l edt o p res en tan y ev i d en ce o f M r. Garci a’ s
co m p et en cy o r qu al i fi cat io ns . InfactM r. W i l l i am s d i dn otev en ch eckM r. Garci a’ s b ack g ro u n db efo re h i ri n g h i m t o wo rko n th e ran ch p ro p erty . M o reo v er, th e reco rdi s d ev o i do f an y ev i den ce s u g g es t i n g h o w m an y h o u rs M r. Garci a s p en t
wo rk i n g o n the ran ch p ro p ert y , o r wh eth er an dh o w o ft en M r. Garci a
co m m u n icat edwi th M r. W i l l i am s . See i d . On th e reco rdb efo re u s , we fi n dth at- 2 8 -

[* 2 8 ] M r. W i l l i am s fai l edt o p ro v e h e h i reda co m p et en tan d qu al i fi edp ers o n t o carryo n th e Sch edu l e F act i v i t i es . Acco rd i ng l y , th i s fact o r fav o rs res p on d en t
. D. Ex p ect at i on Th atAs s et s Us edi n th e Act iv i ty M ay Ap p reci at e Anex p ect at i o n th atas s et s u s edi n th e act i v i ty wi l l ap p reci at e i n v al u e an d th erefo re m ay

p ro duce an o v eral l eco n om i c p ro fi t m ay i n di cat e a p ro fi tm o t i v e
ev en if t h e t ax pay er d eri ves n o o p erat i o n al p ro fi t . Sec. 1 .1 8 3-2 (b )(4 ), In co m e Tax Reg s. A p ro fi t o b

ject i ve, h o wev er, m ay

b e i n ferred fro m

s u ch ex p ect ed ap p reci at i o n o f t h e act i v it y ’ s as s et s o n l y wh ere t h e ex p ect edap p reci at i on ex ceed s th e o p erat i n g ex pen s es an d wo u l db e s u ffi ci en tt o reco up th e accu m u l at edl o s s es
o f p ri o r y ears . Fo s t er v . Co m m i s s i o n er, T.C. M em o . 2 01 2 -2 0 7, 2 0 1 2 W L 3 0 0 0 3 5 0 , at* 7 ; s ee Go l an ty v . Co m m i s s i o n er, 7 2 T.C. at4 27 -4 2 8
. Th e ran ch p ro p ert y

was ap p rai s edat $ 8 ,7 65 ,0 0 0 i n M arch 2 0 1 7 . M r. W i ll i am s h as n o ts ub m i tt edan y cred i b le ev id en ce o f h i s ad ju s t ed b as i s i n t h e
ran ch p ro p ert y . 3 0 Th ere i s n o cred i b l e ev i d en ce i n t h e reco rdth atthe ex p ect at i o n

3 0 W i th res p ectt o th e ad

ju s t ed b as is o f t h e ran ch p ro p erty , al l we h av e i n the reco rdb efo re u s i s th atas p arto f i t s p u rch as e o f t ract II, Nu traTech ex ecu t eda p ro m i s s o ry

n o t e i n th e am o u n to f $ 5 8 2 ,0 0 0
. Ev en as s u m i n g th atam o u n twas equ iv al en tt o th e ad

ju s t edb as i s o f t h attract , we s t i l l d o n oth av e i n th e reco rd b efo re u s the ad

ju s tedb as i s fo r t ract I o r tract III.- 2 9 -

[* 2 9 ] o f fu tu re ap p reci at i o n o f t h e ran ch p ro p ert y ev en b eg i n s t o ap p ro ach th e
am ou n t s o f l o s s es rep o rt eds i n ce t h e b eg i n n i n g o f th e Sch edu l e F act i vi t i es . Acco rd i ng l y , th i s fact o r i s n eu tral
. E. Tax p ay er’ s Su cces s i n Carry i n g OnSi m il ar o r Di s s im i l ar Act iv i t i es Th e fact th ata t ax p ay er en g ag edi n s i m i l ar act i v i ti es an dco n vert edth em fro m u npro fi t ab le t o p ro fi t ab l e en t erp ri s es m ay i n d i cat e th atth e t ax p ay er i s
en g ag edi n th e p res en tact i v i ty fo r p ro fi t , ev en th o u g h th e act i v i ty i s p res en t l y
u np ro fi t ab l e. Sec. 1 .1 8 3 -2 (b )(5 ), In co m e Tax Reg s. M r. W i l li am s co n ten d s th ath i s ab i l it y t o co n v erth i s o th er b u s in es s es fro m
u np ro fi t ab l e t o p ro fi t ab l e an dh i s s u cces s i n th o s e b u s i n es s act i v i t i es i n d i cat e t h e
ex i s t en ce o f a p ro fi tm o ti v e. In res p o n s e, res p o n den tco n t en d s thatM r. W i l l i am s h as d em o n s trat eds u cces s o n l y i n o n e o th er n on rel at edb u s i nes s act i v it y , Gl o b al Search , an dth at h i s o th er b u s i n es s act i v i t i es , s u ch as S & B Cy cl es , were n o t
s u cces s fu l
. Al th ou g h M r. W i l l i am s h as b een s u cces s fu l i n ru n n i n g Gl ob al Search , a h eal th an dwel l n es s b u s in es s , h i s wo rk as a res earch er an dwri t er i s n o ts u ffi ci en t l y
s i m i l ar t o o p erat i ng ran ch i n g act i v i t i es s o as t o i n d icat e t h ath e co u l dd o s o
s u cces s fu l ly . Do d d s v . Co m m i s s i o n er, T.C. M em o . 2 0 1 3 -7 6 , at * 1 9 . M o reo v er, p ri o r s ucces s i n a b us i nes s d o es n o t n eces s ari l y i m pl y a p ro fi t o b

ject i v e fo r a n ew- 3 0 -

[* 3 0 ] act i v i ty

th atm i g h tb e a h o b b y

o r s p o rt . See An n uzzi v . Co m m i s si on er, T.C. M em o. 2 0 1 4 -2 3 3 , at * 2 7
. Acco rd i ng l y , th i s fact o r fav o rs res p on d en t
. F. Tax p ay er’ s Hi st o ry o f In co m e o r Lo s s Fro m th e Act i v i ty A t ax p ay er’ s h i s t o ry

o f i n co m e o r l o ss wi th res p ectt o an act i vi ty m ay i n d i cat e t h e p res en ce o r ab s en ce o f a p ro fi t m o t i ve. Sec. 1 .1 83 -2 (b )(6 ), In co m e Tax Reg s . A s eri es o f l o s ses duri n g th e i n i t i al s tag e o f an act i v i ty d o es n o t
n eces s ari l y

i n d i cat e a l acko f p ro fi tm o t i v e. En gd ah l v . Co m m is s i o n er, 7 2 T.C. at 6 6 9 ; s ec. 1 .1 8 3 -2 (b )(6 ), In co m e Tax Reg s . Th e g o al , h o wev er, m us tb e t o real i ze a p ro fi t o n th e en t i re o p erat i o n , wh i ch p res up po s es n o to n ly fu ture n et earn i n g s b u t al s o s u ffi ci en t n etearn i n g s t o reco up l o s s es i n cu rred i n th e i n t erv en i n g y ears . See Bes sen y ey

v . Co m m i s si o ner, 4 5 T.C. 2 6 1 , 2 7 4 (1 9 6 5 ), aff’ d , 3 7 9 F.2 d2 5 2 (2 dCi r. 1 9 6 7 ). Du ri n g th e y ears ati ss u e, M r. W i l l i am s rep o rt edn etl o s s es o f $ 1 3 8 ,0 7 6 an d $ 1 1 0 ,8 1 7 , o n h i s 2 0 1 0 an d2 0 1 1 Sch edul es F, res p ect iv el y . InfactM r. W i l l i am s h as n ev er earn eda p ro fi t fro m th e cat t l e o p erat i o n . Inad d i t i o n, Nu traTech rep o rt edn et l o s ses o f $ 1 7 9 ,1 1 0 an d$ 2 3 1 , 9 2 0 o n i t s 2 0 10 an d2 0 11 Sch edu l es F,
res p ect i vel y . Acco rd i ng l y , th i s fact o r fav o rs res p on d en t
.- 3 1 -

[* 3 1 ] G. Am o u n t o f Occas i o n al Pro fi t s Earn ed Th e am ou n to f o ccas i o n al p ro fi t s earn edi n rel at i o n t o th e am o un to f l o s s es i n cu rred , th e am o u nto f i n v es t m en t , an dth e v al u e o f as s et s u s ed i n the act iv i ty
m ay i n d i cat e a p ro fi tm ot iv e. Sec. 1 .1 8 3 -2 (b )(7 ), In co m e Tax Reg s. Th e
o p p o rtu ni ty

t o earn s ub s tan t i al p ro fi ts i n a h i g h l y s pecu l at i v e v en tu re m ay
o rd i n ari ly b e s uffi ci en t t o i n d i cat e t h at th e act i v i ty i s en g ag ed i n fo r p ro fi tev en th o u g h l o s s es o r o n l y

o ccas i o n al s m al l p ro fi t s are act u al ly g en erat ed . Id
. Nei ther M r. W i l l iam s n o r Nu traTech h as ev er earn eda p ro fi tfro m th e cat t le
o p erat i o n . Acco rd i ng l y , th i s fact o r fav o rs res p on d en t
. H. Tax p ay er’ s Fi nan ci al St atu s A l acko f s ub s t an ti al i nco m e fro m s o u rces o th er t han th e act i vi ty m ay i n d i cat e t h atth e act i v i ty i s en g ag edi n fo r p ro fi t . Id . s ub p ara. (8 ). Subs t an t i al i n co m e fro m

s o u rces o ther t h an th e act i v i ty (p art icu l arl y

i f l o s s es fro m

th e act i vi t y g en erat e s ub s t an t ial t ax b en efi ts ) m ay i n d i cat e t h e act iv i ty i s n o ten g ag ed i n fo r p ro fi t, es p eci al l y

i f p ers o n al o r recreat io n al el em en t s are i n vo l v ed . Id .; s ee Go l an ty v . Co m m i s s i o n er, 7 2 T.C. at4 2 9
. M r. W i l li am s d i d n o tearn an y i n co m e fro m

h i s ran ch i n g act i vi t i es t o p ay b as i c l iv i n g ex p en s es . Inad d i t i o n, Nu traTech rep o rt eds i g n i fi can tl o ss es fo r each- 3 2 -

[* 3 2 ] o f i t s s ubjecty ears . M r. W i l l i am s’ i n co m e fro m o th er s o u rces , i n cl u di n g Gl o bal Search , al l o w edh i m t o co n t i n u e t h e ran ch in g act i v i t i es d es p i t e y ears o f
s u s t ai n edl o s s es . Ad d it i o n al l y , th e ran ch i ng act i v i t i es g en erat edg en ero u s t ax
s av i n g s i n th e fo rm o f n et l o s s es t o o ffs eth i s o th er i n co m e. 3 1 Acco rd i ng l y , th i s fact o r fav o rs res p on d en t
. 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 p l eas u re o r recreat i on al el em en t s i n carry i n g o n an act i vi ty m ay i n d i cat e t h e act i vi ty

i s n o ten g ag edi n fo r p ro fi t . Sec. 1 .1 8 3 -2 (b )(9 ), In co m e Tax Reg s . Th e fact th atth e t ax p ay er d eri v es p ers o nal p l eas u re fro m
en g ag i n g i n the act i v i ty i s n o tb y i t s el f d et erm i nat i ve t h atth e act i v i ty i s n o t
en g ag edi n fo r p ro fi t . See i d
. M r. W i l li am s d eri v edn o p ers o nal p l eas u re fro m rai s i n g cat t l e. Th erefo re, h e co nt en d s th at th e Sch edu l e F act i v i t ies l ack eds i g n i fi can t recreat i o n al ap p eal
. In res po n s e, res po n d en t co n t en d s th at M r. W i l l i am s p urch as edth e ran ch p ro p ert y

3 1 W e n o te t h at th e reco rdi s u ncl ear wh et h er p et i t i o ners b el i ev ed th atth ey n eed edt o co n du cta fo r-p ro fi tb u s i n es s o n th e ran ch p ro p erty i n o rd er t o cl ai m

th e ag ri cu l tu ral ex em

p t i o n an do b t ai n th e co rres p o n di n g real es t at e t ax s av i n g s . Co n s equ en t l y

we wi ll n o t i n cl ud e i n o u r an al y s is b u td o n o te t h e ex i s t en ce o f t h e redu ced real es t at e l i ab i l i ty fro m th e ch aract eri zat i o n o f t h e l an das b ei n g ran ch p ro p erty .- 3 3 -

[* 3 3 ] wi th th e i n t en t t o l i v e o n i tan dth at i m p ro v em en t s h e m ad e t o th e p ro p ert y
were co ns i s t en twi th th ati n t en t , n o t wi th an i n t en t t o ru n a p ro fi t ab l e b u si nes s . W e fi n dcred i b l e t h e t es ti m o n y o f M r. W i l l i am s th ath e d eri v es n o p ers o n al p l eas u re fro m

rai s i n g cat t le. Acco rd i ng l y , th i s fact o r fav o rs p et it io n ers . J
. Co n cl u si o n Of th e n i n e fact o rs l i s t edi n s ect i o n 1 .1 8 3-2 (b ), In co m e Tax Reg s ., s ev en fav o r res po n d en t , o n e fav ors p et i t i o n ers , an d o n e i s n eu tral
. Aft er co n s i d eri n g th e fact ors an dth e fact s an dci rcu m s t an ces o f t h es e cas es , we co n cl ud e t h atM r. W i ll i am s d i d n o th av e an actu al , h on es tp ro fi to b j ect i v e i n o p erat i n g h i s o r Nu traTech ’ s ran ch i ng act i v i t i es du ri n g the y ears ati s s u e. Acco rd in g l y , th e d educt i o n s fo r ex p en s es p ai dwi t h res p ectt o th e ran ch i ng act i v i t i es are s ub jectt o th e l i m i t at i o ns o f s ect io n 1 8 3
. II. Sect io n 6 6 6 2 (a) Accu racy -Rel at edPen al ty Sect io n 6 6 6 2 (a) an d(b )(1 ) an d(2 ) i m p o s es an accu racy -rel at edp en al ty o n
an y p o rt i on o f an u n derp aym en to f t ax th ati s at tri b u t ab l e t o the t ax p ay er’ s

“ n eg l i g en ce o r d i s reg ardo f ru l es o r reg u lat i on s ” o r “ sub st an t i al u n d ers t at em en to f i n co m e t ax ”. Anu n d ers t at em en to f i n co m e t ax i s s ub s t an t i al i f t h e am o un to f t h e
u n d ers t at em en tfo r t h e t ax ab l e y ear ex ceed s th e g reat er o f 1 0 % o f t h e t ax req u i red- 3 4 -

[* 3 4 ] t o b e s h o wno n t h e ret u rn o r $ 5 , 0 0 0 . Sec. 6 6 6 2(d )(1 )(A). Neg li g en ce i n cl u d es “ an y fai l ure b y th e t ax p ay er t o k eep ad equ at e b o ok s an dreco rd s o r t o
s ub s t an t i at e i t em s p ro p erl y .” Sec. 1 .6 6 6 2 -3 (b ), In co m e Tax Reg s . Th e Co m m is s i o n er b ears th e b u rd en o f p ro du ct i o n wi th res p ectt o th e t ax p ay er’ s l i ab i l i ty fo r a s ect i o n 6 66 2 (a) p en al ty an dm u s t p ro du ce s u ffi ci en t
ev i d en ce i n d i cat i n g th ati ti s ap p ro p ri at e t o i m p o s e t he p en al ty . See s ec. 7 49 1 (c); Hi g bee v . Co m

m i ss i o n er, 1 1 6 T.C. 4 3 8 , 4 4 6 (2 0 0 1 ). As p arto f t h atb u rd en , res p o n d en t m

u s tal s o s h ow t h ath e co m p l i edwi th th e wri t t en ap p ro v al req u i rem en t
o f s ect i o n 6 7 51 (b )(1 ). See Graev v . Co m m i s s i o n er, 1 4 9 T.C. _

_ , _

_ (s l i p o p . at 1 4 ) (Dec. 2 0 , 2 0 17 ), s up p lem en t i n g 1 4 7 T.C. _

_ (No v . 3 0 , 2 0 1 6 ). On ce t h e b u rd eno f p ro du ct i o n i s m et , th e t ax p ay er m u stco m e fo rwardwi th p ers uas i v e
ev i d en ce t h atth e Co m

m i s s i o ner’ s d et erm i n at i o n i s i nco rrect o r t h atth e t ax p ay er h ad reas o n ab l e cau se o r s ub s tan t i al au th o ri ty fo r t h e p o s i t i o n . See Hi g bee v
. Co m m i s s i o n er, 1 1 6 T.C. at4 4 6-4 4 7
. Onth e reco rdb efo re u s , we fi n dth at i f t h e Ru le 1 5 5 co m p u tat i o n s co n fi rm
s ub s t an t i al u n ders t at em en t s o f i n co m e t ax fo r t h e t ax ab le y ears at i s s u e, t h en
res p o n d en t h as m eth i s b u rd en o f p ro du ct i o n . 3 2 Onth e reco rdb efo re u s , we

3 2 W e n o te t h at th e reco rdco n t ai n s ev i d en ce, i n the fo rm o f a ci v i l p en al t y ap p ro v al fo rm , thatres p o n d en tco m p l i edwi th t h e req u i rem en t s o f s ec. 6 7 5 1 (b )(1 ). (co n ti n u ed ...)- 3 5 -

[* 3 5 ] fu rt h er fi n dth atM r. W i l l i am s was req u i red , b u t fai l ed , t o m ai n t ai n ad equ at e
reco rd s t o s ubs t an t i at e h i s d educt i o ns . Sec. 1 .6 6 62 -3 (b ), In co m e Tax Reg s . On th atreco rd , we fi n dth atres p o nd en th as al s o m et h i s b u rd en o f p ro du ct i o n wi th
res p ectt o t h e accu racy -rel at edp en al ty u n d er s ect io n 6 66 2 (a) at tri b u t ab l e t o M r. W i ll i am s ’ n eg l i g en ce. 3 3 Th e accu racy -rel at edp en al ty u n der s ect i o n 6 6 6 2 (a) d o es n o tap p l y t o an y p o rt i on o f an u n d erp aym en ti f i ti s s h o wnth atthere was reas o n ab l e cau s e fo r, an d th atth e t ax p ay er act edi n g o odfai th wi th res p ectt o , s u ch p o rt i o n . Sec. 6 6 6 4 (c)(1 ). Th e d et erm i n at i o n o f wh et h er t h e t ax p ay er act edwi th reas o n ab l e
cau s e an d i n g oo dfai th d ep en d s o n al l th e p ert i nen t fact s an dci rcu m s t an ces , i n cl u d i n g th e t ax p ay er’ s effo rt s t o as s es s t h e t ax pay er’ s p ro p er t ax l i ab i l i ty , th e kn o wl ed g e an d ex p eri en ce o f t h e t ax p ay er, an dth e rel i an ce o n th e ad v ice o f a p ro fes s i on al , s u ch as an acco u n t an t . Sec. 1 .6 6 6 4 -4 (b )(1 ), In co m e Tax Reg s . Rel i an ce o n th e ad v i ce o f a p ro fes s i o n al m ay d em o n s trat e reas on ab le cau se
an d g o o dfai th i f, u n der al l th e ci rcu m s t an ces , s u ch rel i an ce was reas o n ab l e an d th e t ax p ay er act edi n g o odfai th . Id . Inth i s co n n ect i o n , ad v ice i s d efi n ed as a

3 2 (...co n t i nu ed ) See Graev v . Co m

m i ss i o n er, 1 4 9 T.C. _

_ , _

_ (s l i p o p . at1 4 ) (Dec. 2 0 , 2 0 1 7 ), s up p lem en t i n g 1 4 7 T.C. _

_ (No v . 3 0 , 2 0 1 6 ).
3 3 See s up ra n o t e 3 2
.- 3 6 -

[* 3 6 ] co m

m u n i cat i on th atrefl ect s the ad v i s er’ s an al y s i s o r co ncl u s io n . W oo d s u m
v . Co m m i s s i o n er, 1 3 6 T.C. 5 85 , 5 9 3 (2 0 1 1); s ee s ec. 1 .6 6 6 4 -4 (c)(2 ), In co m e Tax Reg s. M o reo v er, i n o rd er fo r a t ax p ay er t o rel y reas o n ab l y

up o n ad v i ce s o as t o p o s s i b ly n eg at e a s ect i o n 6 6 6 2 (a) accu racy -rel at edp en al ty d et erm i n edb y th e Co m m i s s i o ner, th e t ax p ay er m

u stp ro v e b y

a p rep o nd eran ce o f t h e ev i d en ce t h at the t ax p ay er m eet s each req u i rem en t o f t h e fo l lo wi n g three-p ro n g t es t : (1 ) Th e ad v i s er was a co m p et en t p ro fes s i on al wh o h ads u ffi ci en t ex p ert i s e t o ju s t i fy

rel ian ce, (2 ) t h e t ax pay er p ro v i d edn eces s ary an d accu rat e i nfo rm at i o n t o th e ad v i s er, an d (3 ) t h e t ax p ay er act u al l y rel i edi n g o o dfai th o n th e ad v is er’ s ju dg m en t
. * * * Neo nat ol o gy

As so cs ., P.A. v . Co m

m i ss i on er, 1 1 5 T.C. 4 3 , 9 9 (2 0 0 0 ), aff’ d , 2 9 9 F.3 d2 2 1 (3 dCi r. 2 0 02 ). A t ax p ay er’ s du ty

t o fi l e an accu rat e t ax return g en eral l y m ay n o tb e
av o id ed b y

th e t ax p ay er’ s cl ai m

th ath e o r s h e rel i edo n a t ax return p rep arer. See M et ra Ch em

Co rp . v . Co m

m i s s i o n er, 8 8 T.C. 6 5 4 , 6 62 -6 6 3 (1 9 8 7 ). M o reo v er, a t ax p ay er’ s u n co n d i ti o n al rel i an ce o n a C.P.A. d o es n o t , s t an d i n g al o ne, co n s t i tu te
reas on ab l e rel i an ce i n g o o d fai th fo r p u rp o s es o f s ect i o n 6 6 6 4 (c)(1 ) an dth e reg u l at i o n s th ereu n d er. See St o u g h v . Co m m i s s i o n er, 1 4 4 T.C. 3 0 6 , 3 2 3 (2 0 1 5 ). A t ax pay er h as an o b l i g at i o n t o ex erci s e “ [d ] i l i g en ce an d p ru d en ce.” Id . In ad d it i o n , a t ax p ay er h as a du ty t o reada t ax retu rn th at a C.P.A. p rep ares fo r t h e t ax p ay er. See i d . Ev en i f a t ax p ay er p ro v i d edal l th e i nfo rm at i on n eces saryt o- 3 7 -

[* 3 7 ] en ab l e a C.P.A. t o p rep are an accu rat e t ax retu rn , th e t ax p ay er s t il l h as a du ty t o read th e t ax retu rn an dm ak e s u re i ti s accu rat e. See M ag i ll v . Co m m i s s i o n er, 7 0 T.C. 4 65 , 4 7 9 -4 8 0 (1 9 7 8 ), aff’ d , 6 5 1 F.2 d 1 2 33 (6 th Ci r. 1 9 8 1 ). Fu rt h erm o re, t he m ere fact thata C.P.A. p rep areda t ax return d o es n o tm ean h e o r
s h e o pi n edo n an y

o r al l o f t h e i t em s rep o rt edo n th at retu rn . See Neo n at o l o g y As s ocs ., P.A. v
. Co m

m i ss i o n er, 1 1 5 T.C. at1 0 0
. It is M r. W il l i am s ’ p os i ti o n , h o wev er, t hath e i s n o t l i ab le fo r t he accu racy rel at ed p en al ty

fo r th e y ears ati s s u e b ecau s e h e h adreas o n ab l e cau s e an dact edi n g o o dfai th wi th res p ectt o h is retu rn p o s i ti o n. In s up po rto f t h atp o s i t i o n , M r. W i ll i am s cl ai m s th ath e reas o n ab l y rel i ed o n t h e ad vi ce o f h i s C.P.A. an dwas
u n d er n o o bl i g at i o n t o “ ch al l en g e h i s retu rn p rep arer’ s m et h o do f d eal i n g wi th th e i s su e o f d edu ct i bi l i ty

o n h i s 2 0 1 0 an d2 01 1 t ax retu rn s .” Wh i l e M r. Wri g h td i d p rep are M r. W i l l i am s ’ retu rn s an dNu traTech ’ s p art n ers hi p return s fo r t he y ears ati s s ue, i t d o es n o tn eces s ari l y fo ll o wth atM r. Wri g h t p ro v id edad v i ce fo r p u rp o s es o f s ect i on 6 6 6 4 (c). In fact the reco rd
co n tai n s n o ev i d en ce t h atM r. W i l l i am s ev er as k edfo r o r recei v edad v i ce fro m M r. Wri g h t wi th res p ectt o th o s e res p ect iv e ret u rn s . See W o o ds u m v . Co m m i ss i o n er, 1 3 6 T.C. at5 93 ; s ec. 1 .6 6 6 4 -4 (c)(2 ), In co m e Tax Reg s . M o reo v er, M r. W il l i am s
n ev er reado r rev i ewedh i s co m p l et edretu rn s fo r t ax y ear 2 0 1 0 an d 2 0 1 1 ,- 3 8 -

[* 3 8 ] res p ect i v el y . See St o u g h v . Co m m i ss i o ner, 1 4 4 T.C. at3 2 3 ; s ee al s o M ag i l l
v . Co m m i s s i o n er, 7 0 T.C. at4 7 9 -4 8 0
. Onth e reco rdb efo re u s , we fi n dth at M r. W i l l i am s h as fai l edt o carryh i s b u rd eno f es t ab l is h in g thatthere was reas o n ab l e cau s e fo r, an dthath e act edi n g o o dfai th wi th res p ectt o , th e u n d erp aym en t s fo r h is t ax y ears 2 0 1 0 an d2 0 1 1 . On th atreco rd , we fi n dth ati f Ru l e 1 5 5 co m p u tat i on s co n fi rm

s ub s t an t i al
u n d ers t at em en t s o f i nco m e t ax , M r. W i l l i am s h as fai l edt o carryh i s b u rd en o f
es t ab l i s h in g th ath e i s n o t l i ab l e fo r h i s t ax y ears 2 0 1 0 an d2 0 1 1 fo r t he
accu racy -rel at edp en al ti es b ecau s e o f u n d erp aym en t s at tri b u t ab l e t o n eg li g en ce, o r al t ern at i v el y , s ub st an t ial u n d ers t at em en ts o f i n co m e t ax , u n der s ect i o n 6 6 6 2 (a) an d (b )(1 ) an d (2 ). W e h av e co n s id eredal l th e o th er arg u m en ts o f t h e p art i es , an d t o t h e ex t en t
n o td i s cu s s edab o v e, fi n dtho s e arg u m en t s t o b e i rrel ev an t , m o o t , o r wi th ou tm eri t.- 3 9 -

[* 3 9 ] To refl ectthe fo reg o i n g , Deci s i o n wi ll b e en t eredu n d er Ru l e 1 5 5 i n d o ck et No . 2 1 6 3 7 -1 5
. Deci s i o n wi ll b e en t eredfo r
res p o nd en t i n d o ck et No . 2 4 2 5 6 -1 5.