t c memo united_states tax_court rhett rance smith and alice avila smith et al petitioners v commissioner of internal revenue respondent docket nos filed date robert j stientjes thomas c pliske shine lin and anthony s gasaway for petitioners anne w durning nicholas j richards laura beth salant and chris j sheldon for respondent cases of the following petitioners are consolidated herewith for purposes of trial briefing and opinion joel rance and larhea smith docket no j zane and shannon r creese smith docket no and rhett rance and alice avila smith docket nos and a pretrial procedural issue was decided with respect to rhett rance and alice avila smith in docket no see smith v commissioner tcmemo_2006_187 memorandum findings_of_fact and opinion gerber judge respondent determined the following income_tax deficiencies and penalties with respect to petitioners in these consolidated cases petitioners year deficiency accuracy-related_penalty sec_6662 rhett rance alice avila smith dollar_figure dollar_figure big_number dollar_figure big_number dollar_figure big_number dollar_figure big_number none joel rance larhea smith big_number dollar_figure big_number dollar_figure big_number dollar_figure big_number dollar_figure j zane shannon r creese smith big_number dollar_figure big_number dollar_figure big_number dollar_figure big_number dollar_figure unless otherwise indicated all section references are to the internal_revenue_code as amended and in effect for the years under consideration and all rule references are to the tax_court rules_of_practice and procedure after concession sec_2 of the parties the issues remaining for our consideration are whether petitioners rhett rance and alice avila smith joel rance and larhea smith and j zane and shannon r creese smith are entitled to charitable_contribution deductions with respect to interests in family limited_partnerships contributed to a charitable_organization and if so what the values of the charitable_contributions are whether petitioner j zane smith’s dog breeding activity constitutes an activity engaged in for profit within the meaning of sec_183 whether petitioner j zane smith’s cow and dairy farm activity constitutes an activity engaged in for profit within the meaning of sec_183 a large portion of the trial was devoted to the question of whether an offshore employee_leasing arrangement lacked economic_substance and or was a sham after presentation of their case in chief petitioners conceded that the arrangement lacked substance and was a sham petitioners accordingly conceded unreported income and overstated interest deductions related to the offshore arrangement they also conceded the applicability of sec_6662 penalties attributable to the unreported income and overstated interest deductions petitioners conceded that the 6-year period for assessment under sec_6501 applied with regard to their and tax years respondent conceded that petitioners rhett rance smith rhett and alice avila smith alice substantiated cash charitable_contributions of dollar_figure for the year and that they are entitled to reduce their income by dollar_figure respondent also conceded the issue he raised at trial that the contributions of business interests were not completed gifts whether petitioner rhett rance smith’s cutting horse activity constituted an activity engaged in for profit within the meaning of sec_183 and whether petitioners are liable for sec_6662 accuracy-related_penalties for negligence or disregard of rules or regulations with respect to the above-referenced charitable_contribution deductions and or their sec_183 activities background findings_of_fact petitioners rhett rance smith rhett and alice avila smith alice are married and resided in scottsdale arizona at the time their petitions were filed they timely filed form sec_1040 u s individual_income_tax_return for and on date respondent sent notices of deficiency to rhett and alice for their and tax years on date respondent sent a notice_of_deficiency to rhett and alice for their tax_year petitioners joel rance smith rance and larhea smith larhea are married and resided in eagle point oregon at the time their petitions were filed they timely filed form sec_1040 for and on date respondent sent notices of deficiency to rance and larhea for their and tax years petitioners j zane smith zane and shannon r creese smith shannon are married and resided in earlville new york at the time their petition was filed they timely filed form sec_1040 for and on date respondent sent notices of deficiency to zane and shannon for their and tax years rance and larhea smith are the parents of rhett and zane smith noncash charitable_contributions each couple claimed deductions for noncash charitable_contributions of interests in their family limited_partnership flps which essentially was to hold interests in their closely held family-owned arizona c_corporation beneco inc beneco beneco had been incorporated in with big_number initially issued shares of stock held as follows petitioners shares rance larhea rhett and alice zane and shannon total big_number beneco’s business was to provide a qualified_retirement_plan and trust and qualified health and welfare trust services to contractors who work under prevailing state and federal wage laws including the federal davis-bacon act for its taxable years ended date through beneco did not pay a dividend during date petitioners’ attorney robert a kelley jr attorney kelley who specialized in tax and estate_planning established three separate arizona flps in each of which one couple owned a limited_partnership_interest of approximately percent and the couple’s wholly owned corporation as general_partner owned the remaining percent as follows flp limited_partner general_partner jireh lp j rance larhea smith j a rohi corp mustard seed lp j zane shannon r smith z s consulting inc zerubbabel lp alice a smith inc each partnership_agreement provided that partners could not rhett r bull run enters transfer a partnership_interest without prior written consent of all the other partners and that control_over the partnership was vested in the general_partner the couple’s wholly owned corporation during rance and larhea transferred their 51-percent ownership_interest in beneco to jireh limited_partnership jireh jireh is treated as a partnership for federal tax purposes and its only asset i sec_501 shares of beneco stock sometime after date zane and shannon transferred into mustard seed limited_partnership mustard seed their shares of beneco stock which during the years at issue were its sole asset sometime after date rhett and alice transferred into zerubbabel limited_partnership zerubbabel their shares of beneco stock which during the years at issue were its sole asset christian community_foundation ccf a sec_501 charity for tax purposes was incorporated in under the laws of colorado on or about date attorney kelley sent a letter to ccf enclosing a check for dollar_figure and an application to begin a charitable project ccf set up the zacchaeus foundation zacchaeus a donor-advised_fund for petitioners and assigned to it account no attorney kelley advised ccf that for rance and larhea would be contributing an flp interest having a value of dollar_figure and that rhett and alice and zane and shannon would each be contributing an flp interest having a value of dollar_figure attorney kelley further advised that petitioners would be making annual gifts in amounts to be determined by their income for the particular year he further advised that all of the gifts of flp interests that were made to the project would be reacquired via irrevocable life_insurance trusts that were to be funded by life_insurance and that application had been made for the insurance in the irrevocable_trust of each couple and ccf executed a separate agreement for the purchase and sale of limited_partnership_interest each agreement provided that upon the death of the later to die of the couple ccf had the right to require the trustee to buy ccf’s entire limited_partnership_interest similarly the trust could require ccf to sell its interest to the trustee ccf or the trust could exercise the right to buy or sell within sixty days from the date the trust collects the death_benefits from a specified life_insurance_policy it was intended that the sale or purchase transaction be funded by a life_insurance_policy sometime later attorney kelley left the united_states and petitioners hired attorney frederick meyer attorney meyer attorney meyer conducted a review of petitioners’ documents including wills family limited_partnerships and insurance trusts and he discovered what he considered to be inadequacies attorney meyer believed that the partnership agreements should reflect a fiduciary duty to the charity and an obligation to share cashflow with the charity edward kramer mr kramer petitioners’ certified_public_accountant c p a and rance did not believe this was necessary but reluctantly agreed to make the changes in the limited_partnership agreements were revised to accommodate the recommended changes petitioners did not rely on attorney meyer with respect to valuation questions they relied on mr kramer to take care of valuing the partnership interests petitioners paid annual administrative fees to ccf from through rance and larhea assigned interests in jireh to ccf and claimed the following noncash charitable_contributions deductions date percent assigned per tax_return claimed contribution dollar_figure unknown big_number big_number although form_8283 noncash charitable_contributions for indicated that an interest of percent had been contributed to ccf the actual percentage contributed was dollar_figure percent pursuant to rance and larhea’s request during the period to ccf directed their contributed interests in jireh to zacchaeus during the years through rance and larhea did not transfer any beneco stock to ccf rance and larhea attached section b of form_8283 to their return and described the donated property as units jireh ltd with an appraised fair_market_value of dollar_figure the declaration of appraiser part iii on form_8283 for was signed by mr kramer and stated that the appraisal date was date no such appraisal was attached to rance and larhea’s return or made a part of the record the donee acknowledgment part iv on form_8283 for was signed by valerie cornelius director of operations for ccf next to the typed date date attached to rance and larhea’s return was a letter dated date thanking them for their charitable donation on date and stating that no goods or services were provided for this donation likewise rance and larhea attached section b of form_8283 to their return and reported the donated property as units beneco stock jireh ltd with an appraised fair_market_value of dollar_figure mr kramer made the handwritten notation on part iii declaration of appraiser of rance and larhea’ sec_2001 form_8283 see attached report frank e koehl jr the form_8283 was not signed by frank e koehl jr mr koehl also attached to rance and larhea’ sec_2001 return was a one-page letter dated date from mr koehl to rance referring to an dollar_figure-per-share valuation of beneco as of date no such appraisal was attached to rance and larhea’ sec_2001 return the donee acknowledgment part iv on form_8283 for was signed by valerie cornelius and the title president and the date were typed next to her name the typewritten title president and the date were both crossed out and the title treasurer and the date were handwritten no letter of acknowledgment gratitude or statement that no goods or services were received was attached to the return also attached to rance and larhea’ sec_2001 return were two documents each captioned assignment of limited interest in jireh limited_partnership with consent attached one signed by rance and the other by larhea each assignment described the assignment to ccf of an flp interest valued at dollar_figure and included ccf’s acknowledgment by its president john c mulder who signed in that capacity from through zane and shannon assigned interests in mustard seed to ccf and claimed corresponding noncash charitable_contribution deductions on their personal income_tax returns as follows percent assigned per tax_return date claimed contribution dollar_figure dollar_figure unknown big_number big_number zane and shannon requested that ccf direct any contributed interests in mustard seed to zacchaeus for the period to during the years through zane and shannon did not transfer any beneco stock to ccf form_8283 attached to zane and shannon’s return did not include section b the portion of the form designated for gifts over dollar_figure no appraisal or reference to a specific appraisal was mentioned in or attached to zane and shannon’s tax_return an assignment and agreement was attached to their return signed by zane and shannon and a representative of ccf assigning and acknowledging a transfer of an flp interest with a stated_value of dollar_figure as of date the return did not have any reference to whether zane and shannon received goods or services in connection with their contribution during zane and shannon assigned an economic_interest in that percentage of their limited_partnership_interest in the mustard seed which has a value of dollar_figure as of date including all interest in the capital of the partnership but specifically excluding any right to exercise any vote form_8283 attached to zane and shannon’ sec_2001 return contains the statement that the donated property was units of beneco stock the mustard seed lp with an appraised fair_market_value of dollar_figure section b part iii declaration of appraiser on zane and shannon’s form_8283 attached to their return contained the handwritten notation see ltr attached frank e koehl jr on the line to be used for the signature of the appraiser the declaration of appraiser and donee acknowledgment appeared to be signed by mr koehl and valerie cornelius for ccf the typewritten date of appraisal in part iii was mr kramer made the handwritten notation see ltr attached frank e koehl jr also attached to zane and shannon’ sec_2001 return was a one-page date letter from mr koehl to rance referring to an dollar_figure-per-share valuation for beneco as of date also attached to zane and shannon’ sec_2001 return was an acknowledgment from ccf of its receipt of the limited_partnership_interest advising that no goods or services were provided for this donation finally there was attached an assignment of an flp interest in mustard seed along with a signed consent from ccf by its president from through rhett and alice assigned interests in zerubbabel to ccf and claimed corresponding noncash charitable_contribution deductions on their personal income_tax returns as follows date percent assigned per tax_return claimed contribution dollar_figure dollar_figure unknown big_number big_number although rhett and alice’s form_8283 for contained the statement that an interest of percent had been contributed to ccf the actual percentage contributed was dollar_figure percent pursuant to rhett and alice’s request ccf directed their assigned interests in their flp zerubbabel to zacchaeus rhett and alice did not donate beneco stock to ccf during the years through rhett and alice attached form_8283 to their return and in section b part i information on donated property described the donated property as units interest zerubbabel ltd stating that it had an appraised fair_market_value of dollar_figure the declaration of appraiser was signed by mr kramer and contains the statement that the appraisal date was date no appraisal was attached to rhett and alice’s return and no appraisal dated date was provided to respondent or the court no signature appeared in the donee acknowledgment portion part iv of the first section b attached to the return a second section b was also attached to the return bearing the donee acknowledgment signature of valerie cornelius on behalf of ccf also attached to the return was an acknowledgment of the contribution from ccf dated date which included the statement no goods and services were provided for this donation rhett and alice attached two forms section b to their return and in each described the donated property as units beneco stock zerrubbable ltd with a stated_value of dollar_figure the signature line of the declaration of appraiser was blank on one of the forms the other had the handwritten notation see attached report frank e koehl jr with a typewritten address in princeton new jersey and a typewritten appraisal date of date mr kramer made the handwritten notation see attached report frank e koehl jr no appraisal report was attached to the return attached to the return was a letter dated date from mr koehl stating that the value of beneco stock as of date was dollar_figure per share no detail or explanation as to how the valuation was done was attached to the return also attached to the return was an assignment of a portion of their flp by rhett and by alice along with consents and acknowledgment by the president of ccf signed and dated in late date rhett and alice assigned an interest in zerubbabel to crossmen ministries in and claimed a dollar_figure charitable deduction for that contribution crossmen ministries was a texas nonprofit corporation that petitioners organized during larhea rance and rhett were the officers of crossmen ministries during crossmen ministries was affiliated with world bible way fellowship inc world bible way during world bible way was a sec_501 tax-exempt_entity which held a group_exemption_letter permitting subordinate entities not listed as tax exempt to qualify for tax-exempt status because of their affiliation with world bible way rhett and alice did not donate beneco stock to world bible way or crossmen ministries during the years at issue rhett and alice attached section b of form_8283 to their return it described the donated property as of flp beneco stk with an appraised fair_market_value of dollar_figure that form_8283 contained no declaration of appraiser and no appraisal is attached the name and address of the charitable donee was typewritten in section b part iv donee acknowledgment but no signature appeared thereon also attached to rhett and alice’ sec_2002 return was a document titled assignment of limited interest in zerubbabel limited_partnership with consent attached wherein alice as a limited_partner of zerubbabel assigned an interest in the flp to crossmen ministries that typewritten document reflected in two separate locations the value of the interest to be dollar_figure as of date however both the dollar_figure values were crossed out by hand and dollar_figure was handwritten in its place along with three sets of initials the document reflected that alice signed the document on date and crossmen ministries accepted the assignment to be effective as of date mr kramer served as petitioners’ c p a for the period through he prepared individual income_tax returns corporate returns partnership returns payroll tax returns annual reports personal_property_tax returns and other documents for petitioners and their related entities mr kramer at the times he was responsible for the preparation of petitioners’ tax returns was aware of sec_170 and the reporting requirements for noncash charitable_contributions during the years at issue he was also aware that the noncash charitable_contribution regulations required that taxpayers use an appraiser who represented that he was in the business of conducting appraisals for the general_public mr kramer was not a certified appraiser in addition to preparing petitioners’ returns mr kramer for purposes of a tax_year noncash charitable_contribution performed a date valuation of beneco mr kramer’s valuation did not state that it was prepared for income_tax purposes or provide the date of any contributions to the charitable donee mr kramer’s estimated fair_market_value of a 100-percent interest of beneco stock was dollar_figure as of date in valuing petitioners’ flps mr kramer simply chose to value the beneco stock because it was the flps’ only asset and the valuations of the flps depended in great part on the valuation of the beneco stock the valuation of the beneco stock was used for the charitable_contribution deductions of flp interests claimed for the through tax years the methodology mr kramer used to value the flp interests petitioners contributed was to obtain an appraised value of the beneco stock and then to discount that value for minority interest and lack of marketability factors no separate discount was used with respect to the flp interests contributed to the charitable_organization mr kramer valued the beneco stock and did not separately assess the value of the partnership units after his valuation sometime around mr kramer advised petitioners to hire a certified appraiser on date rance as president of beneco retained management planning inc mpi to prepare economic and financial analyses and evaluations of beneco and three limited_partnerships jireh mustard seed and zerubbabel for a fee of dollar_figure mr koehl of mpi transmitted by a letter dated date an evaluation of the common_stock of beneco inc as of date concluding that the aggregate freely traded equity_capital of beneco had a value of dollar_figure mr koehl opined that the average lack of marketability discount for private placements of nonpublicly traded stocks wa sec_27 percent and he decided to use a lack of marketability discount of percent because he was valuing a controlling_interest mr koehl concluded that the outstanding common_stock of beneco had a fair_market_value of dollar_figure million or dollar_figure per share based on big_number shares issued and outstanding as of date on a going-concern controlling-interest basis mr koehl and mpi did not prepare a separate valuation of petitioners’ limited_partnerships jireh mustard seed or zerubbabel mr koehl’s valuation of beneco contained the statement that it was prepared for management information income_tax reporting and other corporate purposes mr koehl’s valuation did not contain a date for any contributions of an flp interest to any particular donee and it did not contain a separate valuation of each flp the valuations by mr kramer and mr koehl were the only valuations referenced in petitioners’ returns rance’s schedule f activity rance began his cutting horse activity with a few horses in during the years at issue rance maintained several horses in his cutting horse activity for the taxable years through rance reported the following total income expenses and net losses year income expenses net losses -0- -0- -0- dollar_figure big_number big_number big_number big_number total big_number dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number the expenses were generally attributable to depreciation animal and land maintenance mortgage interest and training other than the schedules f profit or loss from farming which were part of the tax returns and banking records rance did not maintain books_and_records of his horse cutting activity rance rides his own horses at horse futurities shows and he first rode horses when he was a child and continued to ride when he attended college he became involved in the cutting horse activity in the 1980s and discontinued the activity during because it was expensive competitive and risky and he had a champion mare that had achieved success by winning the pacific coast derby during rance and larhea purchased approximately to acres of land in oregon in date they began construction of a house an office a barn fences and stalls the property was to be for their personal_residence and activities as well as for conducting part of their beneco business construction was completed in date after which rance and larhea moved to the oregon property the barn had four horse stalls a tack room a feed room and storage for hay and related farm equipment during rance purchased p k a driving horse which pulled carts and wagons and which rance rode also during rance purchased leo a western pleasure mule which he rode around the oregon property to check fences and tend the property p k was sold sometime during or rance also purchased popcorn a royal dartmoor pony mare that was in foal popcorn was a hunter jumper and she was sold along with her foal sometime in or rance again became involved in cutting horse activity because he could afford horses with better pedigrees he purchased a 4-year-old dual docs dual docs in for dollar_figure and placed him in training in medford with bobby and jolene nelson semen was collected from dual docs and he was used for live breeding resulting in revenue of several thousand dollars dual docs was entered in competitions and then sold in for dollar_figure rance sometime in or acquired cutting horse reining mares named mitzi and i gotta lotta he then determined that they could not be entered into competitions and he allowed high school girls to ride them in 4-h club activities and other events i gotta lotta was sold in for dollar_figure and mitzi was sold in for dollar_figure for reported gains of dollar_figure and dollar_figure respectively zane’s dog breeding showing and judging activity zane first became interested in showing dogs after his parents bought him his first staffordshire bull terrier and took him to a dog show at age during grade school and high school zane owned and learned to show staffordshire bull terriers by or when zane had substantial experience and had developed a reputation he began contemplating conducting the dog breeding activity on a much more serious level during the years at issue he was considered a worldwide expert in and primarily focused on staffordshire bull terriers and american staffordshire terriers zane became a championship show judge in at age the youngest in recent history and has judged in shows all over the world zane has not won more than nominal amounts showing dogs and he did not earn any income from judging during the years at issue zane did not have a written business plan for his dog breeding activity he did not keep a separate checking account for his dog breeding activity when he wrote a check he noted the purpose of the expense at the end of the year zane summarized the expenses for his c p a for purposes of preparing his returns zane spent approximately to hours each week on the dog breeding activity and was showing one or two dogs regularly and three or four dogs less often zane had two staffordshire bull terriers living with him in new york from through and his other dogs lived with professional handlers in addition zane coowned some dogs that lived with his coowners zane had no income from the dog breeding activity in any of the years and zane’s schedule c profit or loss from business reflected no income and dollar_figure in expenses zane’s schedules f attached to his other returns were entitled cattle crops--dog breeding and for included the term organic dairy milk some of them reflected income but the source was not specified the following table shows the losses zane claimed for the dog breeding activity for the years through tax_year total income total expenses total losses dollar_figure -- big_number -- big_number -- big_number -- big_number -- big_number -- dollar_figure big_number -- big_number total big_number dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number most of the expenditures were for travel advertising and show expenses for example in of the dollar_figure of total expenses claimed dollar_figure was for show expenses dollar_figure for travel and dollar_figure for advertising accordingly dollar_figure of the dollar_figure almost percent was for shows travel and advertising most of the expenses were associated with showing dogs and judging dog shows according to a date report from synbiotics zane had semen straws stored from the dog malcolm synbiotics calculated that inseminations could be accomplished from the straws zane’s cow and dairy farm activity zane had an interest in cattle as a boy and in date he purchased a 400-acre property in earlville new york known as goose hill farm zane had an interest in genetics and animal husbandry beginning with the staffordshire bull terriers when he was a boy zane developed an interest in normande cows and he believed that they are good milking cows and grazing animals he built his personal_residence at goose hill farm with the intent to raise cows in zane also purchased the columbus dairy consisting of acres and located miles from goose hill farm a milking parlor and dairy operation were built at the columbus dairy and calves were raised on the goose hill farm property after purchasing the columbus dairy zane worked to reclaim the pasture land for grazing he studied and researched the various types of cattle that could be bred zane recognized that family dairy farms were not doing well and he decided that to be profitable his cattle activity had to find a niche in the market that would let it compete as to product and price after much research he decided to raise normande cattle the columbus dairy became an organic dairy farm at the columbus dairy zane built a milking parlor and other buildings for the milking operation milking started sometime in normande cows are good producers of milk in france but are largely used for beef consumption in the united_states after visiting many farmers and ranchers throughout the united_states zane acquired a herd of normande cows that he believed would be the best milk producers he intended to further breed the acquired herd so his activity could become competitive in the dairy farming industry zane had a 7-year business plan involving the importation of bull semen from france as he could not import normande cows to breed with his cows to produce offspring that he believed could produce a higher quantity and better quality of milk at the same time zane was working to convert his land from a conventional to a certified organic farm zane believed that if his farm could be certified as organic he would be able to sell the milk at a price three times that of conventional milk by the time of trial zane’s animal breeding was progressing and he hoped he could focus more on the cow activity and less on the dog breeding the farm was certified organic in his gross revenues exceeded dollar_figure for and zane expects the revenue to triple in because of the organic certification in operating this activity zane has consulted with experts done marketing maintained separate checking account records and has focused on ways to maximize revenue during date zane purchased normande cows from keith miller of stuart iowa beginning in date david hughes mr hughes had become zane’s part-time farm manager in exchange for a place to live at the columbus dairy beginning in date mr hughes became zane’s full-time_employee zane paid mr hughes approximately dollar_figure to dollar_figure in cash wages and also provided him a double-wide trailer to live in and allowed him personal_use of a pickup truck mr hughes performed the farm labor and zane was the decision maker for the activity zane decided to graze his cattle rather than confine them because he believed that grazing positively affected the longevity of the cattle he also leased an additional acres of a farm adjacent to columbus dairy for the purpose of grazing cows all milk cows were grazed at the columbus dairy property and on the adjacent leased land automatic milking equipment was placed_in_service in date and milking operations commenced during zane began reporting the cattle activity and deducting expenses in his tax_year zane kept a separate bank account for the columbus dairy penalties--reliance through the tax_year mr kramer prepared rance and larhea’s tax returns mr kramer understood that one of the purposes of the oregon property was to raise and breed horses he believed that rance and larhea purchased the oregon property on account of their concerns about y2k and their desire to have a self-sustaining facility mr kramer told rance and larhea from the beginning of their schedule f activity that they needed to show revenues in order to avoid hobby loss classification the only revenue mr kramer was aware of was the sale of one horse in the second or third year mr kramer advised rance to combine his oregon schedule f activity with zane’s new york schedule f activity to keep them from being classified as hobbies rance and zane did not follow mr kramer’s advice on forming a joint_venture mr kramer did not know how zane used his property mr kramer did not ask for or see any of zane’s underlying financial records in connection with his schedule f activity mr kramer included on the returns all the expenses petitioners listed for him mr kramer knew the dog breeding business was expensive and that it was speculative with a very small percentage of success mr kramer knew that it was very difficult to earn money in the dog breeding business mr kramer did not question the travel expense claimed on zane’s schedule f because he knew that zane traveled overseas as well as around the country mr kramer knew that expenses_incurred at the westminster dog show were extensive mr kramer understood that zane had a cattle breeding activity separate from the dairy operation burden_of_proof opinion petitioners for the first time on brief raise the issue of whether the burden_of_proof shifted to respondent under sec_7491 under that section the burden_of_proof may shift to the commissioner with respect to a factual issue affecting the taxpayer’s liability for tax where the taxpayer introduces credible_evidence with respect to such a factual issue and meets certain substantiation requirements set forth in sec_7491 and b respondent contends that petitioners’ argument as to the burden_of_proof was untimely raised and that even if it had been timely it is petitioners’ burden to show that they have met the requirements of sec_7491 which they have not done we agree with respondent that petitioners’ attempt to raise sec_7491 for the first time in their posttrial brief is untimely under sec_7491 petitioners must for example show that they cooperated during the audit and that they met substantiation requirements petitioners’ attempt on brief to show that they met the requirements by the simple expediency of stating that respondent did not question the substantiation or that they cooperated will not suffice petitioners by raising those allegations on brief do not afford respondent the opportunity to test the allegations by cross-examination or by producing evidence to show otherwise therefore we hold that petitioners’ attempt to shift the burden under sec_7491 causes prejudice and is untimely see eg deihl v commissioner tcmemo_2005_287 accordingly petitioners continue to bear the burden_of_proof with respect to the noncash charitable_contribution issue and the question of whether they carried on various activities for profit within the meaning of sec_183 respondent does bear the burden of production with respect to the sec_6662 penalty see sec_7491 that burden is to come forward with sufficient evidence regarding the appropriateness of applying a particular addition_to_tax or penalty against the taxpayer sec_7491 127_tc_200 116_tc_438 noncash charitable_contributions petitioners are members of the same family comprising a father rance and two sons rhett and zane and their respective spouses together they owned and operated beneco a corporation that provides business services in connection with qualified retirement and health and welfare plans rance and his wife owned slightly over percent of beneco and rhett and zane along with their wives each owned one-half of the remaining minority interest petitioners claimed noncash charitable_contributions of flp interests the flps were created and in any event petitioners have not shown compliance with the substantiation requirements of sec_7491 so as to warrant a shift in the burden_of_proof as to any of the factual issues relevant to their liability for tax designed to hold interests in beneco which were to be contributed to the flps by petitioners the issues concerning these contributions are whether petitioners complied with the reporting requisites of sec_170 and underlying regulations so as to be entitled to the charitable_contribution deductions if we find that petitioners complied with those requisites we will go on to consider the values of the interests contributed in order to decide the amounts of any allowable charitable_contribution deductions sec_170 provides there shall be allowed as a deduction any charitable_contribution payment of which is made within the taxable_year a charitable_contribution shall be allowable as a deduction only if verified under regulations prescribed by the secretary if the contribution consists of property other than cash the value of the contribution is generally the fair_market_value of the donated property at the time of contribution sec_1 170a- c income_tax regs respondent argues that petitioners are not entitled to the noncash charitable_contribution deductions claimed because they failed to comply with the reporting requirements of sec_170 and the underlying regulations petitioners acknowledge that they failed to fully comply with some of the requirements for noncash charitable_contribution deductions petitioners argue however that they are nevertheless entitled to the deductions for the noncash charitable_contributions because they substantially complied that the information provided is sufficient to meet the requirements and because they had reasonable_cause for any failure to fully comply a charitable_contribution is allowable as a deduction only if verified under regulations prescribed by the secretary sec_170 109_tc_258 affd without published opinion 166_f3d_332 4th cir the obligation to substantiate charitable_contribution deductions is clear and unambiguous blair v commissioner tcmemo_1988_581 no deduction is allowed for a contribution in excess of dollar_figure unless the taxpayer meets the substantiation requirements of sec_1_170a-13 income_tax regs 118_tc_334 sec_1 170a- c i income_tax regs sec_1_170a-13 income_tax regs generally provides that a taxpayer must comply with the following three requirements a obtain a qualified_appraisal as defined in paragraph c of this section for such property contributed if the contributed_property is a partial interest the appraisal shall be of the partial interest b attach a fully completed appraisal_summary as defined in paragraph c of this section to the tax_return or in the case of a donor that is a partnership or s_corporation the information_return on which the deduction for the contribution is first claimed or reported by the donor c maintain records containing the information required by paragraph b ii of this section additionally for contributions of dollar_figure or more a taxpayer must obtain a contemporaneous written acknowledgment from the donee organization sec_170 the acknowledgment must be obtained by the earlier of the date the return is filed or its due_date sec_170 the acknowledgment must include the amount of cash and a description of any property other than cash along with certain information about any goods or services provided by the donee sec_170 the purpose of these provisions has been described as providing the commissioner with sufficient return_information to effectively monitor the possibility of overvaluations of charitable_contributions hewitt v commissioner supra pincite sec_1_170a-13 and ii income_tax regs contains the specific requirements that a qualified_appraisal must be made not earlier than days before the date of the contribution nor later than the due_date of the return including extensions on which a deduction is first claimed or reported be prepared signed and dated by a qualified_appraiser contain the name address identifying number and qualifications of the qualified_appraiser contain a statement that it was prepared for income_tax purposes contain a description of the property in sufficient detail for a person who is not generally familiar with the type of property to ascertain that the property that was appraised is the property that was contributed include the terms of any agreement of understanding entered into or expected to be entered into by or on behalf of the donor or donee that relates to the use sale_or_other_disposition of the property including an agreement that restricts temporarily or permanently a donee’s right to dispose_of the property show the date on which the property was contributed show the fair_market_value of the property on the date of contribution show the method of valuation and the specific bases for the valuation and show the date on which the appraisal was made the secretary promulgated the above-referenced regulations in response to the deficit_reduction_act_of_1984 defra publaw_98_369 sec a 98_stat_691 defra section instructs the secretary to provide heightened substantiation reporting requirements for certain noncash charitable_contributions defra section provides appraisal_summary --for purposes of this subsection the appraisal_summary shall be in such form and include such information as the secretary prescribes by regulations such summary shall be signed by the qualified_appraiser preparing the qualified_appraisal and shall contain the tin of such appraiser such summary shall be acknowledged by the donee of the property appraised in such manner as the secretary prescribes in such regulations qualified_appraisal --the term qualified_appraisal means an appraisal prepared by a qualified_appraiser which includes- a a description of the property appraised b the fair_market_value of such property on the date of contribution and the specific basis for the valuation c a statement that such appraisal was prepared for income_tax purposes d the qualifications of the qualified_appraiser e the signature and tin of such appraiser and f such additional information as the secretary prescribes in such regulations see 100_tc_32 in bond this court considered whether certain aspects of the above- referenced regulations were mandatory or directory and whether the taxpayer in that case had substantially complied so as to be entitled to a charitable_contribution_deduction in reaching the conclusion that the requirements were directory the court expressed the following rationale under the above test we must examine sec_170 to determine whether the requirements of the regulations are mandatory or directory with respect to its statutory purpose at the outset it is apparent that the essence of sec_170 is to allow certain taxpayers a charitable deduction for contributions made to certain organizations it is equally apparent that the reporting requirements of sec_1_170a-13 income_tax regs are helpful to respondent in the processing and auditing of returns on which charitable deductions are claimed however the reporting requirements do not relate to the substance or essence of whether or not a charitable_contribution was actually made we conclude therefore that the reporting requirements are directory and not mandatory id pincite citation omitted bond involved the contribution of two blimps to a qualified charity the parties agreed upon the value the fact that the appraiser was qualified and all other regulatory requirements except whether the taxpayers’ failure to obtain and attach to their return a separate written appraisal containing the information specified in the regulations would result in the disallowance of a charitable_contribution_deduction the court noted that substantially_all of the information specified in the regulations had been provided except the qualifications of the appraiser on the form_8283 attached to the return the court concluded that the taxpayers in bond had substantially complied and that disallowance of the deduction under those circumstances would be too harsh a sanction essentially that the purposes of the statute had been substantially achieved subsequently in 109_tc_258 the court again considered these regulations in a situation where taxpayers donated to a charitable_organization their shares of stock of a corporation that was not publicly traded they claimed deductions in amounts that the parties agreed represented the fair_market_value of the stock however the taxpayers did not obtain qualified appraisals before filing their returns for the years at issue the values or deductions claimed were not based upon appraisals instead they were based upon average per-share prices of the stock traded in arm’s-length transactions at approximately the same time as the gifts even though the values were undisputed the court found that the taxpayers had not complied with sec_170 and sec_1 170a- income_tax regs and that they were not entitled to deduct any amount in excess of the amount allowed by the government which was their basis in hewitt the government disallowed the value of the stock in excess of basis because of the lack of qualified appraisals the government agreed that the taxpayers made charitable_contributions that the donee was charitable and that the claimed values represented fair market values of the contributions the taxpayers in hewitt maintained that they should be allowed the deductions because the value used was the average price per share as traded in bona_fide arm's-length transactions relying on the holding in bond v commissioner supra the taxpayers in hewitt contended that they had substantially complied with the requirements of sec_1 170a- income_tax regs and that they were relieved of any obligation to obtain a qualified_appraisal hewitt v commissioner supra pincite unlike the taxpayers in bond the taxpayers in hewitt did not provide information on the form_8283 that satisfied most of the requirements of the regulation in holding that the taxpayers were not entitled to a deduction in excess of their basis for the full fair_market_value the court provided the following rationale petitioners herein furnished practically none of the information required by either the statute or the regulations given the statutory language and the thrust of the concerns about the need of respondent to be provided with appropriate information in order to alert respondent to potential overvaluations petitioners simply do not fall within the permissible boundaries of bond v commissioner supra where an appraisal_summary which was completed by a qualified_appraiser contained most of the required information and could therefore be treated as a written appraisal was attached to the return cf d’arcangelo v commissioner tcmemo_1994_572 respondent prevailed where no qualified_appraisal was obtained moreover it is clear that the principal objective of defra section was to provide a mechanism whereby respondent would obtain sufficient return_information in support of the claimed valuation of charitable_contributions of property to enable respondent to deal more effectively with the prevalent use of overvaluations see s comm on finance deficit_reduction_act_of_1984 explanation of provisions approved by the committee on date s prt vol pincite s comm print staff of joint comm on taxation general explanation of the revenue provisions of the deficit_reduction_act_of_1984 j comm print cf 85_tc_1075 affd 812_f2d_158 4th cir such need exists even though in a particular case such as this it turns out that the taxpayer’s deduction was in fact based on the fair_market_value of the property this happenstance is insufficient to constitute substantial compliance with a statutory condition to obtaining the claimed deduction as we see it what petitioners are seeking is not the application of the substantial compliance principle but an exemption from the clear requirement of the statute and regulations in a situation where there is no overvaluation of the charitable_contribution we are not prepared to follow that path to decision hewitt v commissioner supra pincite petitioners also rely on 100_tc_32 in particular they contend that in bond this court determined that the substantiation rules of defra section and the treasury regulations thereunder are directory rather than mandatory as such the tax_court does not require that taxpayers fully and absolutely comply with the substantiation requirements of the regulations in order to qualify for a charitable_contribution_deduction in bond the tax_court used a substantial compliance analysis to determine that a taxpayer who failed to meet the substantiation requirements of defra section and the regulations nevertheless was entitled to a charitable deduction for a non-cash contribution petitioners go on to attempt to equate the concept of substantial compliance with the concept of reasonable_cause petitioners contend that although not specifically mentioning reasonable_cause the decision of the tax_court in bond is a clear reflection of the principal that exceptions exist to the heightened substantiation reporting requirements such as substantial compliance and reasonable_cause we note that for charitable_contributions made after date congress in the american_jobs_creation_act_of_2004 ajca publaw_108_357 118_stat_1631 which added sec_170 specifically codified the substantiation requirements and also provided an exception where there is reasonable_cause for failure to comply with the substantiation requirements for noncash charitable_contributions petitioners contend that the reasonable_cause exception in ajca was a codification of preexisting law respondent contends that the reasonable_cause exception was not the law before the enactment we agree with respondent petitioners rely in great part on the legislative_history surrounding the enactment of defra section which in effect directed the secretary to promulgate the qualified_appraisal regulations it appears that a reasonable_cause exception was considered by congress but no such exception was included in defra and none appeared in the regulations issued pursuant to the regulatory mandate of defra section we find no sound basis for accepting petitioners’ contention that a reasonable_cause exception existed before the enactment of that exception because the charitable_contribution deductions we consider are for years before and unaffected by ajca we are left to decide whether petitioners substantially complied like the taxpayers in bond v commissioner supra or whether the information included on and with their income_tax returns was insufficient to meet the statutory and regulatory requirements like that of the taxpayers in 109_tc_258 petitioners during consulted with attorney kelley concerning income and estate_tax planning attorney kelley directed and assisted petitioners in setting up an flp for each couple each couple also established a corporation to be the general_partner of their flp and the individuals were made the limited partners of their respective partnerships the general_partner the controlled_corporation of each couple had operating authority over each flp a limited partner’s interest could not be transferred without permission of all other partners in the flp each couple contributed their beneco stock along with other assets to their flp in attorney kelley assisted petitioners with their donations of interests in their limited_partnerships to ccf ccf anticipated that petitioners would make gifts of interests in the flps in and in future years it was understood that the transferred flp interests would be reacquired from ccf or other charitable donee and irrevocable life_insurance trusts were created that would be used to fund the reacquisition of the contributed interest upon each donor’s death at the time of the contributions of the flp interests ccf and later crossmen ministries received flp interests that could not be transferred without petitioners’ and their wholly owned corporate general partners’ consent therefore the interests could not be converted to cash or other_property that could be used to fund charitable activities without petitioners’ agreement by the end of the sole asset in each flp was beneco stock beneco did not pay any dividends before and no dividends were paid thereafter and through the years in issue the decision for beneco to pay dividends appeared to rest solely with petitioners therefore the donee-charity would likely be relegated to waiting until the deaths of petitioners before receiving cash or property that could be used to fund charitable activity zane and shannon’s contribution and rhett and alice’s contribution consisted solely of economic interests in their respective flps it is not clear what status or role ccf played in the respective flps no express distinction was made between limited partners and any charitable donees who held interests in the flps the contributions were ascribed values in round dollar amounts eg dollar_figure that were converted to percentages in each flp on the basis of the beneco stock values petitioners used to establish the amounts of the deductions as described below the forms attached to the returns were prepared in an inattentive and incomplete manner initially we note that valuations petitioners relied on were based on valuations of the beneco stock from which the valuations of the contributed interests in the family limited_partnerships were derived although the values of the flp interests were substantially dependent upon the values of the beneco stock the noncash charitable_contribution in each instance was an interest in an flp mr koehl was asked to appraise both the beneco stock and the flp interests the record however does not contain a separate appraisal report for the flp interests mr koehl prepared a valuation of the beneco stock as of date but it was not attached to any of petitioners’ or returns in connection with their claimed charitable_contributions of flp interests although petitioners obtained two separate appraisals respondent contends that neither is a qualified_appraisal within the meaning of sec_1_170a-13 income_tax regs the first appraisal was of the beneco stock and was performed by petitioners’ c p a mr kramer although mr kramer is a c p a it has not been shown that he had appraisal expertise his report dated date stated a dollar_figure value for a 100-percent interest in beneco stock as of date mr kramer’s valuation report is terse and provides only limited details of the analysis and underpinnings for his value conclusion on petitioners’ forms for the declaration of appraiser was signed by mr kramer and references were made to a date appraisal petitioners did not produce a date appraisal report and no such appraisal report was attached to their returns the second appraisal was performed mr koehl of management planning inc a company in the valuation business mr koehl determined that the aggregate enterprise value of beneco on a controlling_interest basis was dollar_figure million as of date mr koehl did not prepare a separate analysis or valuation of the partnership interests his report appears to have been completed after the due_date for filing petitioners’ returns forms for referred to mr koehl’s valuation and rhett and alice’ sec_2002 contribution was apparently based upon that same appraisal report by mr koehl some of the returns had a one-page letter from mr koehl that fell far short of meeting the statutory and regulatory requirements for an appraisal_summary other returns had no letter summary or appraisal report attached at trial petitioners’ expert scott springer valued the partnership interests as of the dates of the contributions this report however was prepared for purposes of trial and did not purport to be a qualified_appraisal within the meaning of the regulations under consideration accordingly the appraisals petitioners relied on for claiming deductions were not made for the period beginning days before any of the contributions and ending on the due dates of the corresponding returns see sec_1_170a-13 income_tax regs additionally the report by mr kramer did not specifically state that it was prepared for income_tax purposes see sec_1_170a-13 income_tax regs the appraisal reports did not contain the dates or expected dates of the contributions of the interests in the flps to the donee or the values on these dates see sec_1_170a-13 i income_tax regs respondent referencing sec_1 170a- c ii d income_tax regs also notes that the restrictions on the donee’s right to use or dispose_of the donated property as set forth in the partnership agreements and purchase and sale agreements were not disclosed the forms and the documents attached to petitioners’ returns failed to comply with the sec_1_170a-13 income_tax regs requirements that an appraisal_summary be signed and dated by a qualified_appraiser who prepared the qualified_appraisal and include the information specified in sec_1_170a-13 income_tax regs that regulation section requires that the summary contain inter alia a description of the property in sufficient detail for a person who is not generally familiar with the type of property to ascertain that the property that was appraised is the property that was contributed the manner of acquisition and the date_of_acquisition the cost or other basis of the property and the name address and identifying number of the qualified_appraiser who signs the appraisal_summary section b of form_8283 is the form designed for the appraisal_summary the forms attached to the returns were in many respects either improperly or incompletely prepared zane and shannon did not attach a schedule b to the form_8283 that was attached to their income_tax return instead they completed section a which is expressly intended to be used for noncash charitable_contributions worth dollar_figure or less as a result their return contained no declaration by appraiser and no acknowledgment of the donee on the forms attached to rance and larhea’s and rhett and alice’s returns mr kramer signed the declaration of appraiser and referred to an appraisal dated date that was not attached to the returns or shown to have existed rance and larhea’s return reflected that an interest of percent of the partnership with a value of dollar_figure was contributed to ccf the parties have now agreed and stipulated that lance and larhea contributed a 22-percent interest with a total value of dollar_figure rhett and alice’s return reflected that an interest of percent of the partnership with a value of dollar_figure was contributed to ccf the parties have now agreed and stipulated that rhett and alice contributed a 57-percent interest with a total value of dollar_figure each couple claimed a charitable_contribution_deduction for in each instance the declaration of appraiser attached to the return referred to the letter dated date from mr koehl to rance wherein he opined that the value of beneco as of date was dollar_figure million mr koehl did not sign the declaration instead mr kramer wrote mr koehl’s name in the signature area designated for the qualified_appraiser mr koehl’s letter stating an dollar_figure million value was attached to some of the returns but it was terse and fell far short of meeting the summary appraisal requirements for rhett and alice’s return contained the description of the donated property as of flp beneco stk the declaration of appraiser in section b of form_8283 was left blank and the donee acknowledgment portion was unsigned the donee acknowledgment stated that the donee was ccf however the assignment document attached to the return indicated that the donee was crossmen ministries typed on the assignment was dollar_figure as the amount of the contribution that amount however was crossed out and dollar_figure was handwritten below it only the assignment for alice was attached to the return although rhett had apparently signed a similar document under these circumstances we consider whether petitioners’ compliance was substantial or whether they failed to meet the statutorily mandated regulatory requirements 100_tc_32 and 109_tc_258 considered together provide a standard by which we can consider whether petitioners provided sufficient information to permit respondent to evaluate their reported contributions as intended by congress if they provided sufficient information their substantial compliance would adequately serve the purposes intended by congress we hold that petitioners did not provide sufficient information and or submit the documents required to have substantially complied and they are therefore not entitled to deductions for noncash charitable_contributions of flp interests as determined by respondent petitioners in each year under consideration did not attach to their returns qualified summary appraisal reports as required by the statute and the regulations in addition it has not been shown that petitioners’ c p a was a qualified_appraiser within the meaning of the regulatory requirements moreover certain of the reports that were referenced on the returns were not shown to exist and none of the purported reports or documentation submitted met the time requirements for their preparation and submission the contributed_property interests were not fully or adequately described so as to permit respondent to understand the valuation methodology and the documentation submitted was terse and did not adequately explain the bases for the values claimed our review of the materials and information that petitioners submitted to respondent with their returns reveals that important information that would have enabled respondent to understand and monitor the claimed contributions was not supplied congress mandated the reporting information so that the internal_revenue_service irs could monitor and address congressional concerns about overvaluation and other aspects of claimed charitable_contribution deductions the submission of the information is prerequisite to petitioners’ entitlement to a charitable_contribution_deduction petitioners’ failure to substantially comply or otherwise provide respondent with sufficient information to accomplish the statutory purpose compels our conclusion that respondent properly disallowed petitioners’ claimed noncash charitable_contribution deductions sec_183 activities rance and zane each claimed losses that respondent disallowed as being from activities not engaged in for profit within the meaning of sec_183 if an individual engages in an activity but does not engage in that activity for profit no deduction attributable to such activity shall be allowed under this chapter except as provided in sec_183 sec_183 sec_183 permits deductions which are otherwise our holding that petitioners are not entitled to the noncash charitable_contribution_deduction renders it unnecessary to decide the value of the contributed interests allowable without regard to whether the activity is engaged in for profit and sec_183 permits deductions which would be allowable if such activity were engaged in for profit but only to the extent the gross_income derived from the activity exceeds the deductions allowable by reason of sec_183 sec_183 defines an activity_not_engaged_in_for_profit as any activity other than one with respect to which deductions are allowable for the taxable_year under sec_162 or under paragraph or of sec_212 in order for a deduction to be allowed under sec_162 or sec_212 or the taxpayer must establish that he engaged in the activity with ‘the predominant primary or principal objective’ of realizing an economic profit independent of tax savings giles v commissioner tcmemo_2006_15 quoting 4_f3d_709 9th cir affg t c memo see 88_tc_1086 affd sub nom 864_f2d_93 9th cir although a reasonable expectation of profit is not required the facts and circumstances must indicate that the taxpayer entered into the activity or continued the activity with the actual and honest objective of making a profit 94_tc_41 78_tc_642 affd without published opinion 702_f2d_1205 d c cir sec_1_183-2 income_tax regs in making this determination more weight is accorded to objective facts than to the taxpayer’s statement of intent 72_tc_659 factors to be considered in determining whether an activity is engaged in for profit include the manner in which the taxpayer carries on the activity the expertise of the taxpayer or his advisers the time and effort expended by the taxpayer in carrying on the activity the expectation that assets used in the activity may appreciate in value the success of the taxpayer in carrying on other similar or dissimilar activities the taxpayer’s history of income or losses with respect to the activity the amount of occasional profits if any which are earned the financial status of the taxpayer and the elements of personal pleasure or recreation all facts and circumstances are to be taken into account and no single factor or group of factors is determinative 781_f2d_724 9th cir affg lahr v commissioner tcmemo_1984_472 72_tc_411 affd without published opinion 647_f2d_170 9th cir sec_1_183-2 income_tax regs we consider each of rance’s and zane’s activities separately beginning with petitioner rance’s activity involving cutting horses rance’s cutting horse activity schedules f were attached to rance’s through income_tax returns with his activity described as crop livestock at trial the evidence offered was rance’s testimony about his activity but no documentary_evidence ie records was offered in support of the income and deduction entries on the schedules f rance explained that his profit motivation was based on his goal that one of his horses could turn out to be a triple crown winner who could earn him income in excess of the losses claimed from the activity rance’s testimony about his cutting horse activity was in great part lacking in specifics he discussed horse bloodlines but failed to indicate much about his horses such as the year and cost of purchase the training regimen the events entered purses and competitions won breeding efforts profit analyses business plans necessity of expenses sale price and so forth accordingly we are left with the task of analyzing rance’s cutting horse activity using his testimony and the schedules f attached to his income_tax returns rance and larhea had purchased acres of land in southern oregon in and moved to the property late in after for example rance testified about a dollar_figure breeding fee and a mare he sold for dollar_figure the tax returns in the record through do not appear to reflect these events or activity in addition rance testified that he had as many as horses the schedules f likewise do not reflect that level of activity constructing a house and other buildings beginning in rance and larhea claimed farm_losses pertaining to the oregon property for an activity described as crop livestock the primary expenses claimed for were depreciation repairs and plans there was no income for that year the specifics of the claimed expenses for have not been detailed or adequately explained in rance purchased p k a driving horse popcorn a royal dartmoor pony mare in foal and leo a western pleasure mule he subsequently acquired jewels which was later traded for mitzi and i gotta lotta none of these horses were entered in competitions mitzi was sold for dollar_figure and i gotta lotta for dollar_figure no information was offered as to how these horses fit into rance’s business plan which he stated involved cutting horses dual docs was purchased in for dollar_figure and was the first horse entered into competition during and dual docs was in training in medford oregon with bobby and jolene nelson he was sold at a loss in this generic information is in essence all the record offers regarding dual docs the following is an analysis of rance’s cutting horse activity using the nine factors as a guide manner in which the activity is conducted--the fact that a taxpayer carries on the activity in a businesslike manner and maintains complete and accurate books_and_records may indicate a profit objective sec_1_183-2 income_tax regs essentially rance’s only record of his activity was a bank account that for early years was not segregated from his personal checking account no other records were produced with respect to his cutting horse activity no records corroborating his testimony were produced to show the horses purchased or their progress and profitability in particular no formal business plan budgets operating statements or analysis was produced to show the financial management or planning of the activity although rance testified that he had detailed written business plans broken down by horse such plans were not offered into evidence and little detail of the plans was described in the testimony at trial rance was unable to provide detail about the collective deductions claimed on the schedules f the returns were prepared by mr kramer who used the checkbook to prepare the schedules f someone with the intent to make a profit from cutting horses could be expected to have adequate information petitioners attempted to address their failure to present detailed evidence by contending that respondent did not question the substantiation or underlying records during the audit examination that however does not relieve them of the burden of showing that they met the requirements of sec_183 they also attempted to parlay that same contention into a situation where the burden_of_proof would be shifted to respondent under sec_7491 we found that attempt to be untimely and in other respects ill conceived from which to analyze the expenses and to project the progress of the activity the activity was for the most part undocumented and there was little or no interest shown in the financial aspect of the activity or its prospects see eg rinehart v commissioner tcmemo_2002_9 in addition no effort was made to explain how the expenses claimed on the returns related to the activity there was no explanation regarding how the assets being depreciated or the totality of expenses comported with the needs of the activity conducted respondent also points out that the cutting horses lived with trainers and that it was therefore less clear how all the expenses associated with rance and larhea’s oregon acreage pertain to this activity one of the most important indications of whether an activity is being performed in a businesslike manner is whether the taxpayer implements some method for controlling losses 809_f2d_355 7th cir affg tcmemo_1985_523 no such explanation was provided in this case this factor favors respondent and reflects that rance did not operate this activity in a businesslike manner taxpayer’s expertise--a taxpayer’s expertise research and study of an activity as well as his consultation with experts may be indicative of a profit_motive sec_1 b income_tax regs rance was generally knowledgeable about cutting horses and had experience in riding breeding and caring for these animals rance consulted with numerous experts however he did not detail the specific advice received or how he employed that advice in the activity he sought no professional advice on the economics of the cutting horse activity he did however seek advice about the tax aspects and ways to avoid classification of the activity as a hobby rance did seek guidance and advice from others but he failed to explain how the advice he obtained was used or how it assisted in the attempt to seek profits from the activity however this factor favors rance and larhea time and effort spent in conducting the activity--the fact that the taxpayer devotes much of his personal time and effort to carrying on an activity particularly if the activity does not have substantial personal or recreational aspects may indicate an intention to derive a profit sec_1_183-2 income_tax regs rance spent to hours a week on this activity his involvement with cutting horses provided a recreational benefit the record is sparse however on the specifics of rance’s involvement in this activity accordingly this factor favors respondent’s determination expectation that the assets will appreciate in value-- the taxpayer’s expectation that the assets used in the activity may appreciate in value may under certain circumstances indicate a profit_motive sec_1_183-2 income_tax regs clearly it was rance’s expectation that the value of his horses would increase and in two instances the values did increase by small amounts in addition he held approximately acres of pasture land which could appreciate it is also necessary however that the objective be to realize a profit on the entire operation 45_tc_261 affd 379_f2d_252 2d cir in order for rance to recoup the losses claimed through the years in issue future earnings and or appreciation would have to be considerable a champion horse could appreciate substantially but the likelihood of producing a champion is small overall we find that this factor favors respondent’s determination taxpayer’s success in similar or dissimilar activities-- even if an activity is unprofitable the fact that a taxpayer has previously converted similar activities from unprofitable to profitable enterprises may be an indication of a profit_motive with respect to the current activity sec_1_183-2 income_tax regs rance had experience from a previous cutting horse activity but abandoned it because he could not afford it rance testified that in his previous cutting horse activity one of his horses won a championship he did not testify or show that the appreciation in the assets in the earlier activity resulted in overall profits or the amount of losses recouped in comparison to the cutting horse activity rance and larhea have been highly successful in the operation of beneco rance did not explain or show how his business acumen and experience were used in the cutting horse activity see smith v commissioner tcmemo_1997_503 affd without published opinion 182_f3d_927 9th cir accordingly this factor favors respondent’s determination the activity’s history of income and or losses--an important consideration is the taxpayer’s history of income and or losses related to the activity losses continuing beyond the period customarily required to make an activity profitable if not explained may indicate that the activity is not engaged in for profit sec_1_183-2 income_tax regs as of the end of rance had incurred nearly dollar_figure in losses from his schedule f activity by the end of the claimed losses totaled more than dollar_figure these continuing losses were used to offset rance and larhea’s ample income from other pursuits including their involvement in beneco the amount of income in relation to the increasing and accumulating expenses or losses does not show that rance had a profit_motive with respect to this activity other than the outside possibility of his breeding or acquiring a champion see burger v commissioner f 2d pincite accordingly this factor is unfavorable for rance and larhea amount of occasional profits--the amount and frequency of occasional profits earned from the activity may also be indicative of a profit objective sec_1_183-2 income_tax regs rance contends that he sold horses during the years in issue where the price exceeded the original cost the amounts of gain from those sales however were minimal dollar_figure and dollar_figure moreover rance did not report any overall profits from the activity in other words there was no showing of profit when considering the overhead depreciation etc the record reflects continual and overwhelming losses accordingly this factor is unfavorable for rance and larhea financial status of the taxpayer--substantial income from sources other than the activity particularly if the activity’s losses generate substantial tax benefits may indicate that the activity is not engaged in for profit this is especially true where there are personal or recreational elements involved sec_1_183-2 income_tax regs without counting any farm income rance and larhea had combined gross_income before taking into account a disputed and conceded income issue involving offshore deferred_compensation of dollar_figure dollar_figure dollar_figure and dollar_figure for the years and by rance and larhea’s gross_income was dollar_figure without considering the cutting horse activity they see this scenario as one that shows that they had the resources to effectively operate the cutting horse activity which is admittedly capital intensive conversely respondent contends that the continued losses in the cutting horse activity were intended and used for a tax_benefit by means of an offset to rance and larhea’s income considering the record as a whole it appears that the potential for tax benefits attributable to the claimed losses from the activity was substantial considering the fact that this was also a recreational activity this factor favors respondent’s determination elements of personal pleasure--the presence of personal motives particularly when there are recreational elements involved may indicate that the activity is not engaged in for profit sec_1_183-2 income_tax regs respondent points out that rance has been riding horses most of his life and enjoyed his involvement with his cutting horse activities he rode horses in some competitions and had reentered the activity because he enjoyed it and could afford it rance contends that he was interested in the business challenges and derived no personal pleasure from his involvement in the activity rance admits that he enjoyed the activity but that his focus was winning competitions and producing a champion here again the continuing losses without any apparent effort to cut costs would tend to indicate a focus on the recreational nature of the activity overall this factor is unfavorable to rance and larhea our analysis of the nine factors reveals that overall rance did not enter into or continue his cutting horse activity with the requisite profit_motive we hold that respondent’s determination disallowing the losses from that activity was not in error zane’s staffordshire bull terrier activity zane became interested in dogs when he wa sec_12 years old after attending a dog show thereafter his parents bought him his first staffordshire bull terrier he became involved in dog showing breeding and judging and by at age he served as the youngest championship show judge in recent history during the years in issue he attended many dog shows and owned or coowned as many a sec_30 to dogs most of the dogs lived with their handlers or with his coowners zane believed that showing or judging dogs at shows did not normally generate revenue but breeding and selling puppies could have potential for revenue more revenue would result if his dogs showed well and or won medals at a show zane has semen stored from two of his dogs he testified that a breeding typically requires two straws of semen and he could charge around dollar_figure per breeding he estimated that the straws he had pincite ultimately zane became a noted expert in american and staffordshire bull terriers the time of trial would be worth dollar_figure zane was particular about breeding his dogs and he would breed his dogs only with high-quality dogs at the time of trial zane was selling terrier puppies for amounts ranging from dollar_figure to dollar_figure no information was provided however as to the selling_price for puppies during the years at issue zane believed that one of his dogs was worth dollar_figure although no evidence other than his testimony was offered to support his belief manner in which the activity is conducted--zane did not maintain a separate bank account for his dog activities and no other records of this activity were produced for example there were no records showing purchase of dogs financial analysis of their potential for profitability formal business plan budgets operating statements and analyses of cost control zane did not calculate the amount of income he would need to recover the losses_incurred and he did not predict when the activity might become profitable he did however invest a substantial amount in the training and showing of terriers worldwide in order to document their quality because multiple straws are needed for an insemination the number of possible inseminations would be reduced by some mathematical factor one report in the record indicated that approximately straws was the factor if that were correct straws would result in approximately inseminations for total revenue of approximately dollar_figure beginning in and extending through zane filed one schedule f each year designating the activity as cattle crops-- dog breeding in he simply included the dog breeding activity expenses in a schedule f labeled cattle crops--dog breeding and a separate schedule f was attached and designated organic dairy farm zane’s lack of records and failure to address and or be particularly concerned about the financial aspects and the potential for recouping losses show that he did not operate the activity in a businesslike manner someone with the intent to make a profit from dogs would be expected to have a substantial file on each dog see eg rinehart v commissioner tcmemo_2002_9 the lack of detailed records as to which dogs were profitable and which were not is an indication that the dog breeding activity was not carried on for profit see smith v commissioner tcmemo_1997_503 zane made no effort to reduce costs and control losses although he contends that his coownership arrangements helped to reduce expenses any such reduction was insufficient to stem the increasing overall amount of expenses and the increasing losses he did not earn any income from judging during the years at issue and has earned relatively nominal amounts from showing dogs zane’s income_tax returns reflect no income from the dog breeding activity for through and only nominal amounts thereafter this factor is not favorable for zane taxpayer’s expertise--zane is a noted longtime expert in judging showing and breeding american staffordshire terriers and staffordshire bull terriers accordingly this factor favors zane time and effort spent conducting the activity--zane testified that he spent an average of to hours per week on the dog breeding activity he also testified that he spent to hours per week on the dairy farming along with working full time presumably at least hours per week at beneco zane also testified about spending time in charitable activities it appears that he was spread thin and that his estimates of hours may be overstated overall however this factor favors zane expectation that the assets will appreciate in value-- zane believed that one of the dogs was worth dollar_figure but he failed to corroborate his belief in addition he did not specify whether the dog was solely owned or coowned if we were to assume that zane’s belief was correct and that he was the sole owner the dollar_figure would not be sufficient to recoup the dollar_figure in losses already incurred by zane also had potential to earn revenue from insemination breeding and the sale of puppies the difficultly here is the lack of documentation and or corroboration supporting zane’s contention the income reported through the taxable years in question does not reflect the potential to recoup the claimed losses as zane contends accordingly we find this factor to be unfavorable for zane taxpayer’s success in similar or dissimilar activities-- in addition to his dog breeding activity zane operated a cattle activity that had reported losses on the other hand zane was vice president of beneco--a very successful business operated by zane and his family he did not show that the experience or success from beneco was carried over into his dog breeding activity for example there were inadequate records of the activity there was no showing that his acquired_business techniques were used to cut costs or improve receipts accordingly this factor is not favorable to zane the activity’s history of income and or losses--by the end of zane had accumulated losses in an amount approaching dollar_figure by his losses were approaching dollar_figure these losses were used to offset zane and shannon’s other substantial income the amount of losses in comparison with revenues does not show however that zane intended to cut losses or improve the potential for gain although zane contends that the potential to recoup the losses and show gain existed the record does not support his contention accordingly this factor is unfavorable for zane amount of occasional profits--no profits and only limited receipts have been reported from zane’s dog breeding activity this factor is unfavorable for zane financial status of the taxpayer--zane and shannon’s gross_income without considering income adjustments they conceded was dollar_figure dollar_figure dollar_figure and dollar_figure for the and years for each of the next years their income exceeded dollar_figure annually the potential for tax benefits from the claimed dog breeding activity losses was substantial this factor favors respondent’s determination elements of personal pleasure--there is no question about the pleasure zane derived from his involvement in the dog breeding activity he has been involved with dogs since he wa sec_12 years old and enjoyed judging shows and has had the opportunity to travel all over the world it is noted that his judging was not compensated and that he traveled at his own expense and that the travel_expenses have been deducted he was an acknowledged expert concerning staffordshire bull terriers and american staffordshire terriers worldwide considering all of the above-discussed factors and the record as a whole it appears that zane’s dog breeding activity was one of personal_interest and more of a hobby than a business it was the participation in showing and judging terriers that attracted him to the activity and not the profit objective it is noted that expenses for travel shows and boarding dogs were substantial accordingly we hold that zane did not enter into or continue the dog breeding activity with the requisite profit_motive for the years before the court zane’s cow and dairy farm activity zane and shannon argued on brief that zane’s dog breeding and cow and dairy farm activities were one activity and that the cow and dairy farm activity was an expansion or extension of the dog breeding activity that argument was made to some extent to make the point that zane went into the cow and dairy farm activity to help remedy or recoup some of the losses experienced in the dog breeding activity it was also contended that some of his expertise in breeding dogs carried over into the breeding of cows sec_1_183-1 income_tax regs provides the appropriate legal standard for determining whether two or more activities constitute one or two activities a facts and circumstances standard is prescribed to ascertain whether the activities are separate generally the most significant facts and circumstances in making this determination are the degree of organizational and economic interrelationship of various undertakings the business_purpose which is or might be served by carrying on the various undertakings sec_1_183-1 income_tax regs in this instance there was no organizational or economic interrelationship between the two activities other than the reporting of the expenses of both on the same schedule f the activities were geographically and financially independent no business_purpose was expressed other than zane’s ability to use his knowledge of dog breeding in cow breeding the use of that experience and knowledge by zane is not per se a business_purpose and did not result in any economy of scale or symbiosis between the two activities the cow and dairy farm activity was a separate pursuit we treat the dog breeding activity and the cow and dairy farm activity as separate for purposes of our sec_183 analysis beginning in zane claimed losses on schedule f from his cow and dairy farm activity which he reported along with those of his dog breeding activity and described as cattle crops--dog breeding subsequently in he described the activity as organic dairy farm on his schedule f respondent contends that zane did not effectively enter into the cow and dairy farm activity until whereas zane contends that the early activity involving the cattle was preliminary to and an integral part of the expansion of that activity in in zane purchased a 400-acre farm goose hill in upstate new york where he also built his home his schedule f for the tax_year reflects that other than depreciation and repairs of the property most of the expenditures were for the dog breeding activity including dog training and showing no expenses were claimed that appeared to relate directly to the cow and dairy farm activity likewise for the tax_year most were for the dog breeding activity and only a relatively small portion could have been connected with the cow and dairy farm activity for two schedules f were included and the one labeled cattle crops--dog breeding contained substantially increased expenditures relatively large amounts were spent on items relating to cows such as feed and trucking expenses the second schedule f was labeled organic dairy farm and contained claimed expenditures and depreciation totaling dollar_figure these circumstances reflect that zane did not begin to pursue the dairy farm idea until any expenditures nominally connected with cows before would have in any event been considered startup expenditures which are to be capitalized and were incurred before the implementation of the plan to pursue the dairy farm see 128_tc_1 accordingly we agree with respondent that zane and shannon are not entitled to claim any losses in connection with his cow activity before with respect to zane had studied and researched the various types of cattle that could be bred zane recognized that family dairy farms were not doing well and he decided that to be profitable he had to find for his farm a niche in the market that would let it compete as to product and price after much research he decided to raise normande cattle the dairy farm idea had materialized and was operational by the end of and accordingly expenditures would not be considered to be startup expenses during zane purchased additional acres of farmland nearby and called it the columbus dairy the columbus dairy became the organic dairy farm at the columbus dairy zane built a milking parlor and other buildings for the milking operation zane also reclaimed the pastureland and built miles of fencing for the organic dairy operations on the columbus dairy property milking started sometime in normande cows are good producers of milk in france but are largely used for beef consumption in the united_states after visiting many farmers and ranchers throughout the united_states zane acquired a herd of normande cows that he believed would be the best milk producers he intended to further breed the acquired herd so his activity could become competitive in the dairy farming industry zane had a 7-year business plan involving the importation of bull semen from france as he could not import normande cows to breed with his cows to produce more and better milk at the same time zane was working to convert his land from a conventional to a certified organic farm zane believed that if his farm could be certified as organic he would be able to sell the milk at a price three times that of conventional milk by the time of trial zane’s animal breeding was progressing and the farm was certified organic in his gross revenues exceeded dollar_figure for and zane expects the revenue to triple in because of the organic certification in operating this activity zane has consulted with experts done marketing maintained separate checking account records and focused on ways to maximize revenue the following is an analysis of the nine factors more fully described above as applicable to this activity manner in which the activity is conducted--zane physically segregated the cow activity from the dog breeding activity and as of maintained a separate bank account for the cow activity he had a formal 7-year business plan that he pursued throughout the years in issue he took steps to maximize his revenues and continually worked to show a profit although for years before zane reported the dog breeding activity and the cow and dairy farm activity on a single schedule f the activities were separately pursued and had differing operations beginning around zane hired mr hughes to be his farm manager he gave him a place to live the use of a truck and cash wages of around dollar_figure per year although zane did not keep many formal records he did approach the operation of the cow activity in a businesslike manner accordingly this factor is favorable for zane taxpayer’s expertise--through study zane gained expertise in the breeding of cows and in the use of normande cows for dairy purposes he sought professional advice and successfully used in the cow activity his animal husbandry expertise gained from breeding dogs overall this factor is favorable for zane time and effort spent in conducting the activity--zane spent an average of to hours per week on his cow and dairy farm activity certainly to hours per week is significant accordingly this factor favors zane expectation that the assets will appreciate in value-- the term profit encompasses appreciation in the value of assets such as land used in the activity sec_1_183-2 income_tax regs respondent contends farming and the holding of land with the primary intent to profit from an increase in its value will be considered a single activity only if the farming activity reduces the net cost of carrying the land for its appreciation in value that is they will be considered a single activity only if the income derived from farming exceeds the deductions attributable to the farming activity which are not directly attributable to the holding of the land zane has two separate farms one in hamilton new york goose hill with approximately acres purchased in for dollar_figure to dollar_figure per acre and currently worth around dollar_figure per acre on the basis of comparable sales of farm_land and another farm with acres columbus dairy which was purchased in for dollar_figure to dollar_figure per acre and is currently worth around dollar_figure to dollar_figure per acre on the basis of comparable land sales although we do not consider the land appreciation and the cow and dairy farm activity as a single activity we recognize that zane’s investment in the land and buildings also has the potential for appreciation and profit on that basis we find this factor to be favorable to zane taxpayer’s success in similar or dissimilar activities-- zane operated the dog breeding activity at a loss before entering the cow and dairy farm activity although zane was not financially successful in the dog breeding activity he was successful in gaining expertise in animal husbandry and related topics involving the care and breeding of animals beneco is a successful business operated by zane and his family we discern that zane has employed some of the success of other endeavors in his cow activity and accordingly this factor is favorable to zane the activity’s history of income and or losses--by the end of zane’s accumulated losses from the cow activity approached dollar_figure although the total losses had increased to approximately dollar_figure by the last year for which a schedule f was available the potential for increased revenues from the sale of organic milk could address the deficit accordingly we find this factor to be neutral amount of occasional profits--zane has not reported any profits from the cow activity and therefore this factor is unfavorable for zane financial status of the taxpayer--without counting any farm income zane and shannon’s gross_income before considering income adjustments they conceded was dollar_figure dollar_figure dollar_figure and dollar_figure for the years and for each of the next years their income exceeded dollar_figure that level of income provided the potential for substantial tax benefits from the claimed losses from the cow and dairy farm activity therefore this factor is unfavorable for zane and shannon elements of personal pleasure--although zane has a keen interest in cows especially the normande breed his focus in this activity has been to seek a profit from a dairy operation we note that the normande breed was not traditionally used for dairy purposes in the united_states however zane believed that they had great potential for high quality and quantity production unlike the dog breeding activity we find that zane’s interest in the cow and dairy farm activity was more business and less pleasure oriented overall we hold that zane has established that he entered into the cow and dairy farm activity in with the requisite profit_motive within the meaning of sec_183 whether petitioners are liable for penalties under sec_6662 for each adjustment considered by the court for the taxable years and sec_6662 imposes a 20-percent penalty on any portion of an underpayment_of_tax required to be shown on a return the penalty is applicable to the portion of any underpayment attributable to one or more of the following negligence or disregard of rules or regulations any substantial_understatement_of_income_tax and any substantial_valuation_misstatement sec_6662 the term negligence includes any failure to make a reasonable attempt to comply with the provisions of title_26 and disregard includes any careless reckless or intentional disregard sec_6662 negligence is the lack of due care or failure to do what a reasonable and ordinarily prudent person would do in a similar situation 85_tc_934 negligence includes any failure to exercise ordinary and reasonable care in the preparation of a tax_return but it does not include a return position that has a reasonable basis sec_1_6662-3 income_tax regs reasonable basis is a relatively high standard of tax reporting significantly higher than not frivolous or not patently improper it is not satisfied by a return position that is merely arguable sec_1 b income_tax regs negligence may be indicated when a taxpayer fails to ascertain the correctness of an item on the return that would seem to a reasonable and prudent person to be too good to be true under the circumstances sec_1_6662-3 income_tax regs a substantial_understatement_of_income_tax is defined as an understatement of income_tax that exceeds the greater of percent of the tax required to be shown on the tax_return or dollar_figure sec_6662 as already discussed the commissioner bears the burden of production in any court_proceeding with respect to the penalty addition_to_tax or additional_amount imposed by title_26 sec_7491 the burden imposed on the commissioner is to come forward with sufficient evidence regarding the appropriateness of applying a particular addition_to_tax or penalty against the taxpayer 127_tc_200 116_tc_438 sec_7491 does not however require the commissioner to introduce evidence of reasonable_cause substantial_authority or similar provisions sec_6664 provides an exception to the imposition of accuracy-related_penalties if the taxpayer shows that there was reasonable_cause for the underpayment and that the taxpayer acted in good_faith sec_6664 469_us_241 whether a taxpayer acted with reasonable_cause and in good_faith is a factual question sec_1_6664-4 income_tax regs generally the most important factor in determining whether a taxpayer acted with reasonable_cause and in good_faith is the extent to which the taxpayer exercised ordinary business care and prudence in attempting to assess his or her proper tax_liability id reasonable_cause may in some cases be established by reliance on the advice of a professional tax adviser id sec_1_6664-4 income_tax regs in order for the taxpayer to establish that he reasonably relied upon advice he must prove by a preponderance_of_the_evidence that the adviser was a competent professional who had sufficient expertise to justify reliance the taxpayer provided necessary and accurate information to the adviser and the taxpayer actually relied in good_faith on the adviser’s judgment 115_tc_43 affd 299_f3d_221 3d cir although honest misunderstanding of fact or law could be reasonable petitioners are required to take reasonable steps to determine the law and to comply with it see 99_tc_202 in the end the duty_of filing accurate returns lies with petitioners who must bear the ultimate responsibility for any negligent errors of their agent see 63_tc_149 petitioners generally contend that they had hired tax professionals to advise them on their various activities deductions and return reporting and that they appropriately followed the advice and return reporting positions of those professionals respondent however sees petitioners as sophisticated and successful business people who understand complex legal concepts in connection their beneco business respondent contends that petitioners should have known that the positions they took on their returns were incorrect respondent also points out that petitioners have conceded their offshore leasing issue and the penalties determined with respect to it and that those transactions reflected that petitioners had a high tolerance for risk in their tax reporting in essence respondent argues that petitioners were willing to take aggressive tax reporting positions and that we should consider that in evaluating petitioners’ other deductions and reporting positions petitioners claim to have relied upon their accountants for the contribution and sec_183 loss issues mr kramer prepared petitioners’ returns for the years through petitioners each testified that they relied upon mr kramer to properly prepare their returns petitioners’ accuracy-related_penalties for their noncash charitable_contribution adjustments for the and tax years each couple conceded that they are liable for the accuracy- related penalties with respect to their offshore leasing transactions a matter which affected their liabilities for several taxable years we must decide whether petitioners are liable for the accuracy-related_penalties with respect to the noncash charitable_contribution deductions beginning in the mid-1990s and for various years through petitioners claimed deductions for noncash charitable_contributions respondent determined that they are not entitled to the deductions because they failed to supply the information required by the statute and regulations and we have so held respondent contends that petitioners knew that they had not supplied the required information--ie that the appraisals valued beneco stock rather than the limited_partnership interests and that the appraisals submitted were not timely as required by the statute amongst other errors in reporting the noncash charitable_contributions the percentages of ownership were misstated the c p a signed the appraiser’s name and reference was made to an appraisal with a particular date which has not been shown to exist respondent contends that no reasonably prudent person would have allowed these errors to persist year after year respondent also questioned whether the values of the limited_partnership interests or the amounts of the claimed contributions were overstated we have not addressed the value question because we have sustained respondent’s determination that petitioners are not entitled to any deduction because they failed to provide information required by the statute and the regulations petitioners do not dispute the errors on their tax returns with respect to the noncash charitable_contributions they acknowledge that the appraisals of the donated property were not qualified appraisals as required by the regulations that none of the appraisals was made within days of the contribution of the partnership_interest that mr kramer c p a and rick brewster mr brewster c p a each decided not to value the partnership interests ie the property donated but decided to value the only asset of the partnerships the beneco stock petitioners contend that these errors or omissions do not ipso facto make them liable for penalties and that the issue is simply whether they reasonably relied on the professionals they hired--attorney kelley experienced in estate and tax planning mr kramer an experienced c p a practicing in the tax field for over years and mr brewster an experienced c p a practicing in the tax field for over years--to provide them proper tax_advice and to properly prepare their tax returns the penalty under sec_6662 is not imposed with respect to any portion of any underpayment if it is shown that there was reasonable_cause for such portion and that the taxpayer acted in good_faith with respect to such portion a taxpayer’s reliance on the advice of an independent professional as to the tax treatment of an item if such reliance was reasonable and the taxpayer acted in good_faith will establish that the taxpayer was not negligent and will satisfy the reasonable_cause exception sec_6664 sec_1_6664-4 income_tax regs the general_rule is that a taxpayer has a duty to file a complete and accurate tax_return and cannot avoid that duty merely by placing that responsibility with an agent united_states v boyle u s pincite 88_tc_654 in certain limited situations the good_faith reliance on the advice of an independent competent professional in the preparation of the tax_return can satisfy the reasonable_cause and good_faith exception united_states v boyle supra pincite 94_tc_473 reliance on the advice of a professional tax adviser however does not automatically demonstrate reasonable_cause and good_faith sec_1 b income_tax regs all of the facts and circumstances must be taken into account sec_1_6664-4 income_tax regs the advice must be based upon all pertinent facts and the applicable law sec_1_6664-4 income_tax regs the advice must not be based on unreasonable factual or legal assumptions sec_1_6664-4 income_tax regs the advice cannot be based on an assumption that the taxpayer knows or has reason to know is unlikely to be true id in order to show reasonable reliance the taxpayer must prove the adviser was a competent professional who had sufficient expertise to justify the taxpayer’s reliance on him the taxpayer provided necessary and accurate information to the adviser and the taxpayer actually relied in good_faith on the adviser’s judgment weis v commissioner supra pincite citing 59_tc_473 the gist of the disallowance of petitioners’ noncash charitable_contribution deductions was their failure to comply with certain statutorily specified procedural requirements that were intended to enable respondent to monitor such deductions petitioners relied on their tax professionals to properly report the charitable_contribution deductions the court’s holding on this issue was based on these procedural failures petitioners’ c p a mr kramer has been licensed since and he prepared tax returns and gave tax_advice for a living he prepared approximately big_number tax returns each year mr kramer in addition to preparing petitioners’ returns also provides tax and consulting advice for petitioners and their corporation beneco mr kramer advised petitioners with respect to the noncash charitable_contributions that they may have made in and and he was aware that they were relying on his advice he also prepared petitioners’ tax returns for the years at issue making certain necessary recommendations as to obtaining an appraisal when to get the appraisal and what type of appraisal to obtain he was not instructed by any of petitioners on how to do his job or how to value the partnership interests that were donated mr kramer instructed petitioners regarding all of the requirements and he was responsible to properly report the contributions on their returns mr kramer also made the appraisal for the early years at issue by appraising the beneco stock petitioners relied on mr kramer as their c p a and for the necessary appraisals with respect to the partnership interests contributed for their through tax years mr kramer testified that he believed he was familiar with sec_170 reporting requirements for noncash charitable_contributions and with the form_8283 used to report noncash charitable_contributions mr kramer recognized that it was his responsibility to make sure that the sec_170 reporting requirements for the noncash charitable_contributions were met when he completed the tax returns for the years at issue mr kramer stated that he made a good-faith effort to comply with the sec_170 reporting requirements the record reflects that his efforts fell far short of the requirements around or mr kramer advised petitioners to obtain a certified appraisal and he recommended that they hire mr koehl a certified appraiser mr kramer hired mr koehl on petitioners’ behalf to appraise the partnership interests mr koehl made the independent decision to value only the beneco stock accordingly petitioners have shown that they had every reason to believe that their adviser was a competent professional with sufficient expertise to justify their reliance on him there is no question whether petitioners provided necessary and accurate information to their tax professional finally we find that petitioners relied in good_faith on the adviser’s judgment and had good reason to do so it was solely the actions of petitioners’ tax professional that caused petitioners’ failure to meet the procedural requisites for their noncash charitable contributionsdollar_figure under these circumstances we hold that petitioners had reasonable_cause and are not liable for the sec_6662 penalty with respect to the disallowed noncash charitable_contribution deductions whether rance and larhea are liable for a sec_6662 penalty with respect to their disallowed schedule f losses respondent argues that rance and larhea were negligent in claiming schedule f losses in each of the taxable years before the court in support of his argument respondent points out that rance described the activity as crop livestock on the schedule f whereas at trial it was described as a cutting horse activity respondent also points to the failure to keep business records other than a commingled bank checking account see sec_1_6662-3 income_tax regs we see a difference and a distinction between reliance for procedural as opposed to substantive aspects or tax reporting petitioners followed the advice and guidance of the tax professional and provided him with the information needed to document their contributions petitioners relied on the professional’s ample experience and obligation to make sure that the transactions were properly reported which the professional failed to do the court observed that rance’s interest in the activity focused upon the cutting horses and he was otherwise unfamiliar with and could not identify many of the items claimed on the schedules f there were only minimal amounts of revenue in any of the years at issue and the losses were unabated and substantial the size of the tax losses in relation to the revenue from the activity combined with rance’s hobbylike involvement in the activity made the situation one that has been described as too good to be true and can readily be construed as a hobby as opposed to an activity where profit was intended dodge v commissioner tcmemo_1998_89 affd without published opinion 188_f3d_507 6th cir sec_1 b ii income_tax regs we also note that rance was advised by mr kramer that he needed more revenue to avoid hobby loss characterization rance’s principal argument on this issue is that he relied on his tax professional this schedule f situation is unlike the noncash charitable_contribution where petitioners complied with their tax professionals’ requests and the failures to properly comply with the procedural requirements were the fault of the tax professionals rance was engaged in the activity and he is a sophisticated and successful business professional rance was aware of his activities losses etc and his tax professional merely prepared the returns schedules f from the financial information that rance provided the reliance argument is not available to rance and larhea in this instance accordingly we hold that rance and larhea were negligent within the meaning of sec_6662 for failure to keep proper books_and_records and generally for claiming losses from the cutting horse activity whether zane and shannon are liable for a sec_6662 penalty with respect to their disallowed schedule f losses claimed with respect to their dog breeding activity and pre-2001 cow activity zane and shannon claimed schedule f losses in connection with a dog breeding and showing activity for their and tax yearsdollar_figure zane claimed substantial losses from his dog showing breeding and judging activity even though prospects for revenue were limited and or remote he produced no formal books_and_records the expenses were sometimes combined with those involving the cow and dairy farm activity making it difficult to evaluate the success or progress of the business with no revenue from the dog breeding activity in any of the years at issue the size of the tax losses from the activity combined with the substantial enjoyment zane derived from his involvement with the dogs resulted in a situation that has been because zane was found to be involved in a profit- motivated activity with respect to hi sec_2001 cow and dairy farm activity no underpayment results and there is no need to consider the parties’ arguments with respect to the sec_6662 penalty regarding that activity to the extent that an underpayment is attributable to the cow and dairy farm activity claimed on the schedule f for or it is considered in conjunction with the substantially dominant dog breeding activity described as too good to be true smith v commissioner tcmemo_1997_503 sec_1_6662-3 income_tax regs zane’s principal argument on this issue is that he relied on his tax professional this schedule f situation is unlike the one involving the noncash charitable_contributions where petitioners complied with their tax professionals’ requests and the failure to properly comply with the procedural requirements was the fault of the tax professionals zane was engaged in the activity and he is a sophisticated and successful business professional zane was aware of his activities losses etc and his tax professional merely prepared the returns schedules f from the financial information that zane provided the reliance argument is not available to zane and shannon in this instance accordingly we hold that zane and shannon were negligent within the meaning of sec_6662 for failure to keep proper books_and_records and generally for claiming schedule f losses for and to reflect the foregoing and concessions by the parties decisions will be entered under rule