Court Opinion

ID: 9365167
Source: CourtListenerOpinion
Date Created: 2023-01-22 05:01:49.255698+00
Date Added: 2024-06-11T16:49:18.928210
License: Public Domain

United States Tax Court

                           T.C. Memo. 2023-5

         PAUL C. WONDRIES AND PATRICIA WONDRIES,
                        Petitioners

                                    v.

            COMMISSIONER OF INTERNAL REVENUE,
                        Respondent

                               —————

Docket No. 13345-19.                              Filed January 9, 2023.

                               —————

Edward O. C. Ord and Cheng Zhang, for petitioners.

Sarah A. Herson and Mark A. Nelson, for respondent.

       MEMORANDUM FINDINGS OF FACT AND OPINION

       KERRIGAN, Chief Judge: Respondent determined the following
deficiencies and penalties with respect to petitioners’ federal income tax
for years 2015–17 (years in issue):

          Year                  Deficiency            § 6662(a) Penalty

          2015                   $214,226                 $42,845

          2016                   102,698                   20,540

          2017                   104,579                   20,916

                            Served 01/09/23
                                         2

[*2] After concessions 1 the issues for consideration are whether
(1) petitioners are entitled to deductions for expenses reported on the
Schedules F, Profit or Loss From Farming, attached to their 2015, 2016,
and 2017 federal income tax returns and (2) petitioners are liable for
accuracy-related penalties pursuant to section 6662(a) for 2015 and
2016.

       Unless otherwise indicated, all section references are to the
Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times,
all regulation references are to the Code of Federal Regulations, Title 26
(Treas. Reg.), in effect at all relevant times, and all Rule references are
to the Tax Court Rules of Practice and Procedure. We round all
monetary amounts to the nearest dollar.

                             FINDINGS OF FACT

      Some of the facts are stipulated and so found. The Stipulation of
Facts and the attached Exhibits are incorporated herein by this
reference. Petitioners were married and resided in California when they
timely filed their Petition.

      During the years preceding those in issue petitioner husband
operated many successful business enterprises. These included some 23
car dealerships, half of which he managed to convert from losing
enterprises to profitable ones.

       Around early 2004 petitioners sought to diversify their business
interests by acquiring a cattle ranch. They toured many properties
before ultimately deciding on an 1,100-acre ranch in Parkfield,
California (ranch). Various structures stood on the property: a main
house, a guest house, a swimming pool, and a foreman’s house. Wells
and natural springs serviced the ranch’s water needs; petitioners also
installed large storage tanks and drinking troughs for the animals.
Approximately 30 miles of roads provided access to all parts of the ranch.

      Petitioners financed the ranch’s purchase through a California
bank. In support of their loan application, they included a business plan
indicating that the ranch would generate sufficient income to satisfy the

       1   Petitioners conceded that they are required to include an individual
retirement account (IRA) distribution from NADART in income for 2015. NADART is
the financial services and retirement planning division of the National Automobile
Dealers Association. Respondent conceded the penalty pursuant to section 6662(a) for
petitioners’ 2017 underpayment.
                                   3

[*3] mortgage payments—primarily through cattle sales and guided
hunting expeditions—and be profitable within a few years. Their
secondary approach was to hold the property for investment. The bank
funded the loan, and petitioners purchased the property for $2 million—
approximately $1 million below the listing price.

       Because they had no experience in the ranching industry,
petitioners hired a foreman, Robert Palm. Mr. Palm was familiar with
the area, having grown up there, and knew many individuals in the
industry.    He also had approximately two decades of ranching
experience, managing properties in California, Nevada, Oregon, Idaho,
Texas, and Nebraska. Notably, he had managed profitably two
ranches—both over 1,000 acres—close to petitioners’ ranch.

       Mr. Palm began his employment with petitioners as of the
property closing date. His duties included overseeing the property when
petitioners were away, repairing and replacing ranch equipment and
infrastructure, hiring and overseeing laborers to perform more
extensive tasks, managing the cattle herd, controlling the landscape,
and tending the ranch’s crops. As part of those duties, petitioners
provided Mr. Palm with a separate checkbook and a credit card for ranch
purchases.

       Petitioners realized quickly that operational income from the
ranch alone would be insufficient to support the mortgage payments.
They discovered that raising cattle would be cost prohibitive given feed
prices. The initial plan was to feed the cattle by having them graze in
the fields and secondarily with barley grown on the property.

       An unexpected drought resulted in insufficient grass and barley
to feed the herd. Petitioners researched the cost of purchasing feed from
third parties but found this to be infeasible given current beef prices.
Thus within a few months of purchasing the ranch, petitioners sold most
of the cattle.

      Petitioners also determined at this time that guided hunting
would not generate a profit. Not only was the ranch too small to sustain
the wild animals that hunters seek, the insurance requirements and
attendant liability risks significantly outweighed the potential revenue
that providing hunting expeditions could yield.

      In the light of these failed exploits, petitioners pivoted from an
operational focus to an investment one, hoping to eventually sell the
property at a gain. They endeavored to improve the property by
                                    4

[*4] repairing the fencing and irrigation system, renovating the housing
structures and pool, clearing brush for fire control, and maintaining the
grounds surrounding the buildings. Petitioners usually had the foreman
and third-party contractors complete these tasks, but when they visited
the ranch—approximately six days per month—they would contribute
by performing tasks around the ranch.

      When petitioners take vacation time, they visit one of their other
homes. They own residences in Palm Springs, California, Big Bear
Lake, California, and Las Vegas, Nevada. They also travel abroad
extensively, taking trips to Europe, Asia, and Africa in past years.

       Petitioner husband performed the accounting and payroll
function for the ranch. He maintained a running total of expenses
incurred throughout the year as well as copies of checks and receipts.
This method of recordkeeping differs from petitioner husband’s
dealership businesses, which use automated professional software to
manage payroll and accounting.

       Petitioner husband engaged the accountant from his automotive
businesses to periodically review his ranch accounting work. Petitioner
husband’s management style for the ranch is similar to his management
style for the automotive businesses: He hired experienced individuals to
oversee the businesses’ day-to-day affairs, and he checked in with these
managers intermittently for status updates.

       Since acquiring the ranch, petitioners have never realized a profit
nor broken even. They have realized a net loss every year since purchase
and have claimed corresponding deductions. For the years in issue
petitioners reported the following income and expenses for the ranch:

       Year             Income             Expense             Loss

       2015               $892             $474,793          ($473,901)

       2016             12,485              235,580          (223,095)

       2017             10,627              239,751          (229,124)

      Petitioner husband was an employee of AGL Development during
the years in issue. He accordingly reported wage income from Form
W–2, Wage and Tax Statement, for 2015–17. Petitioners also reported
income on their Schedules E, Supplemental Income and Loss, for
                                          5

[*5] businesses associated with petitioner husband’s car dealerships.
Their wage and Schedule E income as well as their total income is set
out below:

        Year             Wage Income          Schedule E Income     Total Income 2

        2015              $4,314,921             $6,861,912          $11,099,715

        2016               4,790,000              6,836,947          12,376,821

        2017               3,541,246              4,981,222           9,259,687

       In addition to business-related income, petitioner husband
received the following IRA distributions in 2015: (1) $56,077 from First
Clearing, LLC; (2) $13,193 from Great-West Trust Co., LLC; and
(3) $7,620 from NADART. Petitioners reported only the distributions
from First Clearing, LLC, and Great-West Trust Co., LLC.

       Respondent’s revenue agent George Krmpotich examined
petitioners’ 2015, 2016, and 2017 tax returns. On November 8, 2018, he
obtained written approval from his immediate supervisor for an
accuracy-related penalty for 2015. On that same day respondent sent
petitioners a Letter 950, commonly referred to as a 30-day letter,
advising them that they had 30 days to either agree or disagree with
respondent before a notice of deficiency would be issued. Respondent
issued the notice of deficiency (notice) on May 7, 2019. Respondent
determined in the notice that petitioners were required to include the
$7,620 IRA distribution from NADART in income for 2015. It also stated
that the ranch property was an “activity not engaged in for profit” within
the meaning of section 183 during the years in issue.

        2 Total Income includes all income (not exclusive of Wage Income and Schedule

E Income) derived by petitioners during the taxable year as described on lines 7–22 of
their Forms 1040, U.S. Individual Income Tax Return.
                                          6

[*6]                                 OPINION

      The main issue in this case is whether petitioners entered into
the cattle ranching business for profit and therefore whether the
deductions were proper. 3

I.     Burden of Proof

       Generally, the Commissioner’s determinations set forth in a
notice of deficiency are presumed correct, and taxpayers bear the burden
of showing the determinations are erroneous. Rule 142(a); Welch
v. Helvering, 290 U.S. 111, 115 (1933). Because respondent determined
that petitioners did not engage in the cattle ranching business for profit,
they bear the burden of proving otherwise. Petitioners do not contend
that the burden of proof should shift to respondent under section
7491(a).

II.    Evidentiary Issue

       On November 22, 2021, petitioners filed a Motion to Strike the
Testimony of George Krmpotich, a revenue agent who testified. They
argue that the APA provides grounds to strike his testimony. We
disagree. Deficiency cases are subject to de novo review, and so the APA
does not apply to them. See Ax, 146 T.C. at 161. Because Mr.
Krmpotich’s testimony was consistent with a de novo proceeding,
petitioners’ Motion to Strike will be denied.

III.   For-Profit Business

       Taxpayers are generally allowed deductions for business-related
and investment expenses. See §§ 162, 212. Under section 183(a),
individuals are not allowed a deduction “if such activity is not engaged

       3Petitioners made various arguments regarding the Administrative Procedure
Act (APA), 5 U.S.C. §§ 551–59. A deficiency case in the Tax Court is not a review of an
agency action pursuant to the APA. See Ax v. Commissioner, 146 T.C. 153 (2016).
        Petitioners contend that an audit for 2004 determined that they intended to
make a profit from their ranch. A taxpayer’s liability is based on the merits and not
on any previous record developed at the administrative level. Greenberg’s Express, Inc.
v. Commissioner, 62 T.C. 324, 327–28 (1974). The acceptance or acquiescence in
returns filed by a taxpayer for a previous year creates no estoppel against the
Commissioner. See Dixon v. United States, 381 U.S. 68, 72–73 (1965). Furthermore,
petitioners raised the issue regarding the 2004 audit during further trial. According
to the Court’s September 14, 2021, Order, further trial was limited to issues included
in the petitioners’ pretrial memorandum.
                                     7

[*7] in for profit.” “[I]f such activity is not engaged in for profit, no
deduction attributable to such activity [is] allowed” except to the extent
provided by section 183(b). § 183(a). Section 183(b) allows deductions
that would have been allowable had the activity been engaged in for
profit but only to the extent of gross income derived from the activity
(reduced by deductions attributable to the activity that are allowable
without regard to whether the activity was engaged in for profit).

       Section 183(c) 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 section 162 or under paragraph (1) or (2) of
section 212.” For expenses to be fully deductible under section 162 or
212, taxpayers must show that they are engaged in the activity with the
primary objective of making a profit. Westbrook v. Commissioner, 68
F.3d 868, 875 (5th Cir. 1995), aff’g T.C. Memo. 1993-634; Wolf
v. Commissioner, 4 F.3d 709, 713 (9th Cir. 1993), aff’g T.C. Memo. 1991-
212.

       The expectation of a profit need not be reasonable, but the
taxpayer must conduct the activity with the actual and honest objective
of making a profit. Keating v. Commissioner, 544 F.3d 900, 904 (8th Cir.
2008), aff’g T.C. Memo. 2007-309. Greater weight is given to objective
facts than to the taxpayer’s self-serving statement of intent. King
v. Commissioner, 116 T.C. 198, 205 (2001); Treas. Reg. § 1.183-2(a)
and (b).

        The regulations provide a nonexhaustive list of nine factors that
should be considered: (1) the manner in which the taxpayer carries on
the activity; (2) the expertise of the taxpayer or the taxpayer’s advisers;
(3) the time and effort expended by the taxpayer in carrying on the
activity; (4) the expectation that assets used in the activity may
appreciate in value; (5) the success of the taxpayer in carrying on other
similar activities; (6) the taxpayer’s history of income or loss with
respect to the activity; (7) the amount of occasional profits, if any, which
are earned; (8) the financial status of the taxpayer; and (9) whether
elements of personal pleasure or recreation are involved. Treas. Reg.
§ 1.183-2(b). “No one factor is determinative,” and it is not intended that
“a determination is to be made on the basis that the number of factors
. . . indicating a lack of profit objective exceeds the number of factors
indicating a profit objective, or vice versa.” Id.
                                     8

[*8]   A.    Manner in Which the Taxpayer Carries On the Activity

       At the time of purchasing the ranch, petitioners interviewed and
hired Mr. Palm to serve as foreman of the property. Given his
significant experience in the ranching industry, he was tasked with
overseeing the property and solving any problems that arose when
petitioners were absent. In this way Mr. Palm served in a similar role
to the managers that petitioner husband employed in his automotive
businesses. We believe that hiring an experienced individual such as
Mr. Palm to oversee the day-to-day operations of the ranch is an
indication that petitioners conducted the ranch in a businesslike
manner.

       Additionally, petitioners maintained complete and accurate books
and records for the ranch during the years in issue. At trial petitioner
husband testified that he personally performed the accounting and
payroll functions. He said that the ranch did not need the more
sophisticated software used by his automotive businesses, which
therefore would have been an unnecessary expenditure. In performing
this function, petitioner husband used a single-entry form of accounting
and maintained copies of all receipts and invoices for ranch-related
purposes. He also provided the foreman with a credit card and a
checkbook designated for ranch purchases only. To verify the accuracy
of their reporting, petitioners employed their long-time accountant to
review the books and records twice annually.

      In their business plan, petitioners informed the bank that they
intended to satisfy the mortgage payments by raising and selling cattle.
This plan also included providing guided hunting expeditions on the
property. Soon after purchasing the property, petitioners realized that
these plans would not be profitable given unforeseen cost constraints.
They accordingly abandoned them in favor of holding the ranch for
investment purposes. Consequently, they reduced the cattle herd. They
also declined to populate the property with game animals and decided
against purchasing hunters’ liability insurance.

       We find that employing Mr. Palm and maintaining a reliable
accounting system indicate that petitioners engaged in the ranching
activity for profit. See Treas. Reg. § 1.183-2(b)(1) (“The fact that the
taxpayer carries on the activity in a businesslike manner and maintains
complete and accurate books and records may indicate that the activity
is engaged in for profit.”). This finding is reinforced by petitioners’ shift
to an investment focus once discovering that the operational one would
                                     9

[*9] be unprofitable. See id. (“A change of operating methods, adoption
of new techniques or abandonment of unprofitable methods in a manner
consistent with an intent to improve profitability may also indicate a
profit motive.”). We find that this factor weighs in petitioners’ favor.

      B.     The Expertise of the Taxpayer or His Advisers

      Petitioners concede that they had zero ranching experience before
making the investment in the property. And it does not appear that
they prepared for the activity by conducting extensive studies
themselves. They did, however, interview several individuals and
ultimately hired Mr. Palm as foreman.

       Respondent contends that the ranch’s failure as a profitable
enterprise belies Mr. Palm’s expertise. We disagree. Mr. Palm had
approximately two decades of ranching experience in the western
United States before starting with petitioners. He had managed
properties in six states and specifically two very large ones close to
petitioners’ property. Thus, despite the ranch’s poor track record, we
believe that Mr. Palm was as close to an expert as could be obtained.

       Although petitioners instructed him to perform certain activities
on the ranch, they deferred to his knowledge when it came to cattle
management and the best practices for running the ranch. We find that
hiring Mr. Palm and adhering to his counsel indicates a profit motive.
See Treas. Reg. § 1.183-2(b)(2) (“Preparation for the activity by extensive
study of its accepted business, economic, and scientific practices, or
consultation with those who are expert therein, may indicate that the
taxpayer has a profit motive where the taxpayer carries on the activity
in accordance with such practices.”). This factor weighs in petitioners’
favor.

      C.     The Time and Effort Expended by the Taxpayer in Carrying
             On the Activity

       Petitioners spent little time at the ranch. Petitioner wife testified
to spending only two to four days per month there while petitioner
husband testified to spending only two weekends per month there. At
maximum, then, they spent six days per month on the ranch, which on
an annual basis would be less than 20% of the year. This limited
investment of time would generally weigh against their having a profit
motive for purchasing the property. See Treas. Reg. § 1.183-2(b)(3) (“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
                                    10

[*10] substantial personal or recreational aspects, may indicate an
intention to derive a profit.”).

       Petitioners did employ Mr. Palm as foreman. He and his wife
lived and worked on the property year round during the years in issue.
As well, Mr. Palm—as an extension of petitioners—hired numerous
individuals to help complete repairs on the property. Therefore, despite
the fact that petitioners have not devoted a substantial amount of their
personal time to ranch business, we do not believe this undercuts their
profit motive. See id. (“The fact that the taxpayer devotes a limited
amount of time to an activity does not necessarily indicate a lack of profit
motive where the taxpayer employs competent and qualified persons to
carry on such activity.”). We find that this factor weighs in petitioners’
favor.

      D.     Expectation That Assets Used in Activity May Appreciate in
             Value

       Petitioners testified that at the outset of purchasing the ranch
they had two strategies in mind: an operational one and an investment
one. The operational plan was to raise and sell cattle as well as provide
guided hunting expeditions. If this plan failed, petitioners’ secondary
strategy was to improve the ranch and hold it as an investment property
in hopes of one day selling it at a profit. As petitioners testified, they
realized quickly that their operational plan was not feasible. They
therefore shifted to their secondary plan and began making
improvements to the existing structures and landscape to increase the
investment value.

       Petitioners’ situation is envisioned by the regulations. See Treas.
Reg. § 1.183-2(b)(4) (“The term profit encompasses appreciation in the
value of assets, such as land, used in the activity. Thus, the taxpayer
may intend to derive a profit from the operation of the activity, and may
also intend that, even if no profit from current operations is derived, an
overall profit will result when appreciation in the value of land used in
the activity is realized since income from the activity together with the
appreciation of land will exceed expenses of operation.”).

      A profit objective may be inferred from expected appreciation of
the activity’s assets only where the appreciation exceeds operating
expenses and is sufficient to recoup accumulated losses of prior years.
See Golanty v. Commissioner, 72 T.C. 411, 427–28 (1979), aff’d without
published opinion, 647 F.2d 170 (9th Cir. 1981); Hillman
                                    11

[*11] v. Commissioner, T.C. Memo. 1999-255. These cases do not
require that the taxpayer recoup all past losses. Instead, the question
is “whether [the taxpayer] would recoup the losses between the years in
issue and the ‘hoped-for profitable future.’” Robison v. Commissioner,
T.C. Memo. 2018-88, at *21 (quoting Helmick v. Commissioner, T.C.
Memo. 2009-220, slip op. at 28). “An overall profit is present if net
earnings and appreciation are sufficient to recoup the losses sustained
in the ‘intervening years’ between a given tax year and the time at which
future profits were expected.” Id. at *20 (quoting Helmick, T.C. Memo.
2009-220, slip op. at 27).

       Petitioners purchased the property in early 2004 for
approximately $2 million. At trial petitioner husband testified that the
property was worth between $5.5 and $6 million during the years in
issue. He also testified that as of the August 3, 2022, trial, the property
was listed for $6.7 million. The question, then, is whether, given this
sale price range, petitioners could recoup the losses incurred in the years
in issue and going forward to the hypothetical sale date.

        During each year in issue, the ranch averaged approximately
$300,000 in losses. Assuming that this trend continues, petitioners
could still expect to earn a profit even if we assume that the property is
sold at the lower end of petitioner husband’s estimates. The margin by
which they earn a profit is dwindling each year. Given that a profit can
still be earned, we find that this factor weighs in petitioners’ favor.

      E.     The Success of the Taxpayer in Carrying on Similar or
             Dissimilar Activities

       Petitioners have not engaged in similar activities in the past. But
petitioner husband has engaged in the automotive sales and servicing
business for many years. Originally starting with one dealership,
petitioner husband has grown his automotive empire to include 23
dealerships in Southern California. Approximately 12 to 14 of these
dealerships were operating at a loss when acquired. Petitioner husband
was able to turn around all of these businesses and make them
profitable. On that basis, we believe petitioners engaged in the ranch
business for profit. See Treas. Reg. § 1.183-2(b)(5) (“The fact that the
taxpayer has engaged in similar [or dissimilar] activities in the past and
converted them from unprofitable to profitable enterprises may indicate
that he is engaged in the present activity for profit, even though the
activity is presently unprofitable.”). This factor weighs in petitioners’
favor.
                                   12

[*12] F.     The Taxpayer’s History of Income or Losses with Respect to
             the Activity

       Petitioners purchased the ranch in 2004. Since then it has never
produced a profit nor broken even. This history would be indicative that
the activity is not being engaged in for profit. See Treas. Reg. § 1.183-
2(b)(6) (“[W]here losses continue to be sustained beyond the period
which customarily is necessary to bring the operation to profitable
status such continued losses, if not explainable, as due to customary
business risks or reverses, may be indicative that the activity is not
being engaged in for profit.”).

       Petitioners testified that an unforeseen drought took place after
they purchased the property which decreased the viability of sustaining
a cattle herd, one of the principal ways in which they intended to
produce revenue. Although droughts are not uncommon in the western
United States, we find that the drought was beyond their control. See
id. (“If losses are sustained because of unforeseen or fortuitous
circumstances which are beyond the control of the taxpayer, such as
drought, disease, fire, theft, weather damages, other involuntary
conversions, or depressed market conditions, such losses would not be
an indication that the activity is not engaged in for profit.”).

       That said, it is not apparent that the losses were sustained
“because of” the unforeseen drought as required by the regulations. See
Whatley v. Commissioner, T.C. Memo. 2021-11, at *28 (finding that a
drought did not cause the cattle operation’s losses). The cattle herd was
decreased within months of petitioners’ purchasing the ranch in 2004.
The losses at issue occurred nearly a decade later. We are therefore
unpersuaded by petitioners’ argument that the drought can be blamed
for the ranch’s recent losses.

       The other anticipated method of producing revenue was providing
guided hunting expeditions. The failure here seems more to be a lack of
planning than any unforeseen circumstances. Petitioners testified that
shortly after purchasing the ranch they realized that the property was
too small to support the type of animals that hunters seek. They also
discovered that purchasing the necessary hunting insurance for the
property would be too expensive. We do not see that this was an
unforeseeable circumstance or customary business risk that arose.
Instead, this appears more to be a failure in business due diligence. In
the light of these considerations we find that this factor weighs against
petitioners.
                                     13

[*13] G.     The Amount of Occasional Profits, if Any, Which Were
             Earned

       Petitioners have never earned a profit from the ranch business
yet have incurred significant expenses. In 2015 the ranch earned less
than $1,000 yet incurred almost half a million dollars in expenses. The
years 2016 and 2017 are not much better: The ranch earned $12,485 and
$10,627 while expending $235,580 and $239,751, respectively. This
indicates a lack of profit motive. See Treas. Reg. § 1.183-2(b)(7) (“The
amount of profits in relation to the amount of losses incurred, and in
relation to the amount of the taxpayer’s investment and the value of the
assets used in the activity, may provide useful criteria in determining
the taxpayer’s intent.”). This factor weighs against petitioners.

      H.     The Financial Status of the Taxpayer

        As mentioned, petitioner husband has had many successful
business endeavors throughout his life, primarily in the automotive
industry. During the years in issue petitioners reported total income of
$11,099,715, $12,376,821, and $9,259,687, respectively. The significant
losses from the ranching activity served to reduce this income.
Therefore, in addition to the fact that petitioners had significant income
from another source, the losses from the ranch activity generated
substantial tax benefits. This benefit is indicative of a lack of profit
motive. See Treas. Reg. § 1.183-2(b)(8) (“Substantial income from
sources other than the activity (particularly if the losses from the
activity generate substantial tax benefits) may indicate that the activity
is not engaged in for profit especially if there are personal or recreational
elements involved.”). This factor weighs against petitioners.

      I.     Elements of Personal Pleasure or Recreation

       Petitioners assert that they did not have personal motives for
purchasing the ranch. At trial they testified that they spent no more
than two weekends per month at the property. And when they did visit,
they did not engage in any personal or recreational activities. Instead
their purpose was usually to check in with Mr. Palm and help him with
any repairs. This is indicative of a profit motivation. See Treas. Reg.
§ 1.183-2(b)(9) (“The presence of personal motives in carrying on of an
activity may indicate that the activity is not engaged in for profit,
especially where there are recreational or personal elements involved.”).

       Respondent argues that petitioners did derive pleasure from their
trips to the property, noting that on some occasions they invited guests
                                    14

[*14] to the property and generally enjoyed enhancing it. Petitioners
did not dispute this fact. But we do not think that undercuts their
position. See id. We find compelling the fact that petitioners have
numerous properties in desirable locations besides the ranch.
Petitioners testified that at these homes they engage in true recreational
activities such as hiking, biking, and boating. Thus despite taking some
personal pleasure from the ranch property, we maintain that
petitioners’ primary motivation was to earn a profit. This factor weighs
in their favor.

IV.   Conclusion

       This is a close case.        After weighing all the facts and
circumstances, we conclude that petitioners engaged in their ranching
activity for profit. Their activities cannot be characterized as a hobby.
We do not sustain respondent’s disallowance of the loss deductions
related to the ranching activity under section 183.

V.    Accuracy-Related Penalties

       Respondent determined accuracy-related penalties under section
6662(a) for the 2015 and 2016 underpayments. Since we have
determined that petitioners did engage in a for-profit business, we reject
the penalties associated with the deficiencies pursuant to the section
183 finding. Respondent also determined that petitioners failed to
report an IRA distribution during 2015. Petitioners conceded that they
should have reported the distribution. They nonetheless argue that the
associated penalties should be voided or abated because respondent
failed to satisfy section 6751.

       According to our caselaw, “the Commissioner bears the burden of
production with respect to the liability of an individual for any penalty.”
Graev v. Commissioner, 149 T.C. 485, 493 (2017), supplementing and
overruling in part 147 T.C. 460 (2016); see § 7491(c). The Commissioner
satisfies that burden by presenting sufficient evidence to show that it is
appropriate to impose the penalty in the absence of available defenses.
Graev, 149 T.C. at 493 (citing Higbee v. Commissioner, 116 T.C. 438, 446
(2001)). This includes satisfying section 6751(b)(1), which provides that
“[n]o penalty under this title shall be assessed unless the initial
determination of such assessment is personally approved (in writing) by
the immediate supervisor of the individual making such determination
or such higher level official as the Secretary may designate.”
                                   15

[*15] The written supervisory approval is not required to take any
specific form. See Palmolive Bldg. Invs., LLC v. Commissioner, 152 T.C.
75, 85–86 (2019). But it generally must be obtained no later than (1) the
date on which the IRS issues the deficiency notice, or (2) the date, if
earlier, on which the IRS formally communicates to the taxpayer the
Examination Division’s determination to assert a penalty. See Belair
Woods, LLC v. Commissioner, 154 T.C. 1, 15 (2020).

       In Kroner v. Commissioner, 48 F.4th 1272 (11th Cir. 2022), rev’g
in part T.C. Memo. 2020-73, the U.S. Court of Appeals for the Eleventh
Circuit disagreed with the Tax Court regarding the timing of the section
6751(b) approval requirement. The Eleventh Circuit concluded that
“the IRS satisfies [s]ection 6751(b) so long as a supervisor approves an
initial determination of a penalty assessment before it assesses those
penalties.” Id. at 1276.

       In Laidlaw’s Harley Davidson Sales, Inc. v. Commissioner, 29
F.4th 1066, 1071 (9th Cir. 2022), rev’g and remanding 154 T.C. 68
(2020), the U.S. Court of Appeals for the Ninth Circuit considered the
timeline for obtaining supervisory approval of “assessable penalties,”
which are not subject to deficiency procedures. The Ninth Circuit held
that, for an assessable penalty, supervisory approval is timely if secured
before the penalty is assessed or “before the relevant supervisor loses
discretion whether to approve the penalty assessment.” Id. at 1074.

       We follow the relevant precedent of the Court of Appeals to which
an appeal would generally lie. See Golsen v. Commissioner, 54 T.C. 742,
757 (1970), aff’d, 445 F.2d 985 (10th Cir. 1971). In this case the appeal
would lie in the Ninth Circuit, which has not addressed this issue in a
deficiency case. Because the immediate supervisor’s signature on the
30-day letter is timely under either standard, the Court does not address
the potential conflict.

       Section 6662(a) imposes a 20% accuracy-related penalty on any
portion of an underpayment of tax required to be shown on a return if,
as provided by section 6662(b)(1), the underpayment is attributable to
“[n]egligence or disregard of rules or regulations.” Negligence includes
“any failure to make a reasonable attempt to comply” with the internal
revenue laws, and “disregard” includes “any careless, reckless, or
intentional disregard.” § 6662(c). Negligence also includes any failure
by the taxpayer to keep adequate books and records or to substantiate
items properly. Treas. Reg. § 1.6662-3(b)(1).
                                  16

[*16] Petitioners conceded that they should have included the IRA
distribution from NADART as income for 2015. The accuracy-related
penalty does not apply with respect to any portion of the underpayment
for which the taxpayer shows that he or she had reasonable cause and
acted in good faith. § 6664(c)(1); see Higbee, 116 T.C. at 446–47.
Petitioners did not show reasonable cause. Accordingly, they are liable
for the section 6662(a) penalty as it pertains to the underpayment
related to the IRA distribution.

      We have considered all arguments made by the parties, and to the
extent not mentioned or addressed, they are irrelevant or without merit.

      To reflect the foregoing,

      An appropriate order will be issued, and decision will be entered
under Rule 155.