T.C. Memo. 2007-368



                     UNITED STATES TAX COURT



RHETT RANCE SMITH AND ALICE AVILA SMITH, ET AL.,1 Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 11902-05, 13225-05,    Filed December 17, 2007.
                 13226-05, 13227-05,
                 13228-05.



     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.



     1
       Cases of the following petitioners are consolidated
herewith for purposes of trial, briefing, and opinion: Joel
Rance and LaRhea Smith, docket No. 13225-05; J. Zane and Shannon
R. Creese Smith, docket No. 13226-05; and Rhett Rance and Alice
Avila Smith, docket Nos. 13227-05 and 13228-05. A pretrial
procedural issue was decided with respect to Rhett Rance and
Alice Avila Smith in docket No. 11902-05. See Smith v.
Commissioner, T.C. Memo. 2006-187.
                               - 2 -

             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:
                                           Accuracy-Related
                                                Penalty
     Petitioners      Year      Deficiency     Sec. 6662

  Rhett Rance &       1998     $311,514       $62,302.80
    Alice Avila Smith 1999      368,777        73,755.40
                      2000      373,183        74,638.40
                      2001      110,429        22,085.80
                      2002       87,535           None


  Joel Rance &        1998       988,392      197,678.40
    LaRhea Smith      1999     1,254,421      250,884.20
                      2000       439,132       87,826.40
                      2001       256,486       51,297.20


  J. Zane & Shannon   1998      375,999        75,199.80
    R. Creese Smith   1999      765,397       153,079.40
                      2000      386,956        77,391.20
                      2001      290,027        58,005.40

     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.
                                - 3 -

     After concessions2 of the parties, the issues remaining for

our consideration are:

     1.   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;

     2.   whether petitioner J. Zane Smith’s dog breeding activity

constitutes an activity engaged in for profit within the meaning

of section 183(a);

     3.   whether petitioner J. Zane Smith’s cow and dairy farm

activity constitutes an activity engaged in for profit within the

meaning of section 183(a);




     2
       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(a) penalties attributable to the
unreported income and overstated interest deductions.
Petitioners conceded that the 6-year period for assessment under
sec. 6501(e)(1)(A) applied with regard to their 1998, 1999, and
2000 tax years. Respondent conceded that petitioners Rhett Rance
Smith (Rhett) and Alice Avila Smith (Alice) substantiated cash
charitable contributions of $217,481 for the year 2002 and that
they are entitled to reduce their 2002 income by $214,970.
Respondent also conceded the issue he raised at trial, that the
contributions of business interests were not completed gifts.
                                 - 4 -

     4.     whether petitioner Rhett Rance Smith’s cutting horse

activity constituted an activity engaged in for profit within the

meaning of section 183(a); and

     5.   whether petitioners are liable for section 6662(a)

accuracy-related penalties for negligence or disregard of rules

or regulations with respect to the above-referenced charitable

contribution deductions and/or their section 183 activities.

                          FINDINGS OF FACT

Background

     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 Forms 1040,

U.S. Individual Income Tax Return, for 1998, 1999, 2000, 2001,

and 2002.    On April 15, 2005, respondent sent notices of

deficiency to Rhett and Alice for their 1998, 1999, 2000, and

2001 tax years.    On March 25, 2005, respondent sent a notice of

deficiency to Rhett and Alice for their 2002 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 Forms 1040 for

1998, 1999, 2000, and 2001.    On April 15, 2005, respondent sent

notices of deficiency to Rance and LaRhea for their 1998, 1999,

2000, and 2001 tax years.
                                 - 5 -

     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 Forms 1040 for

1998, 1999, 2000, and 2001.    On April 15, 2005, respondent sent

notices of deficiency to Zane and Shannon for their 1998, 1999,

2000, and 2001 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 1989 with 1,000 initially issued

shares of stock, held as follows:

              Petitioners            Shares

            Rance                     250.5
            LaRhea                    250.5
            Rhett and Alice           249.5
            Zane and Shannon          249.5
              Total                 1,000.0

     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 March 31, 1997 through 2004, Beneco did not pay a dividend.
                              - 6 -

     During December 1995, 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

98 percent and the couple’s wholly owned corporation, as general

partner, owned the remaining 2 percent as follows:

     FLP                  Limited Partner         General Partner

   Jireh LP              J. Rance &             J.A. Rohi Corp.
                           LaRhea Smith

   Mustard Seed LP       J. Zane &              Z&S Consulting, Inc.
                           Shannon R. Smith

   Zerubbabel LP         Rhett R. &             Bull Run Enters.,
                           Alice A. Smith         Inc.

Each partnership agreement provided that partners could not

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 1995, 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 is 501 shares of Beneco stock.   Sometime after

December 20, 1995, Zane and Shannon transferred into Mustard Seed

Limited Partnership (Mustard Seed) their 249.5 shares of Beneco
                                 - 7 -

stock which, during the years at issue, were its sole asset.

Sometime after December 20, 1995, Rhett and Alice transferred into

Zerubbabel Limited Partnership (Zerubbabel) their 249.5 shares of

Beneco stock which, during the years at issue, were its sole

asset.

     Christian Community Foundation (CCF), a section 501(c)(3)

charity for tax purposes, was incorporated in 1980 under the laws

of Colorado.   On or about December 19, 1995, Attorney Kelley sent

a letter to CCF, enclosing a check for $1,000 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. 06022.

     Attorney Kelley advised CCF that for 1995, Rance and LaRhea

would be contributing an FLP interest having a value of $350,000

and that Rhett and Alice and Zane and Shannon would each be

contributing an FLP interest having a value of $185,000.     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 1996, the irrevocable trust of each couple and CCF

executed a separate Agreement for the Purchase and Sale of Limited
                                - 8 -

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 1997 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
                                 - 9 -

interests.    Petitioners paid annual administrative fees to CCF.

From 1995 through 2001, Rance and LaRhea assigned interests in

Jireh to CCF and claimed the following noncash charitable

contributions deductions:

                            Percent Assigned          Claimed
             Date            Per Tax Return        Contribution
        12/20/95                10.9157%             $350,000
        12/29/97                 9.9133               Unknown
        12/29/00                 1.5988               145,000
        12/31/01                11.272                480,000

Although Form 8283, Noncash Charitable Contributions, for 2000

indicated that an interest of 1.5988 percent had been contributed

to CCF, the actual percentage contributed was 3.22 percent.

     Pursuant to Rance and LaRhea’s request, during the period

1995 to 2002, CCF directed their contributed interests in Jireh to

Zacchaeus.    During the years 1998 through 2001, Rance and LaRhea

did not transfer any Beneco stock to CCF.       Rance and LaRhea

attached section B of Form 8283 to their 2000 return and described

the donated property as “1.5988% Units Jireh Ltd” with an

appraised fair market value of $145,000.       The Declaration of

Appraiser, part III on Form 8283 for 2000, was signed by Mr.

Kramer and stated that the appraisal date was September 1, 1999.

No such appraisal was attached to Rance and LaRhea’s 2000 return

or made a part of the record.

     The Donee Acknowledgment, part IV on Form 8283 for 2000, was

signed by Valerie Cornelius, Director of Operations for CCF, next
                                - 10 -

to the typed date December 29, 2000.     Attached to Rance and

LaRhea’s 2000 return was a letter, dated January 31, 2001,

thanking them for their charitable donation on December 29, 2000,

and stating that “No goods or services were provided for this

donation.”

       Likewise, Rance and LaRhea attached section B of Form 8283 to

their 2001 return and reported the donated property as “11.272%

Units (BENECO Stock) JIREH Ltd” with an appraised fair market

value of $480,000.    Mr. Kramer made the handwritten notation on

part III, Declaration of Appraiser, of Rance and LaRhea’s 2001

Form 8283 “see attached 11/19/01 report 11/19/2001 Frank E. Koehl

Jr.”    The Form 8283 was not signed by Frank E. Koehl, Jr. (Mr.

Koehl).    Also attached to Rance and LaRhea’s 2001 return was a

one-page letter, dated November 19, 2001, from Mr. Koehl, to Rance

referring to an $8,500-per-share valuation of Beneco as of March

31, 2000.    No such appraisal was attached to Rance and LaRhea’s

2001 return.     The Donee Acknowledgment, part IV on Form 8283 for

2001, was signed by Valerie Cornelius, and the title “President”

and the date “12/26/2001” were typed next to her name.     The

typewritten title “President” and the date “12/26/2001” were both

crossed out, and the title “Treasurer” and the date “4/13/2002”

were handwritten.    No letter of acknowledgment, gratitude, or

statement that no goods or services were received was attached to

the 2001 return.
                                 - 11 -

     Also attached to Rance and LaRhea’s 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 $240,000 and included CCF’s

acknowledgment by its president, John C. Mulder, who signed in

that capacity.

     From 1995 through 2001, 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        Claimed
        Date            Per Tax Return       Contribution

     12/20/95               11.5857%          $185,000
     12/29/97                1.95              Unknown
     12/31/98                4.11036            90,000
     12/31/01                8.864             188,000

Zane and Shannon requested that CCF direct any contributed

interests in Mustard Seed to Zacchaeus for the period 1995 to

2002.    During the years 1998 through 2001, Zane and Shannon did

not transfer any Beneco stock to CCF.      Form 8283 attached to Zane

and Shannon’s 1998 return did not include section B, the portion

of the form designated for gifts over $5,000.      No appraisal or

reference to a specific appraisal was mentioned in or attached to

Zane and Shannon’s 1998 tax return.       An “Assignment and Agreement”

was attached to their 1998 return signed by Zane and Shannon and a
                               - 12 -

representative of CCF assigning and acknowledging a transfer of an

FLP interest with a stated value of $90,000 as of December 31,

1998.   The 1998 return did not have any reference to whether

Zane and Shannon received goods or services in connection with

their contribution.

     During 1998, Zane and Shannon assigned “an economic interest

in that percentage of their limited partnership interest in the *

* *[Mustard Seed] which has a value of $90,000 as of December 31,

1998, 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’s 2001

return contains the statement that the donated property was

“8.864% units of (Beneco stock) the Mustard Seed LP” with an

appraised fair market value of $188,000.

     Section B, part III, Declaration of Appraiser, on Zane and

Shannon’s Form 8283, attached to their 2001 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 “11/19/2001”.     Mr.

Kramer made the handwritten notation “see Ltr Attached Frank E.

Koehl Jr”.   Also attached to Zane and Shannon’s 2001 return was a
                                   - 13 -

one-page November 19, 2001, letter from Mr. Koehl to Rance

referring to an $8,500-per-share valuation for Beneco as of March

31, 2000.    Also attached to Zane and Shannon’s 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 1995 through 2001, Rhett and Alice assigned interests in

Zerubbabel to CCF and claimed corresponding noncash charitable

contribution deductions on their personal income tax returns, as

follows:
                             Percent Assigned         Claimed
             Date             Per Tax Return        Contribution
           12/20/95               11.587%            $185,000
           12/29/97                3.92               Unknown
           12/29/00                2.2851             100,000
           12/31/01               13.674              290,000

     Although Rhett and Alice’s Form 8283 for 2000 contained the

statement that an interest of 2.2851 percent had been contributed

to CCF, the actual percentage contributed was 4.57 percent.

Pursuant to Rhett and Alice’s request, CCF directed their 1995-

2001 assigned interests in their FLP (Zerubbabel) to Zacchaeus.

Rhett and Alice did not donate Beneco stock to CCF during the

years 1998 through 2001.
                               - 14 -

     Rhett and Alice attached Form 8283 to their 2000 return and

in section B, part I, Information on Donated Property, described

the donated property as “2.2851% Units Interest Zerubbabel Ltd”,

stating that it had an appraised fair market value of $100,000.

The Declaration of Appraiser was signed by Mr. Kramer and

contains the statement that the appraisal date was September 1,

1999.   No appraisal was attached to Rhett and Alice’s 2000

return, and no appraisal dated September 1, 1999, 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 2000

return bearing the Donee Acknowledgment signature of Valerie

Cornelius on behalf of CCF.    Also attached to the 2000 return was

an acknowledgment of the contribution from CCF, dated January 31,

2001, which included the statement “No goods and services were

provided for this donation.”

     Rhett and Alice attached two Forms 8283, section B to their

2001 return and, in each, described the donated property as

“13.674% Units (Beneco Stock) Zerrubbable Ltd” with a stated

value of $290,000.   The signature line of the Declaration of

Appraiser was blank on one of the forms.   The other had the

handwritten notation “see attached 11/19/01 report Frank E. Koehl

Jr” with a typewritten address in Princeton, New Jersey, and a

typewritten appraisal date of November 19, 2001.   Mr. Kramer made

the handwritten notation “see attached 11/19/01 report Frank E.
                               - 15 -

Koehl Jr”.    No appraisal report was attached to the 2001 return.

Attached to the 2001 return was a letter dated November 19, 2001,

from Mr. Koehl, stating that the value of Beneco stock, as of

March 31, 2000, was $8,500 per share.   No detail or explanation

as to how the valuation was done was attached to the 2001 return.

Also attached to the 2001 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

December 2001.

     Rhett and Alice assigned an interest in Zerubbabel to

Crossmen Ministries in 2002 and claimed a $247,500 charitable

deduction for that contribution.   Crossmen Ministries was a Texas

nonprofit corporation that petitioners organized during 2002.

LaRhea, Rance, and Rhett were the officers of Crossmen

Ministries.   During 2002, Crossmen Ministries was affiliated with

World Bible Way Fellowship, Inc. (World Bible Way).   During 2002,

World Bible Way was a section 501(c)(3) 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 2002 return.    It

described the donated property as “11.67% Of FLP Beneco Stk” with

an appraised fair market value of $247,500.   That Form 8283
                               - 16 -

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’s 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 $91,050 as of

December 27, 2002.   However, both the $91,050 values were crossed

out by hand and “$123,750” was handwritten in its place, along

with three sets of initials.   The document reflected that Alice

signed the document on December 27, 2002, and Crossmen Ministries

accepted the assignment to be effective as of December 27, 2002.

     Mr. Kramer served as petitioners’ C.P.A. for the period 1995

through 2002.   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 section 170 and the

reporting requirements for noncash charitable contributions

during the years at issue.    He was also aware that the noncash
                              - 17 -

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 1995 tax year noncash charitable contribution,

performed a September 30, 1995, 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 1995 estimated fair market value

of a 100-percent interest of Beneco stock was $6,400,000, as of

September 30, 1995.   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 1995 valuation of the

Beneco stock was used for the charitable contribution deductions

of FLP interests claimed for the 1998 through 2000 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.
                               - 18 -

After his 1995 valuation, sometime around 1999-2000, Mr. Kramer

advised petitioners to hire a certified appraiser.

     On April 5, 2000, 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

$12,500.    Mr. Koehl of MPI transmitted by a letter dated November

19, 2001, an evaluation of the “common stock of Beneco, Inc.,” as

of March 31, 2000, concluding that the aggregate freely traded

equity capital of Beneco had a value of $9,195,000.

     Mr. Koehl opined that the average lack of marketability

discount for private placements of nonpublicly traded stocks was

27.5 percent, and he decided to use a lack of marketability

discount of 7.5 percent because he was valuing a controlling

interest.   Mr. Koehl concluded that the outstanding common stock

of Beneco had a fair market value of $8.5 million (or $8,500 per

share, based on 1,000 shares issued and outstanding) as of March

31, 2000, 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
                              - 19 -

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

1999.   During the years at issue, Rance maintained several horses

in his cutting horse activity.    For the taxable years 1998

through 2005 Rance reported the following total income, expenses,

and net losses:

     Year          Income         Expenses          Net Losses

     1998           -0-           $124,291          $124,291
     1999           -0-             76,352            76,352
     2000           -0-             65,486            65,486
     2001         $1,736            83,630            81,894
     2002          3,817            83,691            79,874
     2003          4,583            48,903            44,320
     2004          4,084            66,677            62,593
     2005          1,959            44,474            42,515
       Total      16,179           593,504           577,325

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
                                - 20 -

horse activity in the 1980s and discontinued the activity during

1987 because it was expensive, competitive, and risky, and he had

a champion mare that had achieved success by winning the Pacific

Coast Derby.   During 1996, Rance and LaRhea purchased

approximately 70 to 75 acres of land in Oregon.   In October 1998,

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 November 1999, 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 1999,

Rance purchased P.K., a driving horse which pulled carts and

wagons and which Rance rode.    Also during 1999, 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 2000 or 2001.    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 2001

or 2002.

      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 2001 for

$30,000 and placed him in training in Medford with Bobby and
                               - 21 -

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

2004 for $22,500.

     Rance, sometime in 2001 or 2002, 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 2003 for $6,000 and Mitzi was

sold in 2004 for $6,300 for reported gains of $839 and $230,

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 12.   During grade school and high

school, Zane owned and learned to show Staffordshire Bull

Terriers.   By 1995 or 1996, 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 1985 at age 22, the

youngest in recent history, and has judged in shows all over the
                              - 22 -

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 10 to 20 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 1996 through 2003, 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 1996, 1997, 1998, 1999, and

2000. Zane’s 1997 Schedule C, Profit or Loss From Business,

reflected no income and $52,683 in expenses.   Zane’s Schedules F

attached to his other returns were entitled “Cattle Crops–-Dog

Breeding” and for 2004 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 1997 through 2004:
                                  - 23 -

            Tax          Total         Total           Total
            Year         Income       Expenses         Losses

             1997          --         $52,683        ($52,683)
             1998          –-          61,490         (61,490)
             1999          --          28,826         (28,826)
             2000          –-          51,409         (51,409)
             2001          --          80,152         (80,152)
             2002          –-          56,818         (56,818)
             2003       $5,673          7,651          (1,978)
             2004          –-           6,064          (6,064)
               Total     5,673        345,093        (339,420)

Most of the expenditures were for travel, advertising, and show

expenses.    For example, in 1997, of the $52,683 of total expenses

claimed, $28,676 was for show expenses, $10,850 for travel, and

$9,800 for advertising.       Accordingly, $49,326 of the $52,683

(almost 94 percent) was for shows, travel, and advertising.         Most

of the expenses were associated with showing dogs and judging dog

shows.

     According to a March 2004 report from Synbiotics, Zane had

44 semen straws stored from the dog Malcolm.       Synbiotics

calculated that 7.9 inseminations could be accomplished from the

44 straws.

Zane’s Cow and Dairy Farm Activity

     Zane had an interest in cattle as a boy, and in July 1998,

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
                               - 24 -

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 2000, Zane also purchased the Columbus Dairy, consisting

of 225 acres and located 15 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 2002.

     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.
                                - 25 -

     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

2006.   His gross revenues exceeded $100,000 for 2004, 2005, and

2006.   Zane expects the revenue to triple in 2007 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 August 2001, Zane purchased 77 Normande cows from

Keith Miller of Stuart, Iowa.    Beginning in May 2001, 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

January 2002, Mr. Hughes became Zane’s full-time employee.      Zane

paid Mr. Hughes approximately $29,000 to $30,000 in cash wages
                               - 26 -

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 60 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 October 2001, and milking operations

commenced during 2002.    Zane began reporting the cattle activity

and deducting expenses in his 1998 tax year.    Zane kept a

separate bank account for the Columbus Dairy.

Penalties--Reliance

     Through the 2001 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.
                                - 27 -

     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 1998

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.

                                OPINION

Burden of Proof

     Petitioners, for the first time on brief, raise the issue of

whether the burden of proof shifted to respondent under section

7491(a).   Under that section the burden of proof may shift to the
                               - 28 -

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 section

7491(a)(2)(A) 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 section 7491(a)(2), which they have not done.     We

agree with respondent that petitioners’ attempt to raise section

7491 for the first time in their posttrial brief is untimely.

     Under section 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 section 7491 causes prejudice
                                  - 29 -

and is untimely.3     See, e.g., Deihl v. Commissioner, T.C. Memo.

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 section 183.      Respondent does

bear the burden of production with respect to the section 6662

penalty.      See sec. 7491(c).   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(c);      Wheeler v. Commissioner, 

(2006); Higbee v.

Commissioner, 

(2001).

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 50 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

     3
       In any event, petitioners have not shown compliance with
the substantiation requirements of sec. 7491(a)(2) so as to
warrant a shift in the burden of proof as to any of the factual
issues relevant to their liability for tax.
                             - 30 -

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 section 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.

     Section 170(a)(1) 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-

1(c)(1), 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 section 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
                               - 31 -

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(a)(1); Hewitt v. Commissioner, 

, 261 (1997),

affd. without published opinion 

(4th Cir. 1998).

The obligation to substantiate charitable contribution deductions

is clear and unambiguous.   Blair v. Commissioner, T.C. Memo.

1988-581.   No deduction is allowed for a contribution in excess

of $5,000 unless the taxpayer meets the substantiation

requirements of section 1.170A-13(c)(2), Income Tax Regs.     Todd

v. Commissioner, 

, 340 (2002); sec. 1.170A-

13(c)(1)(i) Income Tax Regs.   Section 1.170A-13(c)(2)(i), 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)(3) 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)(4) 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)(2)(ii) of this section.
                                 - 32 -

     Additionally, for contributions of $250 or more, a taxpayer

must obtain a contemporaneous written acknowledgment from the

donee organization.   Sec. 170(f)(8)(A).   The acknowledgment must

be obtained by the earlier of the date the return is filed or its

due date.   Sec. 170(f)(8)(C).    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(f)(8)(B).

     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. 

at 265.

     Section 1.170A-13(c)(3)(i) and (ii), Income Tax Regs.,

contains the specific requirements that a “qualified appraisal”

must:

     (1) Be made not earlier than 60 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;

     (2) be prepared, signed and dated by a qualified appraiser;

     (3) contain the name address, identifying number, and

qualifications of the qualified appraiser;

     (4) contain a statement that it was prepared for income tax

purposes;

     (5) contain a description of the property in sufficient

detail for a person who is not generally familiar with the type
                             - 33 -

of property to ascertain that the property that was appraised is

the property that was contributed;

     (6) 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;

     (7) show the date on which the property was contributed;

     (8) show the fair market value of the property on the date

of contribution;

     (9) show the method of valuation and the specific bases for

the valuation; and

     (10) 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), Pub. L.

98-369, sec. 155(a), 98 Stat. 691.    DEFRA section 155 instructs

the Secretary to provide heightened substantiation reporting

requirements for certain noncash charitable contributions.   DEFRA

section 155 provides:

          (3) 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.
                              - 34 -

          (4) 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 Bond v. Commissioner, 

, 37 (1993).   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 section 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 section 170 is to allow certain
     taxpayers a charitable deduction for contributions made
     to certain organizations. It is equally apparent that
     the reporting requirements of section 1.170A-13, Income
     Tax Regs., are helpful to respondent in the processing
     and auditing of returns on which charitable deductions
                               - 35 -

    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. at 41; 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 Hewitt v. Commissioner, 

(1997), 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,
                               - 36 -

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 section 170 and section 1.170A-

13, 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. 

, the taxpayers in Hewitt contended that they had

substantially complied with the requirements of section 1.170A-

13, Income Tax Regs., and that they were relieved of any

obligation to obtain a qualified appraisal.    Hewitt v.

at 262.
                                   - 37 -

     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. 

, 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, T.C. Memo. 1994-572 (respondent prevailed
     where no qualified appraisal was obtained).

                       *   *   *     *      *   *   *

          Moreover, it is clear that the principal objective
     of DEFRA section 155 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 March 21, 1984, S. Prt.
     98-169 (Vol. 1), at 444-445 (S. Comm. Print 1984);
     Staff of Joint Comm. on Taxation, General Explanation
     of the Revenue Provisions of the Deficit Reduction Act
     of 1984 (J. Comm. Print 1985); cf. Atlantic Veneer
     Corp. v. Commissioner, 

, 1084 (1985), affd.
     

(4th Cir. 1987). 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
                              - 38 -

     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. 

at 264-266].

     Petitioners also rely on Bond v. Commissioner, 

(1993).   In particular, they contend that in Bond this Court:

     determined that the substantiation rules of DEFRA
     section 155 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 155 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 June 3,

2004, Congress, in the American Jobs Creation Act of 2004 (AJCA),

Pub. L. 108-357, sec. 883, 118 Stat. 1631, which added

section 170(f)(11), specifically codified the substantiation
                              - 39 -

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 2004

enactment.   We agree with respondent.

     Petitioners rely, in great part, on the legislative history

surrounding the 1984 enactment of DEFRA section 155, 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 155.    We find

no sound basis for accepting petitioners’ contention that a

reasonable cause exception existed before the 2004 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. 

, or whether the

information included on and with their income tax returns was

insufficient to meet the statutory and regulatory requirements
                               - 40 -

like that of the taxpayers in Hewitt v. Commissioner, 

(1997).

       Petitioners, during 1995, 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 1995.

       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

1995 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
                               - 41 -

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 1998, the sole asset in each FLP was

Beneco stock.   Beneco did not pay any dividends before 1995, 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 1998 contribution and Rhett and Alice’s

2000 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 (e.g., $145,000) 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 8283 attached to the returns were prepared in an

inattentive and incomplete manner.
                              - 42 -

     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 March 31, 2000, but it was not attached to any of

petitioners’ 2001 or 2002 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 section 1.170A-13(c)(3), 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 November 17, 1995, stated a $6,400,000 value

for a 100-percent interest in Beneco stock as of September 30,

1995.   Mr. Kramer’s valuation report is terse and provides only

limited details of the analysis and underpinnings for his value

conclusion.   On petitioners’ Forms 8283 for 2000, the Declaration
                                - 43 -

of Appraiser was signed by Mr. Kramer, and references were made

to a September 1, 1999, appraisal.       Petitioners did not produce a

September 1, 1999, 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 $8.5 million as of March 31,

2000.   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’ 2000

returns.    Forms 8283 for 2001 referred to Mr. Koehl’s valuation,

and Rhett and Alice’s 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 60
                                - 44 -

days before any of the contributions and ending on the due dates

of the corresponding returns.    See sec. 1.170A-13(c)(3)(i)(A),

Income Tax Regs.   Additionally, the 1995 report by Mr. Kramer did

not specifically state that it was prepared for income tax

purposes.   See sec. 1.170A-13(c)(3)(ii)(G), 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(c)(3)(ii)(C), (I),

Income Tax Regs.   Respondent, referencing section 1.170A-

13(c)(3)(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 8283 and the documents attached to petitioners’

returns failed to comply with the section 1.170A-13(c)(4), 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 section

1.170A-13(c)(4)(ii), 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
                                - 45 -

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 8283 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 1998 income tax return.    Instead they completed section A,

which is expressly intended to be used for noncash charitable

contributions worth $5,000 or less.      As a result, their 1998

return contained no declaration by appraiser and no

acknowledgment of the donee.

     On the Forms 8283 attached to Rance and LaRhea’s and Rhett

and Alice’s 2000 returns, Mr. Kramer signed the Declaration of

Appraiser and referred to an appraisal dated September 1, 1999,

that was not attached to the returns or shown to have existed.

Rance and LaRhea’s return reflected that an interest of 1.5988

percent of the partnership with a value of $145,000 was

contributed to CCF.   The parties have now agreed and stipulated

that Lance and LaRhea contributed a 3.22-percent interest with a

total value of $145,000.   Rhett and Alice’s return reflected that

an interest of 2.2851 percent of the partnership with a value of

$100,000 was contributed to CCF.    The parties have now agreed and
                              - 46 -

stipulated that Rhett and Alice contributed a 4.57-percent

interest with a total value of $100,000.

     Each couple claimed a charitable contribution deduction for

2001.   In each instance, the Declaration of Appraiser attached to

the return referred to the letter dated November 19, 2001, from

Mr. Koehl to Rance wherein he opined that the value of Beneco as

of March 31, 2000, was $8.5 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 $8.5 million value was attached to some

of the returns, but it was terse and fell far short of meeting

the summary appraisal requirements.

     For 2002, Rhett and Alice’s return contained the description

of the donated property as “11.67% 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

“$91,050" as the amount of the contribution.   That amount,

however, was crossed out and “$123,750” 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
                               - 47 -

statutorily mandated regulatory requirements.   Bond v.

Commissioner, 

(1993), and Hewitt v. Commissioner, 

(1997), 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.
                               - 48 -

      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.4

Section 183 Activities

      Rance and Zane each claimed losses that respondent

disallowed as being from activities not engaged in for profit

within the meaning of section 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 * * * [section 183].”     Sec.

183(a).   Section 183(b)(1) permits deductions which are otherwise


     4
        Our holding that petitioners are not entitled to the
noncash charitable contribution deduction renders it unnecessary
to decide the value of the contributed interests.
                              - 49 -

allowable without regard to whether the activity is engaged in

for profit, and section 183(b)(2) 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 section 183(b)(1).

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.”

     In order for a deduction to be allowed under section 162 or

section 212(1) or (2), 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, T.C. Memo. 2006-15

(quoting Wolf v. Commissioner, 

, 713 (9th Cir. 1993),

affg. T.C. Memo. 1991-212); see Patin v. Commissioner, 

(1987), affd. sub nom. Skeen v. Commissioner, 

,

94 (9th Cir. 1989).

     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.   Keanini v.

Commissioner, 

, 46 (1990); Dreicer v. Commissioner, 

, 645 (1982), affd. without published opinion 

50 -

1205 (D.C. Cir. 1983); sec. 1.183-2(a), Income Tax Regs.    In

making this determination, more weight is accorded to objective

facts than to the taxpayer’s statement of intent.     Engdahl v.

Commissioner, 

, 666 (1979).

     Factors to be considered in determining whether an activity

is engaged in for profit include:   (1) The manner in which the

taxpayer carries on the activity; (2) the expertise of the

taxpayer or his 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 or

dissimilar activities; (6) the taxpayer’s history of income or

losses 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) 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.    Indep. Elec. Supply, Inc. v. Commissioner, 

, 726-727 (9th Cir. 1986), affg. Lahr v. Commissioner,

T.C. Memo. 1984-472; Golanty v. Commissioner, 

, 425-

426 (1979), affd. without published opinion 

(9th

Cir. 1981); sec. 1.183-2(b), Income Tax Regs.

     We consider each of Rance’s and Zane’s activities

separately, beginning with petitioner Rance’s activity involving

cutting horses.
                               - 51 -

      Rance’s Cutting Horse Activity

      Schedules F were attached to Rance’s 1998 through 2005

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 (i.e., 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.5      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 70 acres of land in southern

Oregon in 1996 and moved to the property late in 1999 after

     5
        For example, Rance testified about a $17,000 breeding fee
and a mare he sold for $35,000. The tax returns in the record
(1998 through 2005) do not appear to reflect these events or
activity. In addition, Rance testified that he had as many as 20
horses. The Schedules F, likewise, do not reflect that level of
activity.
                                - 52 -

constructing a house and other buildings.     Beginning in 1998,

Rance and LaRhea claimed farm losses pertaining to the Oregon

property for an activity described as “crop livestock”.     The

primary expenses claimed for 1998 were depreciation, repairs, and

plans; there was no income for that year.     The specifics of the

claimed expenses for 1998 have not been detailed or adequately

explained.

     In 1999, 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 $6,300 and I Gotta Lotta for

$6,000.     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 2001 for $30,000 and was the

first horse entered into competition.     During 2001 and 2002, Dual

Docs was in training in Medford, Oregon, with Bobby and Jolene

Nelson.     He was sold at a loss in 2004.   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.

     1.     Manner in Which the Activity Is Conducted--The fact that

a taxpayer carries on the activity in a businesslike manner and
                               - 53 -

maintains complete and accurate books and records may indicate a

profit objective.   Sec. 1.183-2(b)(1), 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.6

     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


    6
       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(a). We found that attempt to be untimely and in other
respects ill conceived.
                              - 54 -

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, e.g., Rinehart v.

Commissioner, T.C. Memo. 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.     Burger v. Commissioner, 

, 359 (7th Cir. 1987), affg. T.C. Memo. 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.

     2.   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. 1.183-

2(b)(2), Income Tax Regs.
                                - 55 -

     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.

     3.   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(b)(3),

Income Tax Regs.

     Rance spent 8 to 10 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.

     4.     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,
                                - 56 -

indicate a profit motive.    Sec. 1.183-2(b)(4), 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 75 acres of

pasture land which could appreciate.      It is also necessary,

however, that the objective be to realize a profit on the entire

operation.    Bessenyey v. Commissioner, 

, 274 (1965),

affd. 

(2d Cir. 1967).       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.

     5.     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(b)(5), 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.
                              - 57 -

     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, T.C. Memo. 1997-503, affd. without published

opinion 

(9th Cir. 1999).    Accordingly, this factor

favors respondent’s determination.

     6.   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(b)(6), Income Tax Regs.

     As of the end of 2001, Rance had incurred nearly $350,000 in

losses from his Schedule F activity.    By the end of 2005, the

claimed losses totaled more than $568,000.    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.

.   Accordingly, this factor is

unfavorable for Rance and LaRhea.
                                - 58 -

     7.    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(b)(7), 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 ($839 and $230).

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.

     8.     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(b)(8), 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 $376,439, $421,563, $644,620, and $1,664,811 for the years

1998, 1999, 2000, and 2001.     By 2005, Rance and LaRhea’s gross

income was $2,739,845, 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
                               - 59 -

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.

     9.   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(b)(9), 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.
                               - 60 -

      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 was 12 years old,

after attending a dog show.    Thereafter, his parents bought him

his first Staffordshire Bull Terrier.7   He became involved in dog

showing, breeding, and judging, and by 1985, at age 22, 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 as 30 to 40 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

$2,000 per breeding.   He estimated that the 80 straws he had at




     7
       Ultimately, Zane became a noted expert in American and
Staffordshire Bull Terriers.
                              - 61 -

the time of trial would be worth $80,000.8   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 $1,500 to $2,000.   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

$50,000, although no evidence, other than his testimony, was

offered to support his belief.

     1.   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.



    8
       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 7.9 straws was the factor. If that were correct,
80 straws would result in approximately 10 inseminations for
total revenue of approximately $20,000.
                               - 62 -

     Beginning in 1998 and extending through 2003, Zane filed one

Schedule F each year designating the activity as “Cattle Crops--

Dog Breeding.”   In 2004, 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, e.g., Rinehart v. Commissioner, T.C.

Memo. 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, T.C. Memo. 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
                               - 63 -

activity for 1997 through 2000 and only nominal amounts

thereafter.   This factor is not favorable for Zane.

     2.    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.

     3.    Time and Effort Spent Conducting the Activity--Zane

testified that he spent an average of 10 to 12 hours per week on

the dog breeding activity.    He also testified that he spent 20 to

30 hours per week on the dairy farming, along with working full

time (presumably at least 40 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.

     4.    Expectation That the Assets Will Appreciate in Value--

Zane believed that one of the dogs was worth $50,000, 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 $50,000 would not be sufficient to recoup the $275,000

in losses already incurred by 2001.     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
                                - 64 -

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.

     5.     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.

     6.   The Activity’s History of Income and/or Losses--By the

end of 2001, Zane had accumulated losses in an amount approaching

$275,000.     By 2004, his losses were approaching $340,000.   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.
                              - 65 -

     7.   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.

     8.   Financial Status of the Taxpayer--Zane and Shannon’s

gross income, without considering income adjustments they

conceded, was $382,020, $277,979, $320,569, and $718,466 for the

1998, 1999, 2000, and 2001 years.   For each of the next 3 years,

their income exceeded $700,000 annually.     The potential for tax

benefits from the claimed dog breeding activity losses was

substantial.   This factor favors respondent’s determination.

     9.   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 was

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
                                - 66 -

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.

     Section 1.183-1(d), 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(d)(1),

Income Tax Regs.
                              - 67 -

     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 section 183 analysis.

     Beginning in 1998, 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 2001 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 2001, whereas Zane contends

that the early activity involving the cattle was preliminary to

and an integral part of the expansion of that activity in 2001.

In 1998, Zane purchased a 400-acre farm, (Goose Hill), in upstate

New York where he also built his home.   His Schedule F for the
                              - 68 -

1999 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 2000 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 2001 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 $98,470.   These

circumstances reflect that Zane did not begin to pursue the dairy

farm idea until 2001.   Any expenditures nominally   connected with

cows before 2001 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 Toth v. Commissioner, 

, 4-6 (2007).

Accordingly, we agree with respondent that Zane and Shannon are

not entitled to claim any losses in connection with his cow

activity before 2001.

     With respect to 2001, Zane had studied and researched the

various types of cattle that could be bred.   Zane recognized that
                               - 69 -

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 2001 and

accordingly expenditures would not be considered to be startup

expenses.

     During 2000, Zane purchased 225 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 2002.

     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
                               - 70 -

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 2006.    His

gross revenues exceeded $100,000 for 2004, 2005, and 2006.    Zane

expects the revenue to triple in 2007 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.

     1.   Manner in Which the Activity Is Conducted--Zane

physically segregated the cow activity from the dog breeding

activity and, as of 2001, 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 2001 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 2001, 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 $30,000 per year.

Although Zane did not keep many formal records, he did approach
                              - 71 -

the operation of the cow activity in a businesslike manner.

Accordingly, this factor is favorable for Zane.

     2.   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.

     3.   Time and Effort Spent in Conducting the Activity--Zane

spent an average of 20 to 30 hours per week on his cow and dairy

farm activity.   Certainly, 20 to 30 hours per week is

significant.   Accordingly, this factor favors Zane.

     4.   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(b)(4),

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 400 acres purchased in 1998 for

$600 to $650 per acre and currently worth around $2,500 per acre
                                 - 72 -

on the basis of comparable sales of farm land, and another farm

with 225 acres (Columbus Dairy) which was purchased in 2000 for

$500 to $600 per acre and is currently worth around $1,200 to

$1,500 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.

        5.   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.

     6.      The Activity’s History of Income and/or Losses--By the

end of 2001, Zane’s accumulated losses from the cow activity

approached $153,000.     Although the total losses had increased to

approximately $307,000 by 2003, the last year for which a

Schedule F was available, the potential for increased revenues
                                - 73 -

from the sale of organic milk could address the deficit.

Accordingly, we find this factor to be neutral.

     7.    Amount of Occasional Profits--Zane has not reported any

profits from the cow activity, and therefore this factor is

unfavorable for Zane.

     8.    Financial Status of the Taxpayer-–Without counting any

farm income Zane and Shannon’s gross income, before considering

income adjustments they conceded, was $382,020, $277,979,

$320,569, and $718,466 for the years 1998, 1999, 2000, and 2001.

For each of the next 3 years, their income exceeded $700,000.

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.

     9.    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.
                                - 74 -

     Overall, we hold that Zane has established that he entered

into the cow and dairy farm activity in 2001 with the requisite

profit motive within the meaning of section 183.

Whether Petitioners Are Liable for Penalties Under Section 6662
for Each Adjustment Considered by the Court for the Taxable Years
1998, 1999, 2000, and 2001

     Section 6662(a) 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:    (1) Negligence or

disregard of rules or regulations; (2) any substantial

understatement of income tax, and (3) any substantial valuation

misstatement.   Sec. 6662(b).

     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(c).   Negligence is the lack of due care or

failure to do what a reasonable and ordinarily prudent person

would do in a similar situation.    Neely v. Commissioner, 

, 947 (1985).

     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(b)(1), 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
                                 - 75 -

by a return position that is merely arguable.    Sec. 1.6662-

3(b)(3), 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(b)(1)(ii), Income

Tax Regs.   A substantial understatement of income tax is defined

as an understatement of income tax that exceeds the greater of 10

percent of the tax required to be shown on the tax return or

$5,000.    Sec. 6662(d)(1)(A).

     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(c).    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.    Wheeler v. Commissioner, 

(2006); Higbee

v. Commissioner, 

(2001).     Section 7491(c) does not,

however, require the Commissioner to introduce evidence of

reasonable cause, substantial authority, or similar provisions.

     Section 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(c); United States v. Boyle, 

(1985).    Whether a taxpayer acted with reasonable cause and
                                  - 76 -

in good faith is a factual question.       Sec. 1.6664-4(b)(1), 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.

in some cases, be

established by reliance on the advice of a professional tax

adviser.

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 (1) the

adviser was a competent professional who had sufficient expertise

to justify reliance; (2) the taxpayer provided necessary and

accurate information to the adviser; and (3) the taxpayer

actually relied in good faith on the adviser’s judgment.

Neonatology Associates, P.A. v. Commissioner, 

, 99

(2000), affd. 

(3d Cir. 2002).

     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 Niedringhaus v.

Commissioner, 

(1992).      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 Pritchett v. Commissioner, 

, 174 (1974).

     Petitioners generally contend that they had hired tax

professionals to advise them on their various activities,
                              - 77 -

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 section 183 loss issues.   Mr. Kramer

prepared petitioners’ returns for the years 1998 through 2001.

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 1998, 1999, 2000, and
2001 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
                                - 78 -

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

2001, 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.9

Respondent contends that petitioners knew that they had not

supplied the required information--i.e., 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.




     9
       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.
                              - 79 -

     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 60 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 (i.e., 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 35 years; and Mr. Brewster, an experienced C.P.A. practicing

in the tax field for over 25 years--to provide them proper tax

advice and to properly prepare their tax returns.

     The penalty under section 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
                               - 80 -

was not negligent and will satisfy the reasonable cause

exception.   Sec. 6664(c); sec. 1.6664-4(b), 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. 

; Metra Chem Corp. v.

Commissioner, 

, 662 (1987).    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 at 250-251; Weis v. Commissioner,

, 487 (1990).    Reliance on the advice of a

professional tax adviser, however, does not automatically

demonstrate reasonable cause and good faith.    Sec. 1.6664-

4(b)(1), Income Tax Regs.    All of the facts and circumstances

must be taken into account.    Sec. 1.6664-4(c)(1), Income Tax

Regs.    The advice must be based upon all pertinent facts and the

applicable law.   Sec. 1.6664-4(c)(1)(i), Income Tax Regs.     The

advice must not be based on unreasonable factual or legal

assumptions.   Sec. 1.6664-4(c)(1)(ii), 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.

show reasonable reliance the taxpayer must

prove:   (1) The adviser was a competent professional who had

sufficient expertise to justify the taxpayer’s reliance on him;
                                - 81 -

(2) the taxpayer provided necessary and accurate information to

the adviser; and (3) the taxpayer actually relied in good faith

on the adviser’s judgment.     Weis v. 

at 487

(citing Pessin v. Commissioner, 

, 489 (1972)).

      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

1967, and he prepared tax returns and gave tax advice for a

living.   He prepared approximately 1,000 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 1998, 1999, 2000 and 2001, 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
                                - 82 -

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 1998

through 2001 tax years.   Mr.   Kramer testified that he believed

he was familiar with section 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 section 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 section 170 reporting requirements.   The record

reflects that his efforts fell far short of the requirements.

     Around 1999 or 2000, 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.
                                - 83 -

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

contributions.10   Under these circumstances, we hold that

petitioners had reasonable cause and are not liable for the

section 6662 penalty with respect to the disallowed noncash

charitable contribution deductions.

Whether Rance and LaRhea Are Liable for a Section 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(b)(1), Income Tax Regs.



     10
       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.
                                - 84 -

     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, T.C. Memo. 1998-89, affd. without

published opinion 

(6th Cir. 1999); sec. 1.6662-

3(b)(1)(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
                                - 85 -

available to Rance and LaRhea in this instance.    Accordingly, we

hold that Rance and LaRhea were negligent, within the meaning of

section 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 Section 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 1998, 1999,

2000, and 2001 tax years.11    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




     11
       Because Zane was found to be involved in a profit-
motivated activity with respect to his 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 1998, 1999, or 2000, it is
considered in conjunction with the substantially dominant dog
breeding activity.
                              - 86 -

described as “too good to be true.”     Smith v. Commissioner, T.C.

Memo. 1997-503; sec. 1.6662-3(b)(1), 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 section 6662, for failure to keep proper

books and records and generally for claiming Schedule F losses

for 1998, 1999, and 2000.

     To reflect the foregoing and concessions by the parties,



                                      Decisions will be entered

                               under Rule 155.