T.C. Memo. 2018-88



                        UNITED STATES TAX COURT



        SHANE V. ROBISON AND ROBIN S. ROBISON, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket Nos. 5339-15, 25120-16.            Filed June 19, 2018.



      Edward I. Kaplan, for petitioners.

      Bryant W. Smith, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      COHEN, Judge: Respondent determined deficiencies in petitioners’ Federal

income tax and penalties as follows:
                                         -2-

[*2]                                                            Penalty
                 Year                  Deficiency             sec. 6662(a)

                 2010                   $262,026                $52,405
                 2011                    229,252                 45,850
                 2012                    217,416                43,483
                 2013                    184,846                36,969
                 2014                    136,184                27,237

       Respondent has now conceded the section 6662(a) penalties. The issues for

decision are as follows: (1) whether petitioners were engaged in a ranching

activity with the objective of making a profit within the meaning of section 183;

and (2) if petitioners were engaged in a ranching activity with the objective of

making a profit within the meaning of section 183, whether petitioners materially

participated in the ranching activity within the meaning of section 469. Unless

otherwise indicated, all section references are to the Internal Revenue Code in

effect for the years in issue, and all Rule references are to the Tax Court Rules of

Practice and Procedure. All monetary amounts are rounded to the nearest dollar.

                               FINDINGS OF FACT

       Some of the facts have been stipulated, and the stipulated facts are

incorporated in our findings by this reference. Petitioners resided in Utah when

their petitions in these consolidated cases were filed.
                                       -3-

[*3] Petitioner Robin S. Robison (R. Robison) was a retired physical therapist

for the years in issue. She previously started and operated her own successful

physical therapy practice. Petitioner Shane V. Robison (S. Robison) had a highly

successful career working for a number of technology companies in Silicon

Valley. For 2010 and until November 2011, he worked as a successful computer

science executive at Hewlett Packard in Silicon Valley. In November 2011, he

retired from Hewlett Packard. He continues to serve on boards and as an adviser

to technology-based corporations. During the years in issue, S. Robison’s wages

and salary were as follows:

                          Year                 Wages/salary

                          2010                 $10,531,957
                          2011                   2,800,875
                          2012                   4,369,496
                          2013                   1,410,432
                          2014                   1,927,874

The Ranch

      In 1999 petitioners purchased a 410-acre ranch in a remote area of southern

Utah at an elevation of approximately 6,700 feet. The cost of the Ranch was

approximately $2 million. In 2000 and 2009 petitioners acquired additional
                                         -4-

[*4] acreage near and surrounding the property, increasing the total property to

more than 500 acres. In 2000 petitioners formed Robison Ranch, LLC (Robison

Ranch). Petitioners each own 50% of Robison Ranch. S. Robison has a family

background in ranching and farming although neither petitioner had ever

previously operated a ranch.

       Upon purchasing Robison Ranch, petitioners were aware that it would

require significant time and capital investment on account of its poor physical

condition. Robison Ranch first operated as a horse breeding and training

operation with a small cattle herd but shifted its focus entirely to cattle ranching in

approximately 2000. Petitioners retroactively prepared business plans for Robison

Ranch for the years in issue.

      From 2000 to 2015 petitioners never made a profit from Robison Ranch’s

ranching activities. The property is currently listed for sale for $10 million. For

the years in issue Robison Ranch filed Forms 1065, U.S. Return of Partnership

Income, and claimed its loss deductions on its Schedules F, Profit or Loss From

Farming. Petitioners claimed Robison Ranch’s loss deductions for the years in

issue on their Schedules E, Supplemental Income and Loss, in the respective

amounts of $657,356, $640,769, $606,633, $493,194, and $420,798. From 2000

to 2015 Robison Ranch reported over $9 million in losses on its Federal income
                                        -5-

[*5] tax returns. From 2000 to 2015 Robison Ranch reported the following on its

Federal income tax returns:

        Year              Income         Expenses             Net income/(loss)

        2000                  -0-        $198,249                ($198,249)
        2001               $3,385          431,154                (427,769)
        2002               25,363          518,728                (493,365)
        2003                  8,355        819,241                (810,886)
        2004               43,246         588,400                 (545,154)
        2005               49,408         719,435                 (670,027)
        2006               58,385         728,322                 (669,937)
        2007               58,103         641,105                 (583,002)
        2008               90,737         701,260                 (610,523)
        2009               60,604         800,452                 (739,848)
        2010               91,290         748,646                 (657,356)
        2011               70,983         711,752                 (640,769)
        2012              121,090         727,723                 (606,633)
        2013              166,971         660,165                 (493,194)
        2014              215,701         636,499                 (420,798)
        2015              126,082         598,597                 (472,515)

      After the years in issue petitioners created activity logs for their time spent

at Robison Ranch. R. Robison reported spending in excess of 1,500 hours on the

ranching activity during each year in issue. S. Robison reported spending in
                                        -6-

[*6] excess of 800 hours on the ranching activity during each year in issue. When

at the ranch petitioners would generally perform whatever work was needed, such

as maintenance work, cleaning, and the feeding and branding of livestock.

Petitioners would also perform managerial duties and oversee operations.

Petitioners were in charge of hiring and managing all ranch employees.

S. Robison was responsible for all top-level decisionmaking. R. Robison, Robison

Ranch’s chief financial officer, was responsible for all accounting and bill paying

aspects, preparing annual profit and loss statements, and all of its employment tax

filings and insurance policy needs. She used QuickBooks for Robison Ranch’s

financial recordkeeping. Petitioners employed a certified public accountant to

prepare the tax returns for Robison Ranch for the years in issue. Their personal

finances were maintained separately from Robison Ranch’s finances.

      Petitioners employed a ranch manager and a ranch hand during the years in

issue. Both employees lived on site and signed employment and lease agreements.

During the years in issue petitioners had two different ranch managers. Daniel

Reeder served as ranch manager until 2012. Tabor Dahl, initially hired in 2011 to

manage and train the ranch’s horses, was promoted to ranch manager for the

remaining years in issue. Both Reeder and Dahl had formal training in agriculture.
                                         -7-

[*7] Dahl was raised on an unregistered cattle ranch and had experience working

on ranches but had never previously managed a ranch.

      Petitioners held weekly meetings with Robison Ranch’s employees. The

meetings were held in person if petitioners were on site, and via conference call

when they were not. Minutes from the weekly meetings were kept and distributed

to participants.

      When purchased, the structures on Robison Ranch were in very poor

condition, and none were habitable. Petitioners constructed Robison Ranch’s core

operating buildings. They acquired the equipment necessary to plant and harvest

hay, as well as tractors, loaders, road maintenance equipment, and trucks and

trailers for transporting livestock and supplies. The first structures petitioners

built were a horse barn, a small cow barn, and corrals for handling the livestock.

      Petitioners also built a woodworking shop and a cement silo so that work

could be done on site. In 2005 petitioners constructed a house on the property

where they would stay when they were at the ranch. Petitioners later sold certain

heavy equipment and trucks that were used to build the infrastructure to reduce

unnecessary costs. Petitioners also purchased additional grazing permits and

water rights, and they improved their hay production in an effort to grow enough

hay to support all of the ranch’s livestock.
                                         -8-

[*8] Petitioners’ Horse Activity

      Initially petitioners focused Robison Ranch’s business on the raising and

breeding of Paint Horses. In approximately 2000, after the Paint Horse business

proved unsuccessful, petitioners decided to shift to the raising and breeding of

Quarter Horses, a more established breed. Petitioners were not able to make a

successful business with the Quarter Horses and ultimately abandoned the horse

selling and showing business. During the years in issue petitioners sold almost all

of their horses not suited for cattle ranching.

Petitioners’ Cattle Ranching Activity

      Also in approximately 2000 petitioners shifted their focus to cattle ranching.

During the years in issue petitioners sought to raise bulls and heifers as seedstock

for other ranchers as well as to become a supplier of grass-fed beef.

      When forming Robison Ranch, petitioners consulted with their accountant,

a ranch attorney, other ranch owners, and trainers and breeders, as well as a local

veterinarian, Dr. Verland King. King was a local expert regarding brisket disease.

At high elevations cattle are at risk of brisket disease, which causes fluid

accumulation in a cow’s lung that can then cause it to suffocate. A cow with a low

pulmonary artery pressure score (PAP score) indicates an animal with a greatly

reduced risk of brisket disease. Because of Robison Ranch’s high elevation,
                                         -9-

[*9] petitioners sought to purchase and breed cattle with low PAP scores.

Petitioners worked with King to test the PAP scores of Robison Ranch’s registered

cattle. King kept the PAP score records.

      Petitioners also kept livestock records. The ranch manager was in charge of

creating and maintaining these records. Robison Ranch’s data allowed them to

calculate the total cost of the herd. Robison Ranch also tracked certain expected

progeny differences (EPD) of its herd but became more specific about the EPD

data it collected beginning in 2010. EPD data is used as a prediction of how future

progeny of each animal are expected to perform relative to the progeny of other

animals in the breed or herd. EPDs are expressed in units of measure for the trait,

such as pounds for birth weight. Robison Ranch also registered their cattle with

the American Angus Association, which provided an online database in which

some of Robison Ranch’s livestock data was kept.

                                      OPINION

      Respondent determined that petitioners’ ranching activity was not an

activity engaged in for profit within the meaning of section 183 and disallowed the

loss deductions relating to Robison Ranch that petitioners claimed on their

Schedules E. Petitioners counter that they engaged in the ranching activity with

an intent to realize a profit. Respondent alternatively argues that if petitioners are
                                        - 10 -

[*10] found to be engaged in the ranching activity with an intent to realize a profit,

their loss deductions should be limited by the passive loss limitations of section

469.

       The arguments made by the parties through counsel are tainted by extreme

views of the strength of their respective positions and attacks on the motives and

credibility of their opponent(s). They view the facts objectively only with respect

to the penalties that respondent conceded. We do not agree entirely with any of

those arguments. Petitioners appeared sincere and reasonable in their testimony.

The weakness in their position regarding the section 183 issue is primarily the

indisputable history and magnitude of losses, despite reduced losses during the

years in issue, and whether petitioners can expect to recoup them. But for their

financial position, these losses could not be afforded. At this point petitioners are

trying to minimize losses, but to prevail they must show a profit objective.

       In addition to the section 183 analysis we address respondent’s alternative

argument that section 469 limits petitioners’ loss deductions for the years in issue.

That is, even if petitioners have adequately shown a profit objective, the absence

of reliable records is most obvious with respect to this issue, and petitioners’ reply

brief barely touches on respondent’s arguments in that regard.
                                        - 11 -

[*11] I.     Burden of Proof

      Neither party discusses the burden of proof at length. Respondent cites the

presumption of correctness, Rule 142(a), and Welch v. Helvering, 

,

115 (1933), for the general rule, which is that the Internal Revenue Service’s

determinations in a notice of deficiency are generally presumed correct, and

taxpayers bear the burden of proving them erroneous. With respect to deductions,

the taxpayer almost always has that burden. INDOPCO, Inc. v. Commissioner,

, 84 (1992); sec. 1.6001-1(a), Income Tax Regs. Petitioners do not

contend that the burden of proof should shift to respondent under section 7491(a).

If section 7491(a) had been raised, the lapses in petitioners’ recordkeeping would

seem the primary impediment to shifting the burden of persuasion. The burden

remains on petitioners.

II.   Section 183

      Under section 183(a), if an activity is not engaged in for profit, no deduction

attributable to that activity is allowed except to the extent provided by section

183(b). In relevant part, section 183(b) allows those deductions that would have

been allowable had the activity been engaged in for profit only to the extent of

gross income derived from the activity (reduced by deductions attributable to the
                                       - 12 -

[*12] activity that are allowable without regard to whether the activity was

engaged in for profit).

      Section 183(c) defines an activity not engaged in for profit as “any activity

other than one with respect to which deductions are allowable for the taxable year

under section 162 or under paragraph (1) or (2) of section 212.” For expenses to

be deductible under section 162, Trade or Business Expenses, or section 212,

Expenses for Production of Income, and not subject to the limitations of section

183, taxpayers must show that they engaged in the activity with the primary

objective of making a profit. Westbrook v. Commissioner, 

, 875 (5th

Cir. 1995), aff’g T.C. Memo. 1993-634.

      The expectation of profit need not be reasonable, but the taxpayer must

conduct the activity with the actual and honest objective of making a profit.

Hildebrand v. Commissioner, 

, 1026-1027 (10th Cir. 1994), aff’g

Krause v. Commissioner, 

 (1992); Keanini v. Commissioner, 

, 46 (1990). Because petitioners were the only partners in Robison Ranch, we

need not separately determine the intent at the partnership level. Greater weight is

given to objective facts than to a taxpayer’s self-serving statement of intent. King

v. Commissioner, 

, 205 (2001); sec. 1.183-2(a) and (b), Income Tax

Regs. Evidence from years subsequent to the years in issue is relevant to the
                                        - 13 -

[*13] extent it creates inferences regarding a taxpayer’s requisite profit objective

in earlier years. See Hoyle v. Commissioner, T.C. Memo. 1994-592; Smith v.

Commissioner, T.C. Memo. 1993-140.

      Section 1.183-2(b), Income Tax Regs., provides a nonexclusive list of

factors to be weighed when considering whether a taxpayer is engaged in an

activity for profit. These factors include the following: (1) the manner in which

the taxpayer carried 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 the 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, that are earned from the

activity; (8) the financial status of the taxpayer; and (9) whether elements of

personal pleasure or recreation are involved in the activity. All facts and

circumstances are to be taken into account, and no single factor or mathematical

preponderance of factors is determinative. Westbrook v. Commissioner, 68 F.3d

at 876; Hildebrand v. Commissioner, 28 F.3d at 1027. We address the most

relevant factors in determining petitioners’ intent.
                                        - 14 -

[*14] A.     Manner in Which Activity Is Conducted

      Carrying on an activity in a businesslike manner, such as by maintaining

complete and accurate books and records, conducting the activity in a manner

similar to other activities of the same nature that are profitable, and making

changes in operations to adopt new techniques or abandon unprofitable methods,

is a factor that may indicate a profit objective. Sec. 1.183-2(b)(1), Income Tax

Regs. Businesslike conduct is characterized by careful and thorough investigation

of the profitability of a proposed venture, monitoring of a venture in progress, and

attention to problems that arise over time. See Ronnen v. Commissioner, 

, 93 (1988); Taube v. Commissioner, 

, 481-482 (1987).

      While a taxpayer need not maintain a sophisticated cost accounting system,

the taxpayer should keep records that enable the taxpayer to make informed

business decisions. See Burger v. Commissioner, 

, 359 (7th Cir.

1987), aff’g T.C. Memo. 1985-523. For a taxpayer’s books and records to indicate

a profit motive, the books and records should enable a taxpayer to cut expenses,

increase profits, or evaluate the overall performance of the operation. See Abbene

v. Commissioner, T.C. Memo. 1998-330. Petitioners kept many financial and

administrative records, such as weekly meeting minutes, employment contracts,
                                       - 15 -

[*15] payroll tax returns, insurance policies and payments, and formal leases for

employees who lived on Robison Ranch.

      Although petitioners’ records were voluminous, respondent argues that

petitioners’ administrative and financial recordkeeping was more akin to a

conscious attention to detail than to something used to analyze expenses or

improve profitability. See Golanty v. Commissioner, 

, 430 (1979),

aff’d, 

 (9th Cir. 1981). Petitioners contend that R. Robison used

QuickBooks’ profit and loss statements to monitor the ranch’s finances and cut

costs. We believe petitioners used them for the important purposes of cutting

expenses, increasing profits, and evaluating the overall performance of the

operation. See id. However, there is no evidence that they used them to create

budgets or make income projections, which would have been advantageous and

further indicative of operating in a businesslike manner. See Keating v.

Commissioner, 

, 904 (8th Cir. 2008), aff’g T.C. Memo. 2007-309;

Foster v. Commissioner, T.C. Memo. 2012-207, slip op. at 14.

      Petitioners also kept multiple records regarding their cattle though these

records varied during the years in issue. Robison Ranch’s animal records

significantly improved with the hiring of Dahl as ranch manager in 2012,

particularly in regard to EPD data, which petitioners had begun to track better in
                                       - 16 -

[*16] 2010. Petitioners were able to use their cattle records to make meaningful

projections as well as make educated decisions in regard to cattle purchases and

sales, current and future. The improved data recording during the years in issue

evidences petitioners’ increasingly businesslike approach to Robison Ranch’s

cattle activity.

       Respondent also argued that petitioners had no written business plan for

Robison Ranch. Numerous court opinions mention that a businesslike operation

often would involve a business plan. See, e.g., Wesinger v. Commissioner, T.C.

Memo. 1999-372. Petitioners retroactively created business plans for the years in

issue, which were largely narratives of the actions petitioners took during those

years. The fact that petitioners had no written business plan does not negate a

profit motive, as a business plan can be evidenced by actions. See Annuzzi v.

Commissioner, T.C. Memo. 2014-233, at *16; Phillips v. Commissioner, T.C.

Memo. 1997-128 (stating that written financial plan not required for 32-horse farm

where business plan was evidenced by action). Nevertheless, a business plan

likely would have aided petitioners in creating analyses for the future financial

management or planning of the activity. See Foster v. Commissioner, T.C. Memo.

2012-207, slip op. at 14.
                                        - 17 -

[*17] Maintaining an additional bank account for the activity separate from a

taxpayer’s personal finances is indicative of an activity being carried on in a

businesslike manner. See Wayts v. Commissioner, T.C. Memo. 1992-82 (finding

horse racing and breeding activity was carried on in a businesslike manner because

it had a separate bank account) (citing Pryor v. Commissioner, T.C. Memo. 1991-

109). Petitioners’ separate maintenance of their personal finances and Robison

Ranch’s are indicative of operating in a businesslike manner.

      Perhaps the most important indication of whether an activity is being

performed in a businesslike manner is whether the taxpayer implements methods

for controlling losses, including efforts to reduce expenses and generate income.

See Dodge v. Commissioner, T.C. Memo. 1998-89, aff’d without published

opinion, 

 (6th Cir. 1999). Petitioners contend that they made changes

to their operating methods, adopted new techniques, and abandoned unprofitable

methods that contributed to their losses. The record supports this contention.

Petitioners made changes in their ranching activity when they realized that certain

operations would not be profitable, changing Robison Ranch’s operation two

times--from Paint Horses, to Quarter Horses, to a registered cattle herd. Cf.

Williams v. Commissioner, T.C. Memo. 2018-48, at *24-*25 (finding cattle

operation was not carried on in a businesslike manner because taxpayer did not
                                        - 18 -

[*18] make changes or transition his operation for 10 years despite continued

losses).

      Petitioners also sought to reduce expenses by obtaining increased water

rights, producing their own hay, purchasing additional grazing permits, selling

unnecessary equipment, and increasing the tracking and recording of EPD data for

their cattle herd. All of these decisions were business decisions designed to

reduce expenses and were not made merely on the basis of petitioners’ whim or

fancy. See Welch v. Commissioner, T.C. Memo. 2017-229, at *31. Petitioners

were able to reduce their expenses, which led to a decrease in their net losses for

the years in issue. Petitioners’ implementation of operating changes to combat

continued losses indicates their intention to make a profit.

      After carefully considering the evidence, we conclude that this factor favors

petitioners.

      B.       Expertise of the Taxpayer or His/Her Advisers

      The taxpayers’ expertise, research, and study of an activity, as well as their

consultation with experts, may be indicative of a profit motive. See sec. 1.183-

2(b)(2), Income Tax Regs. S. Robison has a family background in ranching and

farming although he had never previously operated a ranch. Petitioners consulted

with persons who were knowledgeable about ranching, including a ranch attorney,
                                        - 19 -

[*19] other ranch owners, trainers and breeders, and their veterinarian. See

Givens v. Commissioner, T.C. Memo. 1989-529 (a profit objective was indicated

where the taxpayer sought and acquired advice in all aspects of Tennessee

Walking Horse breeding from experienced owners, trainers, and a veterinarian).

Petitioners also sought advice regarding the business elements of starting Robison

Ranch from their accountant. In the face of mounting losses, it would have been

prudent to seek further business advice; however, we believe this factor favors

petitioners.

      C.       Taxpayers’ Time and Effort Devoted to the Activity

      The taxpayers’ devotion of much of their personal time and effort to

carrying on an activity may indicate a profit motive, particularly if the activity

does not involve substantial personal or recreational aspects. Sec. 1.183-2(b)(3),

Income Tax Regs. A profit motive may also be indicated if a taxpayer “employs

competent and qualified persons to carry on such activity.” Id. Petitioners hired

professionals to manage Robison Ranch, employing a full-time ranch manager and

a ranch hand during the years in issue, both of whom lived on site. Petitioners

also conducted weekly meetings with Robison Ranch employees. While Dahl was

not an expert in registered Angus cattle ranching, nor had he managed a ranch

previously, he was experienced in cattle ranching, having been raised on an
                                         - 20 -

[*20] unregistered cattle ranch. Further, petitioners made use of a local

veterinarian who was an expert regarding brisket disease and the effects of high

altitudes on cattle. This factor favors petitioners.

      D.     Expectation That the Activity’s Assets May Appreciate

      An expectation that assets used in the activity will appreciate may indicate a

profit motive even if the taxpayers derive no profit from current operations. Id.

subpara. (4). However, a profit objective may be inferred from such expected

appreciation of the activity’s assets only where the appreciation exceeds operating

expenses and is sufficient to recoup the accumulated losses of prior years. See

Golanty v. Commissioner, 72 T.C. at 427-428; Hillman v. Commissioner, T.C.

Memo. 1999-255.

      Respondent argues that petitioners’ objective must include recoupment of

all of Robison Ranch’s past losses. This expectation is too high. See Welch v.

Commissioner, at *35. “An overall profit is present if net earnings and

appreciation are sufficient to recoup the losses sustained in the ‘intervening years’

between a given tax year and the time at which future profits were expected.”

Helmick v. Commissioner, T.C. Memo. 2009-220, slip op. at 27 (citing Bessenyey

v. Commissioner, 

, 274 (1965), aff’d, 

 (2d Cir. 1967)).

Therefore, the question is not whether petitioners would recoup all of Robison
                                         - 21 -

[*21] Ranch’s losses but whether they would recoup the losses between the years

in issue and the “hoped-for profitable future.” See id. at 28.

      Petitioners did not provide a valuation of Robison Ranch. There is not

enough evidence in the record to determine the current value of or petitioners’

adjusted basis in the ranch property, and we are therefore unable to determine the

amount of appreciation, if any. Accordingly, this factor is neutral.

      E.     Taxpayers’ History of Income or Loss From the Activity

      A history of continued losses with respect to the activity may indicate the

lack of profit motive. See sec. 1.183-2(b)(6), Income Tax. Regs. While a series of

losses during the startup stage of an activity may not necessarily indicate a lack of

profit motive, a record of large losses over many years is persuasive evidence that

a taxpayer did not have such a motive. See Golanty v. Commissioner, 72 T.C. at

426. An activity’s cumulative losses should not be of such a magnitude that an

overall profit on the entire operation, including recoupment of past losses, could

not possibly be achieved. Bessenyey v. Commissioner, 45 T.C. at 274.

      Petitioners realized no profits whatsoever in 16 years of engaging in their

ranching activity. Petitioners contend that the years in issue are the startup stage

for their cattle ranching activity. See Burrus v. Commissioner, T.C. Memo. 2003-

285 (finding that losses incurred in the first six years of a cattle activity occurred
                                         - 22 -

[*22] during its startup stage). However, petitioners began their cattle operation in

approximately 2000; thus the years in issue are beyond the startup stage.

      Further, despite reduced expenses and increased profits during the years in

issue, petitioners produced no detailed or concrete plans as to how to further

reduce their losses or as to when they expect to make a profit. The possibility of a

speculative profit is insufficient to outweigh the absence of profits for a sustained

period of years. See Chandler v. Commissioner, T.C. Memo. 2010-92 (the

possibility of a speculative profit did not outweigh more than 20 years of losses

reported for the taxpayer’s horse activity). This factor strongly favors respondent.

      F.     Taxpayers’ Financial Status

      Substantial income from sources other than the activity may indicate that the

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

This is particularly true if the losses from the activity generate substantial tax

benefits. Golanty v. Commissioner, 72 T.C. at 429. A taxpayer with substantial

income unrelated to the activity can more readily afford a hobby. See Wesley v.

Commissioner, T.C. Memo. 2007-78. Petitioners’ substantial income from

S. Robison’s career has allowed them to continue their ranching activity in spite of

16 years of losses. Further, the activity has also generated tax savings in the form
                                        - 23 -

[*23] of net losses that offset that income, resulting in much smaller after-tax

burden for the years in issue. This factor favors respondent.

       G.    Conclusion

       This is a very close case, and our determination for the years in issue is

limited to the facts found for those years. After weighing all the facts and

circumstances in the light of the relevant factors, we conclude that petitioners

engaged in their ranching activity for the years in issue with the requisite profit

objective. Petitioners’ activities cannot be characterized as a “hobby” during those

years. Petitioners’ efforts to reduce Robison Ranch’s expenses and the resulting

decrease in petitioners’ net losses during the years in issue are most persuasive.

Accordingly, we reject respondent’s disallowance of the loss deductions relating

to the ranching activity under section 183.

III.   Section 469 Passive Activity

       We must now consider whether petitioners’ losses from Robison Ranch

were passive under section 469. Loss deductions from a passive activity are

generally allowed for the years in which the losses are sustained only to the extent

of passive activity income. Sec. 469(a)(1)(A), (d)(1). In general, a passive

activity is a trade or business in which the taxpayer does not materially participate.
                                         - 24 -

[*24] Sec. 469(c)(1). A taxpayer materially participates in an activity when he or

she is involved on a regular, continuous, and substantial basis. Sec. 469(h)(1).

      A passive activity loss is the amount by which the aggregate losses from all

passive activities for the taxable year exceed the aggregate income from all

passive activities for such year. Sec. 469(d)(1). Passive activity losses are

suspended until the taxpayer either has offsetting passive income or disposes of

the taxpayer’s entire interest in the passive activity. Sec. 469(b), (g).

      Application of section 469 might permit petitioners a future use of the

accumulated but disallowed losses, particularly if they are able to sell the ranch at

the currently listed price. Sec. 469(b), (g). Petitioners’ activities in operating

through the ranch manager suggest characterization of the activity as passive--that

of an investor. That was the observation of the Court at the conclusion of the trial,

and our impression has not been altered.

      In general, a taxpayer is treated as materially participating in a trade or

business if the taxpayer is involved in the operations of the trade or business on a

regular, continuous, and substantial basis. Sec. 469(h)(1). A taxpayer can

establish material participation by satisfying any one of seven tests provided in the

regulations. Sec. 1.469-5T(a), Temporary Income Tax Regs., 53 Fed. Reg. 5725-

5726 (Feb. 25, 1988); see Miller v. Commissioner, T.C. Memo. 2011-219; Bailey
                                       - 25 -

[*25] v. Commissioner, T.C. Memo. 2001-296. Of these, the two following tests

are most relevant to the case:

            (1) The individual participates in the activity for more than 500
      hours during such year;

                   *       *      *       *       *      *       *

            (7) Based on all of the facts and circumstances * * * the
      individual participates in the activity on a regular, continuous, and
      substantial basis during such year.

Sec. 1.469-5T(a), Temporary Income Tax Regs., supra.

      Material participation of a taxpayer in an activity is determined separately

for each taxable year, and the taxpayer generally has the burden of proving

material participation. See sec. 469(a); see also Harrison v. Commissioner, T.C.

Memo. 1996-509. In determining whether a taxpayer materially participates, the

participation of the spouse of the taxpayer shall be taken into account. Sec.

469(h)(5). We therefore treat petitioners as a unit for the purposes of

participation.

      Generally, any work done by an individual in connection with an activity in

which he or she owns an interest at the time the work is done is treated as

participation of the individual in the activity. Sec. 1.469-5(f)(1), Income Tax

Regs. However, activity performed in an individual’s capacity as an investor does
                                         - 26 -

[*26] not qualify as participation in an activity, unless the individual is directly

involved in the day-to-day management of the activity. Sec. 1.469-5T(f)(2)(ii)(A)

and (B), Temporary Income Tax Regs., 53 Fed. Reg. 5727 (Feb. 25, 1988).

Investor-related activities not qualifying as material participation include: (1)

studying and reviewing financial statements or reports on operations; (2) preparing

or compiling summaries or analyses of the finances or operations of the activity

for the individual’s own use; and (3) monitoring the finances or operations of the

activity in a nonmanagerial capacity. Id.

      A.     500-Hour Test

      The extent of an individual’s participation in an activity may be established

by any reasonable means. Id. subpara. (4). Contemporaneous daily time reports or

logs are not required. Id. While the regulations permit some flexibility with

respect to the evidence required to prove material participation, we are not

required to accept postevent “ballpark guesstimates”, nor are we bound to accept

the unverified, undocumented testimony of taxpayers. See Estate of Stangeland v.

Commissioner, T.C. Memo. 2010-185; Shaw v. Commissioner, T.C. Memo.

2002-35; Scheiner v. Commissioner, T.C. Memo. 1996-554.

      The records petitioners introduced for the years at issue provide a broad

overview of their time spent at Robison Ranch. These records predominantly
                                         - 27 -

[*27] appear to be estimates prepared noncontemporaneously, with the exception

of the minutes kept from the weekly conference calls petitioners had with ranch

employees. The annual log petitioners provided for each tax year reports hours

assigned to activities years after the fact, in preparation for trial, and based solely

on their judgment and experience as to how much time the activities must have

taken them.

      The weekly minutes indicate that petitioners were typically working on

activities such as minutes, payroll, taxes, and house issues. The annual logs also

include similar activities, such as generating payroll, paying bills, communicating

with staff members, and the hiring and firing of ranch employees. Petitioners’

weekly minutes and annual logs also fail to show what specifically petitioners did

day to day and exactly how much time they spent on matters directly relating to

the ranch, making it impossible to conclude that this activity was conducted

outside of an investor-type capacity. See Iversen v. Commissioner, T.C. Memo.

2012-19.

      We do not doubt that while away from Robison Ranch petitioners spent

time on ranch activities, talking on the telephone to the ranch manager and

employees, reading articles on cattle ranching, receiving bills and correspondence,

and maintaining the financial and business records. Also, we acknowledge that
                                       - 28 -

[*28] while at Robison Ranch petitioners participated in and assisted with the

cattle operation, ranch maintenance, and improvements. However, a very

significant portion of the time petitioners spent on Robison Ranch activities

appears to have been in the capacity of investors not involved in the day-to-day

activities or management. These hours cannot be counted toward the 500-hour

test of subparagraph (1), nor towards participation on the regular, continuous or

substantial basis required by subparagraph (7), discussed below. See sec. 1.469-

5T(f)(2)(ii)(B), Temporary Income Tax Regs., supra.

      B.     Facts and Circumstances Test

      Under section 1.469-5T(b)(2)(ii)(A) and (B), Temporary Income Tax Regs.,

53 Fed. Reg. 5726 (Feb. 25, 1988), a taxpayer’s management activities under the

facts and circumstances test shall not be taken into account if another person also

receives compensation for management services relating to the activity or if

another person spends more time performing management services relating to the

activity than the taxpayer. The presence of a full-time paid ranch manager at the

ranch for all of the years at issue disqualifies petitioners’ time working on Robison

Ranch management services from counting towards their participation. As a

result, petitioners do not meet the facts and circumstances test under subparagraph

(7). See sec. 1.469-5T(a), Temporary Income Tax Regs., supra.
                                        - 29 -

[*29] C.     Conclusion

      The weight of the evidence before us does not establish that during the years

at issue the majority of hours petitioners spent were hours spent in a capacity other

than as investors. After the hours attributable to investor types of activities are

subtracted, and in the light of the fact that Robison Ranch employed a full-time

ranch manager, petitioners did not spend the required 500 hours on the Robison

Ranch activity, nor were they engaged on a regular, continuous, and substantial

basis, as required under section 469 and the related regulations.

      We conclude that petitioners did not materially participate in Robison

Ranch and it was a passive activity. Petitioners’ losses reported for the years at

issue with respect to the ranching activity are subject to the passive loss

limitations imposed by section 469, and these losses are suspended until

petitioners either have offsetting income or dispose of their entire interest in

Robison Ranch.

      In reaching our conclusions, we have considered all arguments made by the

parties and, to the extent not mentioned above, we conclude they are moot,

irrelevant, or without merit.
                                  - 30 -

[*30] To reflect the foregoing,


                                                Decisions will be entered

                                           under Rule 155.