John and Louisa A. Hodel - Page 3

          formed a proprietorship (the nursery) to rent the land from FCC             
          and grow ligustrum trees for resale.                                        
               Petitioners expected the trees to mature and be ready for              
          resale in approximately 3 years.  Instead, the trees were                   
          afflicted with continuous problems including freezes, disease,              
          and inadequate care.  Petitioner testified that he was not                  
          properly equipped to care for his nursery and, as a result, has             
          not been able to prepare the trees for resale.  Despite the                 
          substantial time petitioners devoted to the nursery, at the time            
          of trial they had not sold one tree.                                        
               On their 1986 joint Federal income tax return, petitioners             
          depreciated a truck, a farm tractor, a trailer and cart, security           
          equipment, and two cars.  The remainder of expenses attributable            
          to the nursery was currently deducted on petitioners' Schedule F.           
          These expenses included chemicals, rent paid for the FCC's land,            
          seeds and plants, supplies, taxes, utilities, gasoline, repairs             
          and maintenance, insurance, fertilizers, and labor.  Petitioners            
          continued to deduct similar expenses on their 1987 through 1990             
          returns.  Petitioners have not received the approval of the                 
          Internal Revenue Service (IRS) to amend their treatment of the              
          expenses deducted.                                                          
               Farmers, like taxpayers in any other type of business, may             
          deduct their ordinary and necessary business expenses under                 
          section 162.  The farming business includes the operation of a              
          nursery and the raising of ornamental trees such as petitioners'            

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