S.K. Johnston, III and Julie N. Boyle f.k.a. Julie N. Johnston, et al. - Page 22

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                  Petitioner is actively involved in examining the annual                             
           business plans for Flying H.  During the years in issue,                                   
           petitioner's business manager would review the financial results                           
           of the operation in detail with MacCarty, working up budgets and                           
           plans, which petitioner studied and either approved or amended.                            
           Respondent concedes that Flying H is not an over-improved                                  
           property.  The main ranch house was on the property when                                   
           petitioner purchased it.  Respondent further concedes that the                             
           facilities at Flying H are not extravagant or showy, but are                               
           rather ordinary and functional, just like any other working                                
           western ranch.                                                                             
                  Discussion                                                                          
                  As evidence of a lack of profit motive, respondent focuses                          
           on Flying H's history of losses, petitioners' use of such losses                           
           to offset other income, and the pleasure aspect of the activity.                           
           As discussed above, these factors alone do not negate a finding                            
           that petitioners engaged in their ranch activity with an intent                            
           to make a profit, especially given that the years in issue fall                            
           within the startup period of the activity.  See Trafficante v.                             
           Commissioner, T.C. Memo. 1990-353 (a series of losses during the                           
           initial stages of an activity does not necessarily indicate that                           
           the activity was not engaged in for profit).                                               
                  The parties have stipulated that petitioners carried on                             
           their ranching activity in a businesslike manner and maintained                            
           complete and accurate records.  Moreover, respondent concedes                              



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