Harold W. and Julia A. Kahla - Page 16




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          in carrying out the Schedule F activities.  However, we are mindful         
          that initially petitioner performed many of the required chores             
          around the North Ranch.  At the same time, however, petitioners             
          used the property for hunting and fishing trips, as well as to              
          entertain guests during the holiday season.  As a result, we are            
          unable to draw an inference regarding the existence of a profit             
          motive solely from how much time and effort petitioners may have            
          expended working on their Schedule F activities.                            
               4.  Expectation That Assets May Appreciate                             
               An expectation that assets used in the activity will                   
          appreciate may indicate a profit objective.  See sec. 1.183-                
          2(b)(4), Income Tax Regs.  Accordingly, a profit motive may be              
          inferred where there are no operating profits, so long as the               
          appreciation in value of the activity’s assets exceeds its                  
          operating expenses of the current year and its accumulated losses           
          from prior years.  See Golanty v. Commissioner, 72 T.C. 411, 427-           
          228 (1979), affd. 647 F.2d 170 (9th Cir. 1981); Sullivan v.                 
          Commissioner, T.C. Memo. 1998-367, affd. 202 F.3d 264 (5th Cir.             
          1999); sec. 1.183-2(b)(4), Income Tax Regs.                                 
               Between 1976 and 1997, the amount of accumulated losses from           
          petitioners’ Schedule F activities exceeded $1.8 million.                   
          Petitioners anticipate that they will continue to incur operating           
          losses from these activities in the near future.                            
               During the years in issue, the value of the North Ranch                






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