-7-
Respondent audited petitioners’ return for 1995. In that
audit, respondent did not disallow the deductions petitioners
claimed in connection with their farming activity for that year.
Several natural events occurred during the years at issue
that impacted the lemon farming activity. A 1993 wildfire
destroyed some of the lemon trees. Poor soil conditions led
petitioners to consult a supervising plant pathologist in 1997
out of concern for their trees’ health. The pathologist examined
the trees and noted that they looked unhealthy and had curled
yellow leaves. The pathologist reported that these problems
could be due to the soil staying wet too long or to a mineral
deficiency. Petitioners also claim they experienced a water
shortage during the years at issue. Petitioners drilled
additional wells in 2000 and 2002, but their efforts did not
produce any additional water. Mr. Bangs indicated at trial that
he would await the outcome of this case before he decided whether
to drill more wells on the property.
The Trust Scheme
Petitioners became involved in a trust scheme in 1999.
They did not consult an attorney or CPA before they bought into
the scheme. Petitioners transferred title to most of their
assets to trusts to avoid paying taxes on the income from these
assets. Petitioners, in contrast to the lack of records for
lemon farming, kept detailed books and records relating to their
trusts. The trust-related financial records included balance
sheets, capital gain reports, and transaction reports by
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