James M. and Ruth J. Riley - Page 6

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               Petitioner purchased the Ross farm in 1997 for $154,000.               
          The improvements on the Ross farm consisted of two buildings (a             
          barn and a storage building) and installed drainage tile.  He did           
          not use the barn in his farming operations but occasionally used            
          the storage building to store soybeans.                                     
               Petitioner purchased a 2001 Dodge Truck for $35,000 for use            
          in his farming activity.  He used it to transport grain in                  
          Minnesota and when traveling to Montana, Wyoming, and South                 
          Dakota to find feeder cattle for purchase.  During 2001, 2002,              
          and 2003, petitioner drove the truck approximately 7,000 miles              
          each year in his farming operations.  He also has three other               
          vehicles that he used while conducting his farming and rental               
               Petitioner prepared and timely filed petitioners’ Forms                
          1040, U.S. Individual Income Tax Return, for 2001, 2002, and                
          2003, using the cash basis method of accounting.                            
               On Schedules E, petitioners reported rental income and loss            
          from the rental of four houses.  One house was reported as being            
          in South Dakota, one in Minnesota, one in Iowa, and one in Utah.            
          Petitioners reported a rental loss of $178 for 2001 and rental              
          income of $5,032 for 2002 and $5,133 for 2003.                              
               Petitioners reported income from farming on Schedules F.               
          They reported a net farm loss of $29,350 for 2001 and net farm              
          profits of $6,219 for 2002 and $156,492 for 2003.                           

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