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breeding activity). Prior to this, petitioner was not involved
in horse breeding. Petitioner derived personal pleasure and
enjoyment from the horse breeding activity.
Before starting the horse breeding activity, petitioner
studied breeding operations and the effect of bloodlines on
performance, read books and journals on the subject matter, and
attended a short course on equine reproduction at a local
university. Petitioner also had knowledge of equine artificial
insemination techniques. Petitioner, however, did not consult
with any horse breeders about the best way to minimize expenses
or to operate a profitable business.
Petitioner operated the horse breeding activity by himself.
He started by purchasing a stallion from which to breed cutting
horses. In 1985, petitioner owned between 65 and 70 horses;
however, only one was a stallion, and the remaining horses were
mares or foals. Pursuant to a divorce decree in 1986, petitioner
transferred about half of the horses to his former spouse, but he
retained the stallion.
In 1990, hoping to establish a name in the cutting horse
industry, petitioner began rebuilding his herd and rented an
indoor arena in Royce City, Texas. In March 1991, petitioner
purchased a 40-acre horse farm in Campbell, Texas, for $350,000
called "Compass R Ranch" and leased an additional 40 acres
adjacent to the farm (together referred to as the ranch). The
farm had an arena, a blacksmith shop, a stallion and breeding
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