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In 1991, petitioners bred two of their broodmares, "Kamla" and
"Meczewza", with stallions owned by other breeders.
Petitioners are members of various Arabian horse
associations, registries, and clubs. They subscribe to various
magazines and newsletters, and they attend various classes and
seminars pertaining to horse raising and care.
Petitioners have never used in vitro fertilization
techniques as part of their horse breeding activities, and they
have never commissioned a study of Arabian horses' bloodlines to
determine those horses that are most likely to sire foals of
racing potential. They do not maintain a bank account for their
activity separate from their personal accounts, and they do not
maintain journals, ledgers, or organized records of income and
expenses for their activity. They have never prepared income
statements, balance sheets, income projections, or any other
financial guidelines for their activity. They have never
reported a profit from their activity, or from any other
horse-related activity, on any Federal income tax return.
During the years in issue, petitioners collected insurance
proceeds totaling $15,000 for injuries or death suffered by their
horses, and they had life insurance policies on many of their
horses. In 1993, they sold one horse for $1,500.
With respect to the subject years, petitioners reported on
their joint tax returns the following amounts of pension income,
self-employment income, capital gain income, farm income (loss),
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