Harvey J. Davis and Patricia A. Davis - Page 13





                                       - 13 -                                         
               During the years in issue, petitioners advertised their                
          horses primarily by showing them at horse shows.  They also had             
          baseball caps made bearing the Midwest Spanish Arabians logo.               
          Petitioners sold some and gave away some of these caps.  They               
          advertised horses for sale by word of mouth and once in the                 
          newspaper.                                                                  
               Petitioner did not insure his horses.                                  
               In July 1990, petitioners obtained from Empire Bank a                  
          $15,000 home equity line of credit, secured by a mortgage on                
          their residence.  They used the line of credit to finance some of           
          the improvements to the property that they planned to use in                
          their Arabian horse breeding activity.                                      
               Petitioners did not have a separate bank account for their             
          Arabian horse activity.  Petitioners paid the expenses for their            
          horse activity from their personal account.                                 
               Petitioners have kept records of the income and expenses of            
          their Arabian horse activity since 1990.  Petitioner kept                   
          receipts for expenses and he made notes on the expense checks.              
          At the end of each year, petitioner prepared a summary of                   
          expenses and gave it to his accountant to prepare petitioners’              
          income tax return.                                                          
               Petitioner kept a ledger beginning in 1990 of petitioners’             
          expenses from 1990 to 1993.  Beginning in 1994, Mrs. Davis used a           
          computer to keep a record of income and expenses.  However, the             






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