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invoices, receipts, and other documents, which Mrs. McKeever
placed in a manila envelope each month. At the end of each
taxable year, Mrs. McKeever compiled annual expense journals from
the stored documents.
Petitioners also kept pedigrees and show records for their
horses. Starting in about 1993, Mr. McKeever began studying
bloodlines and pedigrees. Petitioners did not keep heat and
health records for their horses, except for copies of veterinary
bills and notations made on a small calendar kept in their barn.
Petitioners did not prepare written profit and loss
projections for the taxable years 1991, 1992, and 1993 concerning
their horse activity, or any of their other activities, nor have
they prepared any such projections for taxable years commencing
after 1993 through the trial in this case.9
9In 1998, after the petition in this case had been filed,
petitioners consulted an accountant with experience in the horse
industry, Patrick J. Hurley. At Mr. Hurley’s suggestion,
petitioners began using a computerized record keeping system.
Mr. Hurley provided petitioners with a sample “Summary of
Operations” for a horse business and advised them to prepare a
similar document. Petitioners prepared a summary of operations
for their horse activity for the years 1988 through 1998, which
they refer to as a business plan. The document summarizes
various facts related to the horse activity and indicates in very
general terms how petitioners plan to improve the profitability
of the activity. The document does not indicate what level of
income would be required to achieve profitability or to what
extent expenses might be reduced. Although petitioners
maintained detailed expense records, the summary of operations
does not analyze any of the past expenses to determine whether
any adjustments to those expenses could improve profitability.
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