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intent to improve profitability. See Engdahl v. Commissioner, 72
T.C. 659, 666-667 (1979); sec. 1.183-2(b)(1), Income Tax Regs.
Petitioners contend that they operated their horse activity
in a businesslike manner because they maintained accurate books
and records, persevered in their sales and marketing efforts,
culled their herd and focused on the highly marketable registered
paso fino breed, and changed operating methods.
Respondent asserts that the books and records served no
part in controlling costs and increasing profitability, that
anemic and ineffective sales and marketing efforts do not support
a profit motive, that petitioners continued to breed horses from
the bloodline allegedly culled, and that the changes in operating
methods were insufficient to materially affect the activity’s
profitability. Respondent also asserts that petitioners used
poor business practices in carrying on the activity.
a. Petitioners’ Record Keeping
Petitioners maintained copies of invoices and checks which
documented horse-activity expenses and which were used to prepare
an expense journal at the close of each taxable year. The
maintenance of these limited records, however, represents nothing
more than petitioners’ substantiation of the expenses claimed on
their returns. As we have stated previously:
The purpose of maintaining books and records is more
than to memorialize for tax purposes the existence of
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