Joseph E. Machado - Page 6

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          1985-90                                                                     
               By 1985, the racehorses that petitioners had purchased in              
          prior years and that petitioners still owned were too old to                
          race.  To reduce expenses and stud fees, petitioners began to               
          breed their broodmares only with the older racehorses that                  
          petitioners already owned.  Petitioners purchased no additional             
          racehorses, and petitioners moved their broodmares to California,           
          where their racehorses were then stabled.  Thereafter,                      
          petitioners intended to obtain racehorses only from the offspring           
          of broodmares and racehorses that they owned.                               
               From 1985 through 1988, petitioners did not attempt to sell            
          any of their broodmares or racehorses through advertising or                
          auctions.                                                                   
               From 1985 through 1988, petitioners' broodmares produced 11            
          horses that petitioners trained and raced.  From 1985 through               
          1988, these 11 horses ran in 35 races.  The record does not                 
          indicate the number of races petitioners' horses won, nor how the           
          horses placed.                                                              
               Petitioners maintained information relating to their horse             
          breeding and horse racing activities on a calendar.                         
               During 1985 through 1988, petitioners realized no income               
          from their horse breeding activity, and they realized total prize           
          money of $7,316 from their horse racing activity.                           
               In spite of the above changes to the manner in which                   
          petitioners operated their horse breeding and horse racing                  




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