Joseph E. Machado - Page 7

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          activities, petitioners continued to realize substantial losses             
          from both activities.  During 1985 through 1988, petitioners                
          realized combined net losses of $518,277 from their horse                   
          breeding and horse racing activities.                                       
               In 1989, petitioners determined that they were no longer               
          able to continue their horse breeding and horse racing                      
          activities.  In 1989, petitioners attempted to sell four of their           
          racehorses in a horse auction in California.  Three of                      
          petitioners' horses were sold at a price of $200 to $400 each.              
          After 1989, Joseph was no longer involved in the horse breeding             
          and horse racing activities.                                                
               In 1990, Robert sold or gave away the remainder of the                 
          horses and terminated the horse breeding and horse racing                   
          activities.                                                                 
               During 1980 through 1990, petitioners continued to work full           
          time at Machado Trucking.  In 1990, at the time petitioners'                
          horse breeding and horse racing activities were terminated,                 
          Machado Trucking became unprofitable and went out of business.              
               Petitioners recorded their expenses with respect to their              
          horse breeding and horse racing activities on a handwritten                 
          ledger and in a computer database that was also used by Machado             
          Trucking.  Checks, check stubs, and receipts relating to                    
          petitioners' expenses with respect to their horse breeding and              
          horse racing activities were commingled and did not reflect                 






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