Steven F. and Kathryn A. Dawson - Page 2

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               Unless otherwise indicated, all section references are to              
          the Internal Revenue Code in effect for the years in issue, and             
          all Rule references are to the Tax Court Rules of Practice and              
               After concessions, the issue for decision is whether                   
          petitioners are entitled to certain deductions relating to their            
          horse training and breeding activity (the Activity)1 for 1988 and           
          1989, and if petitioners are not entitled to deductions, whether            
          they are liable for additions to tax and a penalty.                         
                                  FINDINGS OF FACT                                    
               Some of the facts have been stipulated and are so found.               
          The Stipulation of Settled Issues is incorporated by this                   
               Petitioners resided in Riverside, California, when the                 
          petition in this case was filed.  Petitioners were divorced in              
               Petitioners have three children, Jeanette, Joshua, and Ann.            
          During the years in issue Steven F. Dawson was a full-time                  
          employee of the Southern Pacific Railroad, where he worked the              
          graveyard shift (i.e., 11 p.m. to 7 a.m.) as a pipe fitter.  He             
          also devoted about 20 hours a week to his carpet cleaning                   
          business.  Mrs. Dawson, who was a professional bookkeeper during            

               1 The Activity refers to Mr. and Mrs. Dawson's horse                   
          training and breeding activity in 1988 and Mr. Dawson's horse               
          training and breeding activity in 1989.                                     

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