Steven F. and Kathryn A. Dawson - Page 4

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               Mr. Dawson believed that Hot Twist, after being adequately             
          trained, could be entered into numerous national competitions               
          and, if successful in these competitions, could become a                    
          profitable stud.  Petitioners anticipated that the stud fee from            
          breeding Hot Twist with a single mare would be approximately                
          $1,000.  Mr. Dawson also expected to obtain cash prizes from                
          competitions in which Hot Twist participated as well as revenue             
          from the sale of foals produced by breeding Hot Twist with                  
          petitioners' two brood mares.                                               
               Petitioners filed their 1988 joint income tax return on                
          November 17, 1992, and Mr. Dawson filed his 1989 individual                 
          income tax return on or about April 21, 1993.  Petitioners have             
          conceded that the section 6651 addition to tax for failing to               
          file their return in a timely manner is applicable to their 1988            
          joint income tax return and to Mr. Dawson's 1989 individual                 
          income tax return.  On March 7, 1994, respondent issued a notice            
          of deficiency disallowing petitioners' claimed deductions                   
          relating to the Activity and determining additions to tax and a             
          penalty.  On June 6, 1994, petitioners filed their petition.                
               Section 183 limits the deductions for an activity not                  
          engaged in for profit.  Sec. 183(b).  An activity "not engaged in           
          for profit" is defined as any activity for which no deductions              
          are allowable under section 162 or under paragraph (1) or (2) of            
          section 212.  Sec. 183(c).  For purposes of section 183, a                  

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