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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.
OPINION
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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