Steven F. and Kathryn A. Dawson - Page 9

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          devote substantial time to the Activity is not inconsistent with            
          the existence of a profit objective.                                        
          IV.  Expectation That Assets May Appreciate                                 
               The appreciation of assets is to be considered in                      
          determining whether a taxpayer intended to derive a profit from             
          his activity.  Sec. 1.183-2(b)(4), Income Tax Regs.  Respondent             
          contends that "petitioners' indifference to the present and                 
          future value of their horses weighs against a finding of profit             
          motive."  Respondent's contention, however, is contrary to the              
               As Hot Twist became better known and trained, petitioners              
          believed that:  (1) Hot Twist could be bred with Kate Dillon and            
          Dynamic King Bar and the sale of the foals would produce revenue;           
          (2) Hot Twist could participate in national-level competitions,             
          where gate prizes often reached $100,000; and (3) other horse               
          owners would seek to breed their mares with Hot Twist.  According           
          to Mr. Barton, petitioners could make approximately $1,000 per              
          foal by breeding Hot Twist.  Mr. Dawson believed that Hot Twist             
          could breed with more than 100 mares in a single year.                      
          Petitioners also expected to make money on "mare care" (i.e., a             
          per diem amount for boarding and feeding mares brought to                   
          petitioners for breeding).  All of these factors would have the             
          effect of increasing the value of petitioners' horses.                      
               We conclude that petitioners sincerely and reasonably                  
          believed that their horses would appreciate in value.                       

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