Steven F. and Kathryn A. Dawson - Page 11

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          in determining whether the taxpayer entered into the activity for           
          profit, a small chance of making a large profit may indicate the            
          requisite profit objective.  Sec. 1.183-2(a), Income Tax Regs.              
          According to the regulations, "it may be found that an investor             
          in a wildcat oil well who incurs very substantial expenditures is           
          in the venture for profit even though the expectation of a profit           
          might be considered unreasonable."  Id.                                     
               Petitioners' family was one of modest means.  Petitioners              
          believed that the prospect of producing a champion horse that               
          could generate hundreds of thousands of dollars in revenue and              
          correspondingly large profits seemed to be well worth the risks             
          involved.  In essence, the Activity was petitioners' "wildcat oil           
          well".  Petitioners actually and honestly believed that if Hot              
          Twist were successful in horse shows, future earnings and profits           
          would be substantial.  Mr. Barton confirmed that Hot Twist had              
          the potential to be very successful.  We conclude that                      
          petitioners' expectation of future profits is consistent with the           
          existence of a profit objective.                                            
          VII.  History of Income and Losses                                          
               A taxpayer's history of income, losses, and occasional                 
          profits with respect to an activity may indicate the presence or            
          absence of a profit objective.  Sec. 1.183-2(b)(6), Income Tax              
          Regs.  Respondent contends that, because petitioners have                   
          incurred losses on their horses in each year, they did not have             
          the requisite profit objective.  We disagree.                               

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