Steven F. and Kathryn A. Dawson - Page 12

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               Section 1.183-2(b)(6), Income Tax Regs., states that "A                
          series of losses during the initial or start-up stage of an                 
          activity may not necessarily be an indication that the activity             
          is not engaged in for profit."  Where startup losses are                    
          involved, the taxpayer's objective must be not only to have                 
          future net earnings but also sufficient net earnings to recoup              
          losses previously sustained.  Estate of Power v. Commissioner,              
          736 F.2d 826, 830 (1st Cir. 1984) (citing Bessenyey v.                      
          Commissioner, 45 T.C. 261 (1965), affd. 379 F.2d  252 (2d Cir.              
          (1967)), affg. T.C. Memo. 1983-552.                                         
               Petitioners' losses were incurred during the Activity's                
          startup stage.  In 1989, petitioners had been in the business of            
          breeding paint horses for only 3 years.  Before Hot Twist could             
          produce a profit, petitioners had to properly train the horse and           
          show him in enough events for him to obtain a favorable                     
          reputation.  This would encourage other horse owners to seek to             
          breed their mares with Hot Twist.  Based on Mr. Barton's advice,            
          petitioners reasonably believed that revenue from the Activity              
          would be sufficient to recoup previously sustained losses.                  
          Therefore, we conclude that petitioners' brief history of losses            
          does not indicate the absence of a profit objective.                        
          VIII.  Personal Pleasure or Recreation                                      
               The presence of personal pleasure or recreation may indicate           
          the lack of a profit objective.  Sec. 1.183-2(b)(9), Income Tax             
          Regs.  Respondent contends that petitioners derived substantial             

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