- 12 -
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
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Next
Last modified: May 25, 2011