Patrick F. and Arlene Gwon Sheehy - Page 3

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          identifying horses that could potentially become champion                          
          racehorses from their bloodlines.  At all relevant times, John E.                  
          Judge was Super Horse's sole shareholder.  Mr. Judge was also                      
          petitioners' accountant.                                                           
                In 1991, petitioner paid Super Horse $165,000 to acquire                     
          interests in five thoroughbred racehorses, as follows:                             
          Date of Purchase    Horse                Interest       Price                      
          1/17/91             U Gotta Bargain       50%           $10,500                    
          5/18/91             Dr. Bounty            50             13,000                    
          5/18/91             Gypsy Pirate          66.6           14,000                    
          8/25/91             All the Days          50              7,500                    
          11/1/91             Orchesis              100           120,000                    
          Total                                                        165,000               
          Petitioner acquired his interests in these horses, believing that                  
          the horses could become champions based on their bloodlines.  Super                
          Horse trained these racehorses for petitioner.                                     
          Petitioners' 1991 Schedule C                                                       
                On a Schedule C attached to their 1991 Federal income tax                    
          return, petitioners deducted $165,000 as research and development                  
          expenses.2  This deduction relates to the amount petitioner paid                   
          Super Horse to acquire his racehorse interests.  Petitioners took                  
          the deduction on the advice of Mr. Judge.  They did not claim a                    
          depreciation deduction for the racehorses.                                         
          Notice of Deficiency                                                               

                2    The deduction appears on line 27a, "Other expenses".                    




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