James C. Vallette and Arleen R. Vallette - Page 4

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               Petitioners have never kept a set of books or records for              
          their breeding activity.  They have never maintained any records            
          on the lineage, birth, or disposition of their cattle.                      
          Mr. Vallette enjoys working with cattle.  He grew up around                 
          cattle, and the cattle industry is second nature to him.                    
               Respondent disallowed petitioners' losses from their                   
          breeding activity because she determined that the activity was              
          "not engaged in for profit" under section 183.  Section 183                 
          generally limits the deductions for an activity not entered into            
          for profit.  Sec. 183(b).  An activity is not engaged in for                
          profit if deductions are not allowable for the taxable year under           
          section 162 or section 212(1) or (2).  Sec. 183(c).  Section 162            
          allows individuals to deduct ordinary and necessary expenses                
          connected with the conduct of a trade or business.  Section                 
          212(1) and (2) allows individuals to deduct expenses for the                
          production or collection of income, or for the management,                  
          conservation, or maintenance of property held for the production            
          of income.  Westbrook v. Commissioner, 68 F.3d 868, 875 (5th Cir.           
          1995), affg. T.C. Memo. 1993-634.                                           
               An individual engages in an activity for profit for purposes           
          of section 183 if he or she entered into, or continued, the                 
          activity "with the actual and honest objective of making a                  
          profit".  Dreicer v. Commissioner, 78 T.C. 642, 645 (1982), affd.           
          without published opinion 702 F.2d 1205 (D.C. Cir. 1983).                   

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