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From 1988 to 1994, petitioners reported income and expenses
relating to the operation of Silk Oak on Schedule C in the
following amounts:
Year Ranch Expenses1 Gross Income Ranch Losses
1988 --- --- ($10,000)
1989 --- --- (16,559)
1990 --- --- (21,742)
1991 $21,601 $ 500 (21,101)
1992 21,772 250 (21,522)
1993 32,173 4,000 (29,673)
1994 32,183 7,270 (24,913)
Total 2(145,510)
1 The record does not include information regarding
petitioners' income and expenses for 1988, 1989, and 1990.
2 The stipulation of facts miscalculated total losses as
$145,702.
Petitioners deducted the losses resulting from the operation of
Silk Oak. Respondent disallowed petitioners' deductions for 1991
and 1992, concluding that petitioners did not engage in the
running of Silk Oak with the requisite profit motive.
Petitioners have hired professional trainers to work with
their horses, averaging 1 to 3 months per horse. To increase
profitability, petitioners have improved their own abilities to
personally train their horses, thereby mitigating the expenses of
hiring an outside trainer. In addition, petitioners have sought
to increase profitability by "breeding up"; i.e., breeding their
horses to horses with stronger pedigrees. Petitioners have
advertised their horses for sale in the local newspaper, have
posted flyers offering their horses for sale or stud services,
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