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achieve a later profitable level of operation, bearing
in mind, however, that the goal must be to realize a
profit on the entire operation, which presupposes not
only future net earnings but also sufficient net
earnings to recoup the losses which have meanwhile been
sustained in the intervening years."
In this instance, petitioners sustained substantial losses
from their horse-breeding activities for 7 years from 1988 to
1994. The aggregate net losses over the course of these years
was $145,510. Losses grew steadily over the first 6 years of
operation. Petitioners' operating expenses in each of the years
in issue exceeded $21,000, while they have never realized a
profit greater than $2,500 on the sale of any one horse. It is,
therefore, unlikely that petitioners will generate sufficient
profits from the activity to make up for past losses. Despite
petitioners' sincere devotion to the operation of Silk Oak, we
find this to be highly probative evidence that petitioners do not
expect their horse-breeding activity to become profitable. See
id. This factor favors respondent.
7. The Amount of Occasional Profits, If Any, Which Are
Earned
The amount of profits generated in relation to the amount of
losses incurred, and in relation to the taxpayer's investment and
the value of the assets used in the activity, may suggest the
taxpayer's intent. Sec. 1.183-2(b)(7), Income Tax Regs. From
1988 to 1994, petitioners generated a net gain of $6,350 from the
sale of four horses and two goats and $400 from the use of their
land for grazing. Petitioners' sporadic revenues from the
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