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day for 2 days on the weekend and 2 hours each weeknight) on the
Pescadero property. Sec. 1.183-2(b)(3), Income Tax Regs.
The Taxpayers’ History of Income and Losses With Respect to
the Activity. Under section 1.183-2(b)(6), Income Tax Regs.,
losses in the initial stages of an activity are not necessarily
indicative of a lack of profit motive. However, when unexplained
losses have continued for an extended period of time, they may be
probative that an activity is not engaged in for profit. Allen
v. Commissioner, supra at 34. Specifically, the presence of
losses in the formative years of a business is not inconsistent
with an intention to achieve a later profitable level of
operation. The goal must be to realize a profit on the entire
operation, which presupposes recouping past losses in addition to
current expenses. Bessenyey v. Commissioner, 45 T.C. 261, 274
(1965), affd. 379 F.2d 252 (2d Cir. 1967).
Petitioners did not take steps to address the continuous and
substantial losses incurred in connection with the Pescadero
property.
Petitioners' main argument is that their farm could not be
profitable due to ongoing legal disputes. They assert that they
were precluded from expanding their farming operations because of
the uncertainty regarding the water supply. Petitioners did not,
however, show that the herd size was maximized to comport with
the amount of water available in the reservoir. Petitioners'
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