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claims are further undermined by the fact that for several years
after the purchase of the ranch, and prior to the water use
dispute in 1988, they were not limited in utilizing the water in
the reservoir (other than by the agreement and the 1987 drought).
After the conclusion of the litigation with Dell'Oca, petitioners
did not augment or increase the size of their livestock herd even
though they were legally guaranteed a significant portion of the
reservoir water.
Expectations That Assets Used in the Activity May Appreciate
in Value. Section 1.183-2(b)(4), Income Tax Regs., provides that
profit includes expected appreciation in assets such as land.
Appreciation may explain a taxpayer's willingness to continue to
sustain losses. Allen v. Commissioner, 72 T.C. at 36; see also
Fields v. Commissioner, T.C. Memo. 1981-550. Unrealized
appreciation is relevant to deciding whether the taxpayer has a
profit objective. Lemmen v. Commissioner, 77 T.C. 1326, 1342-
1343 n.22 (1981).
Section 1.183-1(d)(1), Income Tax Regs., provides that in
order to determine to what extent section 183 and the regulations
thereunder apply, the activity or activities of the taxpayer must
be ascertained from all the facts and circumstances.5
5
(d) Activity defined--(1) Ascertainment of
activity. In order to determine whether, and
to what extent, section 183 and the
(continued...)
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