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2. Petitioners' Horse- and Dog-Breeding Activities
On January 1, 1988, petitioners began operating a horse-
racing and horse-breeding business called Arabian Hill Horse Park
(Arabian Hill), which continued operations throughout the taxable
years in issue. On Schedules C of their respective 1988 returns,
petitioners began reporting income and expenses attributable to
Arabian Hill. Petitioners also bred American Kennel Club
registered dogs for sale during the tax years in issue.
(a) Casualty and Theft Losses in 1991
In 1990, petitioners purchased a horse named Since Gussie.
Petitioners each claimed depreciation expenses with respect to
Since Gussie on their respective 1990 returns, indicating an
original basis in the amount of $700. In May 1991, Since Gussie
unexpectedly died from an uncertain cause. Petitioners
calculated Since Gussie's adjusted basis to be $467 at the date
of death. Petitioners have stipulated that they have offered no
substantiation in regard to the price they paid for Since Gussie
in 1990.
During 1991, one of petitioners' puppies was stolen. The
record does not indicate whether petitioners purchased the puppy
or whether the puppy was born on petitioners' ranch.
On their 1991 returns, petitioners claimed casualty loss
deductions in the amount of $4,000, attributable to Since
Gussie's purported fair market value on the date of death, and in
the amount of $150, attributable to the puppy's fair market value
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