S.K. Johnston, III and Julie N. Boyle f.k.a. Julie N. Johnston, et al. - Page 16

                                               - 16 -                                                 

            Engdahl v. Commissioner, supra at 669.  From approximately 1985                           
            through 1990, Bendabout suffered unforeseen losses resulting from                         
            a high rate of abortion in its brood mares, which occurred                                
            because the pastures on which they were grazing were contaminated                         
            with a toxic fungus.  Respondent argues, however, that after                              
            petitioners replaced 45 acres of pasture land at a substantial                            
            cost they abandoned the thoroughbred program.  Respondent                                 
            contends that discontinuing an activity after expending large                             
            sums to improve its productivity does not support a profit                                
            objective.                                                                                
                  Respondent fails to mention, however, that petitioners                              
            replanted the pastures prior to 1990, and they did not liquidate                          
            their horse breeding program until 1993.  In fact, on brief,                              
            respondent conceded that after petitioners had replanted the                              
            pastures, Bendabout purchased several well-bred mares to enhance                          
            its thoroughbred business.  Furthermore, respondent ignores the                           
            harsh reality of Mother Nature.  During the years in issue, the                           
            entire southeast entered into a severe 4-year drought.  As a                              
            result, Bendabout's first two or three efforts in reestablishing                          
            the pastures were unsuccessful, exacerbating petitioners' losses.                         
            Respondent further ignores the changes that occurred in the                               
            market during this time. Robert Hill (Hill), petitioners' expert                          
            witness in the thoroughbred industry, credibly testified that the                         
            late 1980's brought a drastic drop in the average and median                              
            prices for yearlings.  He noted, however, that this price decline                         



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