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transactions through their personal bank account and Mr. Lencke's
former insurance bank account.
Petitioners argue that their record-keeping system for Red
Caboose was complete and accurate, and thus evidence of their
profit motive, because Mr. Lencke used the same system for his
insurance activity. We do not find their reasoning persuasive.
Even if the record-keeping system used by petitioners for Red
Caboose was an adequate record-keeping system for Mr. Lencke's
insurance activity, which is an issue we do not address, it does
not follow that such a system was a complete and accurate record-
keeping system for a model railroad activity.
It is significant that petitioners did not have a concrete
plan for improving the profitability potential of Red Caboose.
During each year in issue, and in later years, they sustained
sizeable losses in connection with Red Caboose. In 1990 they
reported a loss of $29,818; in 1991 they reported a loss of
$17,911; and in 1992 they reported a loss of $24,058. However,
in spite of these large losses, they failed to substantially
change their method of operating Red Caboose. Other than staying
at less expensive hotels and eating at less expensive restaurants
while they were attending model railroad shows, they did little,
if anything, to reduce Red Caboose's operating expenses.
Moreover, they were not successful in implementing remedial
measures to increase Red Caboose's revenues. For example, they
did not consider installing a separate telephone line for Red
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