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Caboose so they could profit from telephone orders. In fact,
petitioners' record-keeping system for Red Caboose was in such a
disorganized state that we doubt they could have constructively
analyzed Red Caboose's expenses and revenues and formulated a
plan for increasing its profitability.
As we stated in Bessenyey v. Commissioner, 45 T.C. 261, 274
(1965), affd. 379 F.2d 252 (2d Cir. 1967), 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,
bearing in mind, however, that the goal must be to realize a
profit on the entire operation, which presupposes not only future
net earnings but also sufficient net earnings to recoup the
losses which have meanwhile been sustained in the intervening
years". See also sec. 1.183-2(b)(6), Income Tax Regs.
Petitioners assert that they expected to incur losses from Red
Caboose operations in its early years, but that eventually, as
Red Caboose's sales increased, they expected to realize a profit.
If Mr. Lencke were to die, they point out, his Social Security
benefits would cease, and Mrs. Lencke would have to support
herself with the proceeds from Red Caboose. We are not persuaded
by these assertions. Petitioners have not formulated a concrete
business plan to reverse the substantial losses sustained by them
in operating Red Caboose. Thus, we are not convinced that Red
Caboose (now Jim's House of Trains) will ever show a profit, let
alone recoup the present history of losses.
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