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activity (particularly if the losses from the activity generate
substantial tax benefits) may indicate that an activity is not
engaged in for profit, especially if there are personal or
recreational elements involved. Sec. 1.183-2(b)(8), Income Tax
Regs.
On their 1990, 1991, and 1992 Federal income tax returns,
petitioners reported taxable pension income in the amounts of
$71,424, $35,524, and $33,714, respectively. The losses claimed
by them from the operation of Red Caboose for 1990, 1991, and
1992 were $29,818, $17,911, and $24,058, respectively.
Consequently, the losses that petitioners sustained in the
operation of Red Caboose resulted in appreciable tax savings for
them. The operation of Red Caboose, it appears to us, provided a
method for attempting to achieve these tax savings while enabling
Mr. Lencke to pursue his lifelong hobby of collecting model
railroad equipment and memorabilia.
Respondent further contends that petitioners may have viewed
Red Caboose as a recreational activity. The presence of personal
or recreational motives in carrying on an activity may indicate
that the activity is not engaged in for profit. Sec. 1.183-
2(b)(9), Income Tax Regs. Both petitioners enjoy their model
railroad activity and have never considered abandoning it. Mr
Lencke has been collecting model railroad equipment and
memorabilia for over 50 years. One reason petitioners started
Red Caboose was to provide Mr. Lencke with an activity to occupy
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