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believed that they could eventually generate a profit of
approximately $8,000 to $10,000 per year.
Petitioners began their horse-related operation on
June 28, 1986, when they acquired a registered Tennessee
Walking Horse stallion from Mr. Adkins. After purchasing
this stallion, petitioners acquired and developed various
parcels of real property to facilitate their activity. In
the following discussion, we describe petitioners' real
estate transactions before describing their acquisitions
and transfers of horses.
Real Estate Transactions
On November 21, 1986, petitioners purchased 1.72 acres
of real estate located in Union County, Ohio, for a total
price of $103,733.95. Petitioners satisfied $11,855.24 of
the purchase price with cash and executed a promissory note
for the balance. Petitioner obtained a portion of the cash
downpayment from a savings account and obtained the
remainder by cashing in Mr. Perry's retirement options and
Ms. Hofer's stock options with General Motors. The 1.72-
acre parcel included a small house which petitioners used
as their personal residence from the time they acquired the
property until 1994. Petitioners constructed a small barn
and two separate paddocks on the 1.72-acre parcel. The
barn consisted of two open stalls and a separate area for
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