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holding the land for its appreciation in value should be
treated as a separate activity. Respondent maintains that
any appreciation in the value of the Union County property
"is clearly not the result of, or even related to, the
horse-related activity." Respondent also takes the
position that this appreciation was not attributable to
petitioners' horse breeding and boarding. Respondent
argues that any appreciation in the value of the land
should therefore not be considered in determining whether
petitioners engaged in horse breeding and boarding with
the requisite profit motive.
Section 1.183-1(d)(1), Income Tax Regs., provides the
following guidance for determining whether "farming" and
the holding of the farm land will be considered a single
activity:
Where land is purchased or held primarily with
the intent to profit from increase in its value,
and the taxpayer also engages in farming on such
land, the farming and the holding of the land
will ordinarily be considered a single activity
only if the farming activity reduces the net cost
of carrying the land for its appreciation in
value. Thus, the farming and holding of the
land will be considered a single activity only
if the income derived from farming exceeds the
deductions attributable to the farming activity
which are not directly attributable to the
holding of the land (that is, deductions other
than those directly attributable to the holding
of the land such as interest on a mortgage
secured by the land, annual property taxes
attributable to the land and improvements,
and depreciation of improvements to the land).
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