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During 1965, Mr. Phillips purchased a quarter horse for Mrs.
Phillips as a Mother's Day gift. Every year or every 2 years
thereafter, petitioners purchased another quarter horse. During
1972, petitioners moved to Louisiana. By the early 1980's, in
addition to breeding quarter horses, petitioners had a cattle
operation. During 1982 or 1983, petitioners began filing a
Schedule F with their income tax returns, claiming that their
horse activity was a business.
During 1985, petitioners decided to change the focus of
their horse activity from quarter horses to Arabians when they
purchased Bella Joya, an Arabian filly, along with 11 other
Arabians. Petitioners financed the total purchase price for the
horses of $17,350 with a mortgage on the horses (purchase money
mortgage). At the time of the purchase, petitioners owned
another Arabian horse, which they had saved from going to
slaughter. By 1987, petitioners sold all of their cattle.
During 1986, Bella Joya won several races at Delaware Park,
including the Delaware Arabian Stakes. During 1987, Bella Joya
was named the Filly of the Year by Arabian Horse World, the
Racehorse of the Year by Arabian Horse Express, and the
International Arabian Three-Year-Old Horse of the Year by the
International Arabian Horse Association. Additionally, during
1987, Bella Joya won a Darley Award for excellence in Arabian
racing.
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