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complete and accurate records and books within the meaning of
section 1.183-2(b)(1), Income Tax Regs.
The regulations also provide that "A change of operating
methods, adoption of new techniques or abandonment of
unprofitable methods in a manner consistent with an intent to
improve profitability may also indicate a profit motive." Sec.
1.183-2(b)(1), Income Tax Regs. Respondent contends that
petitioners continued their activity in essentially the same
manner they had in previous years, despite suffering growing
losses year after year. Respondent argues that petitioners could
have increased profitability by selling some or all of the
unproductive animals. Additionally, respondent argues that
petitioners' lack of effort to reduce costs and to increase
profitability is evidence of the lack of a genuine profit
objective. Specifically, respondent contends that petitioners
lacked a profit motive because they increased the costs of
maintaining their herd during the years 1989 through 1993 by:
(1) Failing to sell any horse after 1989, (2) acquiring two
horses at a cost of $1,300, and (3) spending $6,500 in stud fees
to produce three half Arabians. Additionally, respondent
challenges the efficacy of petitioners' advertising efforts at
Arabian horse conventions when, by petitioners' own testimony,
they were unable to sell horses or to increase breeding activity
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