James D. Schlicher - Page 3

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               In 1975, petitioner purchased a principal residence (the               
          Livermore residence) and approximately 5 acres of land in                   
          Livermore, California (the Livermore property) for $52,000.  The            
          Livermore residence was approximately 1,000 square feet in size,            
          and there were several small farm structures on the property.               
          Between 1975 and 1988, petitioner made $25,000 in capital                   
          improvements to the Livermore residence, and $25,000 in capital             
          improvements to the farm structures.  Petitioner's total adjusted           
          basis in the Livermore residence, farm structures, and 5 acres of           
          land was $102,000.                                                          
               While living on the Livermore property, petitioner operated            
          a mobile farrier (horse-shoer) business out his 1984 Dodge pickup           
          truck, which was equipped with a horse-shoeing camper.  Although            
          petitioner parked his truck on the property he did not operate              
          the farrier business on the Livermore premises.  In 1988,                   
          petitioner received gross receipts from his farrier business of             
          $37,088,3 and paid deductible business expenses of $49,542.                 
               Petitioner also operated a horse boarding and breeding                 
          business on pasture land that he leased from neighbors.  At any             
          given time, petitioner boarded approximately 30 horses for                  
          clients on the leased premises.  In addition, petitioner kept one           
          stallion, approximately 6 brood mares, and 6 colts on the leased            
          premises, which he owned and used in his horse breeding business.           
          Petitioner did not use these horses for personal purposes.                  

          3    Petitioner's gross receipts from this activity are referred            
          to in the notice of deficiency as "Schedule C gross receipts."              

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