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able to begin breeding their dogs in 1990. They named their
activity Dacher Kennel and began advertising in national dog-
breeding magazines. Petitioners paid thousands of dollars
promoting the name of Dacher Kennel. In addition, they hired
professional handlers to show their dogs and to help establish
their kennel's reputation.
During the taxable years 1990, 1991, and 1992, petitioners
maintained approximately three adult dogs at their Los Gatos
residence and 15 to 30 additional dogs at outside kennels. Mr.
Smith typically spent 8 to 10 hours per week performing various
activities in keeping and caring for the dogs, including
performing basic veterinary procedures. Mrs. Smith typically
spent approximately 12 hours per week caring for the dogs and
spent an additional 12 hours per month in promotional activities
related to dog breeding and showing. For the first
3 weeks after puppies were born, petitioners had to be "on call"
to care for the puppies 24 hours a day.
Mr. Smith kept track of expenses and revenues of the dog-
breeding activity on his computer. Petitioners, however, did not
keep track of which of their dogs were profitable. Although Mr.
Smith maintained a separate checking account for Dacher Kennels,
occasionally he used personal checks to pay for dog-breeding and
showing activity expenses.
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