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Petitioners achieved their goal of breeding high-quality
dogs. One of petitioners' dogs, Dacher Gotta Get a Gun, won 21
best-of-breed competitions in 1992 and was also the 10th-ranked
Portuguese water dog in the country that year. Unfortunately,
petitioners' success at the shows did not translate into a
profit-making activity.
Progressive retinal atrophy (PRA), a degenerative disease of
the retina that causes blindness, began appearing in Portuguese
water dogs in September of 1990. Within a year, the number of
Portuguese water dogs diagnosed with PRA went from 2 to 42.
However, Mr. Smith did not know that any of his dogs were
afflicted with PRA until 1994.
Petitioners reported net losses from their kennel in the
amount of $38,724, $69,629, and $109,795 for the taxable years
1990, 1991, and 1992, respectively. During that same period,
petitioners reported gross receipts of only $5,055, $4,650, and
$5,950, primarily from the sale of puppies and from stud fees.
Petitioners' losses were due primarily to the high cost of
dog boarding and handling. In 1992, petitioners reported $88,700
in dog boarding and handling expenses. That amount constituted
nearly 90 percent of the expenses associated with the dog-
breeding and showing activity for 1992. In the notice of
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