David E. and Cheryl G. Smith - Page 16

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          petitioners' argument that the losses were the result of startup            
          expenses to be without merit.                                               
               In addition, petitioners assert that their losses were the             
          result of "unforeseen or fortuitous circumstances * * * beyond              
          * * * [their] control".  Sec. 1.183-2(b)(6), Income Tax Regs.               
          Petitioners assert that the disease PRA caused an unanticipated             
          increase in expenses in 1992 because they were required to                  
          purchase new stock for breeding.  This argument fails for two               
          reasons.  First, PRA did not have a significant impact on                   
          petitioners' dog-breeding activity during the taxable years in              
          question.  Petitioners did not know that any of their dogs even             
          had PRA until 1994.  Second, as already noted, petitioners'                 
          losses were largely the result of the high cost of dog boarding             
          and handling, and not from the purchase of breeding stock.                  
               7.  Amount of Occasional Profits                                       
               The amount and frequency of occasional profits earned from             
          the activity may also be indicative of a profit objective.  Sec.            
          1.183-2(b)(7), Income Tax Regs.  Given that petitioners have                
          never reported a profit on their dog-breeding activity, we find             
          that this factor supports a finding that the dog-breeding                   
          activity was not carried on for profit.  Glenn v. Commissioner,             
          T.C. Memo. 1995-399.                                                        
               8.  Financial Status of the Taxpayer                                   
               We next consider petitioners' financial status.  Sec. 1.183-           
          2(b)(8), Income Tax Regs.  Substantial income from sources other            



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