Donald Keith Morley and Rebecca B. Morley - Page 3

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               Petitioners did not have a retirement plan.  During the                
          years in issue, petitioners placed approximately $6,000 into an             
          IRA account.                                                                
               In 1985, Mr. Morley met Ed Horton (Mr. Horton).  Mr. Horton            
          and his wife owned a horse farm.  Mr. Horton had been in the                
          horse-breeding business for many years, and he had an impressive            
          reputation regarding his knowledge of horse business operations             
          and the area horse market.                                                  
               During 1985, Mr. Horton convinced Mr. Morley that there was            
          great potential for profit in breeding and selling Arabian                  
          horses.  Mr. Horton showed Mr. Morley how to use Arabian horses             
          to provide a retirement plan.2                                              
               Mr. Horton assisted Mr. Morley's entry into breeding and               
          selling Arabian horses (the horse-breeding activity).  From the             
          inception of the horse-breeding activity, Mr. Morley consulted              
          with other horse breeders and read journal articles about horse             
          breeding.  He attended seminars, took courses, and purchased                
          video tapes on breeding Arabian horses and horse farm management.           
          Mr. Morley also did a break-even analysis at the inception of his           
          horse-breeding activity.                                                    
               In June 1985, Mr. Morley acquired a 34-acre farm (the farm)            
          located approximately 6 miles from petitioners' residence.  Mr.             
          Morley conducted the horse-breeding activity on the farm.                   

               2  Prior to 1985, Mr. Morley had no knowledge of breeding              
          Arabian horses.                                                             



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