Donald Keith Morley and Rebecca B. Morley - Page 12

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          written profit or loss statements or balance sheets for the                 
          horse-breeding activity.  Mr. Morley, however, had a business               
          plan, which was to develop the horse-breeding activity into an              
          enterprise that would support himself and his wife during their             
          retirement years, and he modified the plan in order to reduce               
          expenses and in an attempt to generate a profit.  The business              
          plan was evidence by Mr. Morley's actions:  Mr. Morley purchased            
          the farm for the horse-breeding activity, bred his horses to                
          produce foals, showed his horses, and advertised his horses for             
          sale.  See Phillips v. Commissioner, T.C. Memo. 1997-128.                   
               Mr. Morley maintained an itemized list of expenses and a               
          general ledger for the horse-breeding activity.  He also                    
          consulted with other horse breeders and educated himself about              
          breeding Arabian horses and horse farm management.7                         
               Mr. Morley maintained a separate bank account for the horse-           
          breeding activity.  He advertised his horses.  Mr. Morley                   
          marketed his horses with promotional materials whose color                  
          pattern matched those of the University of Tennessee.8  He                  

               7  We have previously held that a taxpayer's informal and              
          continuous consultations with experts knowledgeable about horses            
          and horse-breeding activities demonstrated the taxpayer's intent            
          to engage in horse breeding for profit even though the taxpayer             
          did not conduct a formal market study.  Engdahl v. Commissioner,            
          72 T.C. 659, 668 (1979).                                                    
               8  Mr. Morley testified that he chose the color pattern for            
          his promotional materials because orange and white were the                 
          colors of the University of Tennessee, and he lived in "Big                 
          Orange" country.  We understand his statement about "Big Orange"            
                                                             (continued...)           



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