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Respondent argues that Mr. Morley's consistent history of
losses in the horse-breeding activity is persuasive evidence that
he did not expect to make a profit. Mr. Morley argues that he
sustained losses because of unforeseen circumstances beyond his
control; i.e., the decline in the horse market, the death of two
horses that were central to the horse-breeding activity in a
sinkhole accident, and the loss of other horses due to a fatal
collision with a car and a broken leg.
We conclude that the financial losses Mr. Morley sustained
were the result of unforeseen circumstances beyond his control.
Furthermore, during the last few years of years in issue, the
losses from the horse-breeding activity had been steadily
decreasing. Additionally, from 1992 through 1995, petitioners'
net losses from the horse-breeding activity declined even further
to an average of $11,515. Mr. Morley also testified that in 1996
he made a profit from the horse-breeding activity. Moreover, we
believe that the years in issue encompassed a startup period.
See Phillips v. Commissioner, T.C. Memo. 1997-128; see also
Engdahl v. Commissioner, 72 T.C. 659, 669 (1979). As
petitioners' losses were sustained during the startup phase of
the horse-breeding activity and were the result of unforseen
circumstances beyond petitioners' control, we conclude that the
losses sustained are not an indication that the horse-breeding
activity was not engaged in for profit.
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