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profit motive where the taxpayer follows such advice. Sec.
1.183-2(b)(2), Income Tax Regs. In preparing for an activity, a
taxpayer need not make a formal market study, but ordinarily
should undertake a basic investigation of the factors that will
affect the activity's profitability. Underwood v. Commissioner,
T.C. Memo. 1989-625; Holbrook v. Commissioner, supra.
We do not believe that either petitioner knows the business
or economic aspects of a horse racing, breeding, and sales
activity, including, specifically, the way in which such an
activity must be operated in order to return a profit.
Petitioners never studied their activity's market, and they never
conducted a basic investigation of the factors that would affect
the activity's profitability. Nor can we find that petitioners
knew the activity's accepted business and economic practices.
Although petitioners did employ three certified horse trainers in
their activity, and consulted a veterinarian, the trainers worked
for petitioners for no longer than 8 months, and the veterinarian
never advised petitioners on horse breeding or training. We are
unpersuaded that these individuals were utilized to assist
petitioners in running a profitable business. The same is true
with respect to an accountant whom petitioners retained to
represent them during an IRS audit in 1991. The record contains
no evidence that the accountant was retained to assist
petitioners with a business plan for the activity or to establish
any other methodology for producing a profit.
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