Terry F. and Carol J. Zdun - Page 5

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          apples, petitioner grows the apples, picks and bags them, and               
          then takes the bags to his offices for sale to his patients.                
          Thus, petitioner considers his apple orchard an integral part of            
          his dental practice.                                                        
               Petitioner testified that he has tried, but prefers not, to            
          sell the apples commercially.  Some of the apples have suffered             
          injury from insects and are otherwise marked which makes much of            
          his fruit less valuable on the commercial market; thus, in                  
          petitioner's opinion the profit margin from commercial sales is             
          not good.  Instead, he prefers to grow the best, most nutritious            
          apples that he can and provide them to his patients.  If a                  
          patient cannot afford to purchase the apples, petitioner gives              
          them to the patient without charge.  Petitioner estimates that of           
          all his patients, only 10 or 15 percent avail themselves of the             
          apples.  There is no question that petitioners have never made a            
          profit with respect to the apple orchard activity during their              
          14-year involvement with the fruit.                                         
          Petitioners' Tax Returns                                                    
               Petitioners formed a partnership, Twin Creeks Organic Farm,            
          in 1992.  Petitioners are the only partners in the partnership.             
          For reporting purposes, petitioners combined their dentistry                
          activity gross receipts with their apple orchard activity income            
          and expenses on one Form 1065 (U.S. Partnership Return of                   
          Income).  In each of the years at issue, petitioners reported the           





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