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7. Petitioner's Breeding and Herd Management Program
Petitioner increased the size of his herd from 1955 to 1975.
His herd grew to a high of 84 horses in 1990.
In the mid-1970's, petitioner began to send his mares to be
bred to Kentucky stallions which had excellent pedigrees but
unproven racing records. Petitioner continued to believe
vitamins and minerals were important.
In 1986, petitioner bought a broodmare, Luna Rutera, for
$70,000. Luna Rutera suffered a tear in her cervix which
prevented her from giving birth. Petitioner gave Luna Rutera
away in 1994.
In 1990 or 1993, petitioner began to use stallions with
proven pedigrees and race performance, such as Dr. Carter, Summer
Squall, Cryptoclearance, and Carson City.
8. Prior Examinations
Respondent audited petitioners' 1977 Federal income tax
return in 1980 and 1984 return in 1987. Respondent made no
adjustments to those returns. Kida represented petitioner in
those audits. Petitioner repeatedly told Kida that his horse
activity was a business and that petitioner intended to make a
profit. Kida believed that petitioner's horse racing and
breeding activity was a business.
F. Petitioners' Income Tax Returns
Petitioners reported the horse racing and breeding activity
on their joint Federal income tax returns each year from 1957
through the years in issue. The following chart shows the
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