Louis A. Filios and Estate of Emma L. Filios, Deceased, Louis A. Filios, Executor - Page 20




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          from his horse racing and breeding activity.  His net losses from            
          the activity were more than $6 million from 1957 to 1993.                    
               A small chance to make a large profit may indicate that a               
          taxpayer has a profit objective.  Sec. 1.183-2(b)(7), Income Tax             
          Regs.  Landry testified that 3 to 5 percent of those in the horse            
          racing and breeding activity make about $775 million.  That does             
          not establish that petitioner had a small chance to make a large             
          profit, absent evidence showing what other horse operations did              
          to become profitable.                                                        
               Petitioners contend that a horse that petitioner had bred in            
          1995, Bent Creek City, was worth $1 million.  Petitioners contend            
          that this shows the potential of substantial profit from                     
          petitioner's horse activity.  We disagree.  Landry's estimate of             
          Bent Creek City's value appears to be inflated; he testified that            
          petitioner sold the horse in 1996 for $35,000.                               
               This factor favors respondent.                                          
               8.   Financial Status of the Taxpayer                                   
               Substantial income from sources other than the activity,                
          especially if the losses generate large tax benefits, may                    
          indicate that the taxpayer is not conducting the activity for                
          profit.  Sec. 1.183-2(b)(8), Income Tax Regs.                                
               Petitioner concedes that he had a substantial amount of                 
          income from Westfield Gage at all times, but he contends that                
          this factor is neutral because most of his losses were direct                
          expenses requiring cash outlays.  We disagree.  Even if a                    
          taxpayer pays expenses out of pocket the potential tax benefits              


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