Barry S. and Yvonne C. Hillman - Page 12

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          of any gross income generated by the activity.  See sec. 183(a)              
          and (b)(2).3                                                                 
               Respondent asserts that petitioners were not engaged in the             
          show horse activity for profit, which would result in a                      
          disallowance of their claimed losses to the extent that they                 
          exceeded gross income generated by the activity.  Petitioners                
          argue that they were engaged in show horse activity for profit               
          and that accordingly their losses are fully deductible.4                     
               Section 183(c) defines an activity not engaged in for profit            
          as an “activity other than one with respect to which deductions              
          are allowable for the taxable year under section 162 or under                
          paragraph (1) or (2) of section 212.”  Deductions are allowable              
          under section 162 or section 212 with respect to activities for              
          which the taxpayer has the requisite section 183 profit motive.              
          See Holmes v. Commissioner, ___ F.3d ___, ___ (6th Cir., July 1,             
          1999), revg. and remanding T.C. Memo. 1997-401; Hayden v.                    
          Commissioner, 889 F.2d 1548, 1552 (6th Cir. 1989) (“The threshold            
          inquiry in determining whether an activity is a trade or business            
          or is carried on for the production of income is whether the                 
          activity is engaged in for the primary purpose and dominant hope             

               3 Deductions that would be allowable without regard to                  
          whether or not such activity is engaged in for profit are not                
          restricted by this rule.  See sec. 183(b)(1).                                
               4 Petitioners have not argued that any of the losses claimed            
          are nevertheless deductible by virtue of sec. 183(b)(1).                     

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