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advice may constitute reasonable cause for this purpose. See
sec. 1.6664-4(b)(1), Income Tax Regs.
Petitioners have failed to show error in respondent’s
negligence determination; the evidence amply supports a finding
of negligence. Petitioners’ fundamental grounds for claiming a
profit motive--that they expected to produce a small herd through
breeding--is illogical in light of the fact that they never
produced a foal or breeding fee during the years at issue or
thereafter. We believe that the obvious recreational benefits
and the substantial losses that sheltered petitioners’ other
income combined to create a situation which should have seemed
“too good to be true” to a reasonable and prudent person, within
the meaning of section 1.6662-3(b)(1)(ii), Income Tax Regs. See
Smith v. Commissioner, T.C. Memo. 1997-503, affd. without
published opinion ___ F.3d ___ (9th Cir., Apr. 28, 1999). In
addition, petitioners failed to allocate costs of feed and
bedding and stable help between horses used in their show horse
business and those conceded to be used for personal purposes
only, and instead treated all such costs as business expenses.
Similarly, petitioners treated the cost of their daughter’s
equine instruction as if it were a business expense. This
indiscriminate deducting of obvious personal expenditures as
business expenses demonstrates a lack of due care and a failure
to make a “reasonable” attempt to comply with the provisions of
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