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4. Expectation That Property Used in the Activity Would
Appreciate in Value
A taxpayer may expect, despite the lack of profit from
current operations, that an overall profit will result when
appreciation in the value of assets used in the activity is
realized. Bessenyey v. Commissioner, 45 T.C. 261, 274 (1965),
affd. 379 F.2d 252 (2d Cir. 1967); sec. 1.183-2(b)(4), Income Tax
Regs. There is an overall profit if future net earnings and
appreciation are sufficient to recoup losses sustained in prior
years. Bessenyey v. Commissioner, supra.
Petitioners contend that this factor favors them because
petitioner expected that their horses would appreciate in value.
We disagree. Petitioners offered no evidence showing which of
their horses would appreciate or the amount of appreciation they
expected. Temptation's potential value decreased substantially
after he was injured in 1983, which was at least 5 years before
the years in issue. The two foals by Temptation were of far less
quality than petitioner expected. By the years in issue,
petitioner did not reasonably expect Temptation's value to
increase. Petitioner sold Donka for $1,500 in 1989.
Until 1988, Labrette had not produced any valuable
offspring. It is true that Labrette could appreciate in value,
but there is no evidence showing how much that appreciation could
be. We are not convinced that petitioner expected the
appreciation of her horses to exceed her total losses.
On balance, this factor favors respondent.
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