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Sec. 1.183-2(b)(1), Income Tax Regs. Petitioners kept records of
what was owed to them and how much to bill for veterinarian
services and trimmings for the horses that they boarded.
Petitioners maintained records for everything they spent on the
activity and were able to substantiate just about every expense
claimed. Nevertheless, petitioner testified that they referred
to these records only when preparing their tax returns, not to
monitor their expenses.
When petitioners determined that the breeding and racing of
quarter horses would not be profitable, petitioners modified
their operations by switching to thoroughbreds. However, other
than owning a successful thoroughbred in a joint venture with
several others, there is no evidence that petitioners
investigated the merits of such a switch. Moreover, petitioners
kept two quarter horses, the expenses for which were claimed on
the Schedule C. Petitioner failed to explain why keeping those
quarter horses reflected a profit objective. Furthermore,
petitioner testified that Ding Dong Daddy and Halyard were
valuable horses, but she did not reveal the price that was paid
for them. Additionally, Halyard was an older horse and known to
be a difficult breeder, and petitioner did not have any bookings
for him. We fail to see a profit objective in acquiring Halyard,
but more significantly, in keeping an unproductive stallion for
nearly 8 years.
Petitioners did not prepare business or profit plans with
cost projections or budgets. Petitioner stated that the
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Last modified: May 25, 2011