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Section 183 disallows (with certain nongermane exceptions)
deductions attributable to an activity not engaged in for profit.
Section 183(d) provides a rebuttable presumption that an activity
will be an activity engaged in for profit if the gross income
from the activity exceeds the deductions attributable to the
activity for 3 or more of the taxable years in a 5-year period.
In the case of an activity which consists in major part of the
breeding, training, showing, or racing of horses, "2" is
substituted for "3" and "7" for "5". Generally, as to a "horse"
activity, if gross income exceeds the deductions for 2 of the 7
years, the activity is presumed to be conducted for profit during
the second profit year and all subsequent years during the same
7-year period. See 1 Bittker & Lokken, Federal Taxation of
Income, Estates and Gifts, par. 22.5.5, at 22-79 (3d ed. 1999).
Under section 183(e), a taxpayer may elect to postpone a
determination of whether the presumption applies until the close
of the fourth taxable year (or the sixth year for qualifying
horse activities) following the first taxable year in which the
taxpayer engages in the activity. An electing taxpayer may file
returns in the interim on the assumption that the activity is
conducted for profit, and if, under section 183(e)(2), there are
3 or 2 profitable years in the applicable 5-year or 7-year
period, the presumption applies to all 5 or 7 years, including
years preceding the profit years. See id.
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