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activity would be considered entertainment. In pertinent part
they provide:
Objective test. An objective test shall be used to
determine whether an activity is of a type generally
considered to constitute entertainment. Thus, if an
activity is generally considered to be entertainment,
it will constitute entertainment for purposes of this
section and section 274(a) regardless of whether the
expenditure can also be described otherwise, and even
though the expenditure relates to the taxpayer alone.
This objective test precludes arguments such as that
“entertainment” means only entertainment of others or
that an expenditure for entertainment should be
characterized as an expenditure for advertising or
public relations. However, in applying this test the
taxpayer’s trade or business shall be considered.
Thus, although attending a theatrical performance would
generally be considered entertainment, it would not be
so considered in the case of a professional theater
critic, attending in his professional capacity.
Similarly, if a manufacturer of dresses conducts a
fashion show to introduce his products to a group of
store buyers, the show would not be generally
considered to constitute entertainment. However, if an
appliance distributor conducts a fashion show for the
wives of his retailers, the fashion show would be
generally considered to constitute entertainment. [Sec.
1.274-2(b)(1)(ii), Income Tax Regs.]
Petitioners argue that they are in the entertainment
business and that the Derby expenses, Breeders’ Cup expenses, and
miscellaneous expenses are all part of their entertainment
product and therefore should be fully deductible. Petitioners
conduct live horse races, including the Kentucky Derby, at their
facilities. The races produce revenues through pari-mutuel
wagering (including simulcast pari-mutuel wagering), admissions
and seating, concession commissions, sponsorship revenues,
licensing rights, and broadcast fees. Petitioners’ main source
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