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of revenues is wagers placed on horse races.
In determining whether the expenses in question are
entertainment expenses petitioners’ trade or business must be
considered. We would agree petitioners are in the entertainment
business. However, applying the objective test mandated by
section 1.274-2(b)(1)(ii), Income Tax Regs., the Derby, Breeders’
Cup, and miscellaneous expenses all constitute entertainment
expenses and cannot be properly categorized as “part of the
entertainment product”. Thus the Derby, Breeders’ Cup, and
miscellaneous expenses are subject to the restrictions imposed by
section 274(n)(1) unless they fall within one of the exceptions
set out in section 274(n)(2).
Petitioners alternatively argue that the Derby, Breeders’
Cup, and miscellaneous expenses are excluded from the operation
of section 274(n)(1) by paragraphs (7) and (8) of section 274(e).
Those paragraphs provide as follows:
(7) Items available to public.--Expenses for goods,
services, and facilities made available by the taxpayer to
the general public.
(8) Entertainment sold to customers.--Expenses for
goods or services (including the use of facilities) which
are sold by the taxpayer in a bona fide transaction for an
adequate and full consideration in money or money’s worth.
Petitioners provide entertainment to all of the public
through their different events. The Kentucky Derby and the
Breeders’ Cup Championship are open to the general public as are
other races during Derby Week and Breeders’ Cup week. In
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