Harvey J. Davis and Patricia A. Davis - Page 17

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          substantial in relation to their losses in the fifth through                
          seventh year of operating their horse activity.                             
          B.   Applying the Factors                                                   
               1.   Manner in Which the Taxpayer Conducts the Activity                
               Maintaining complete and accurate books and records,                   
          conducting the activity in a manner substantially similar to                
          comparable businesses which are profitable, and making changes in           
          operations to adopt new techniques or abandon unprofitable                  
          methods suggest that a taxpayer conducted an activity for profit.           
          See Engdahl v. Commissioner, 72 T.C. 659, 666-667 (1979); sec.              
          1.183-2(b)(1), Income Tax Regs.                                             
               Respondent contends that petitioners’ business plan was                
          inadequate because it contained little information about the                
          economics of the horse activity, and its financial projections              
          showed that petitioners would lose money from the activity.                 
          Respondent contends that petitioners did not adequately                     
          investigate other Arabian horse farms before they began their               
          horse activity because they did not examine the books and records           
          of other breeders and they visited much larger horse farms that             
          were involved in all aspects of the Arabian horse business.                 
          Respondent contends that petitioners did not run the horse                  
          activity in a businesslike manner because petitioners used the              
          same bank accounts for their horse activity and their personal              
          expenses.  Respondent further contends that petitioner did not              

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