Harvey J. Davis and Patricia A. Davis - Page 19

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          because the years in issue were the early stages of the horse               
          activity, which was very different from their other businesses.             
               Petitioners kept their expenses as low as possible.                    
          Petitioner built most of the barn, stable, and exercise arena               
          himself.  He significantly reduced some of his costs, such as               
          stud fees and the daily cost of feed per horse.  Also,                      
          petitioners sometimes negotiated reducing the purchase prices of            
          horses by offering a foal for a reduction in the cash price.                
               Respondent points out that the "show files" that petitioners           
          kept for each horse were not contemporaneously prepared but were            
          assembled in 1997.  We infer nothing from this because the                  
          preparation of the show files was based on information that                 
          petitioners had contemporaneously.                                          
               This factor favors petitioners.                                        
               2.   The Expertise of the Taxpayers or Their Advisers                  
               Efforts to gain experience, a willingness to follow expert             
          advice, and preparation for an activity by extensive study of its           
          practices may indicate that a taxpayer has a profit motive.  See            
          sec. 1.183-2(b)(2), Income Tax Regs.                                        
               Respondent contends that petitioners lacked expertise in               
          running a successful horse business, and that, although                     
          petitioner studied the history of the Arabian horse and its                 
          bloodlines, he spent little time investigating the business                 
          aspects of an Arabian horse activity.  Respondent contends that             

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