Harvey J. Davis and Patricia A. Davis - Page 21

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               4.   Expectation That Property Used in the Activity Would              
                    Appreciate in Value                                               
               A taxpayer may intend to make an overall profit when                   
          appreciation in the value of assets used in the activity is                 
          realized.  See Bessenyey v. Commissioner, 45 T.C. 261, 274                  
          (1965), affd. 379 F.2d 252 (2d Cir. 1967); sec. 1.183-2(b)(4),              
          Income Tax Regs.  There is an overall profit if net earnings and            
          appreciation are enough to recoup losses sustained in prior                 
          years.  See Bessenyey v. Commissioner, supra.                               
               Respondent contends that petitioners had no realistic                  
          expectation of recouping their losses from the horse activity               
          through appreciation of their assets.  We disagree.  Petitioners            
          provided expert appraisal testimony from O’Connor and Truitt.               
          Respondent called no witnesses and left petitioners’ appraisals             
          substantially unrebutted.  We conclude that petitioners have                
          proven that the appreciation in their horses and farm                       
          improvements was substantial in relation to their losses and that           
          they reasonably expected appreciation to exceed their losses.               
                    a.   Horse Appreciation                                           
               Respondent contends that petitioners did not expect their              
          horses to increase substantially in value because petitioners did           
          not discuss horse appreciation in their business plan.                      
          Respondent points out that petitioners’ business plan contained             
          no projections of appreciation in the value of their farm                   
          improvements or horses.                                                     

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