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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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