Otis W. Jordan and Alma F. Jordan - Page 11

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          their horse racing activity, mortgage interest is not allowable             
          as a trade or business deduction on the Schedule F.                         
               In general no deduction is allowed for “any amount paid out            
          for new buildings or for permanent improvements or betterments              
          made to increase the value of any property.”  Sec. 263.  During             
          1994, petitioners constructed a new barn, or substantially                  
          improved an existing one.  Amounts expended for the construction            
          or improvement of the barn were deducted as “supplies” on the               
          Schedule F.  Petitioners are not entitled to deduct the                     
          construction costs.  Instead, the costs must be capitalized and             
          included in the basis of the barn.  See sec. 1012; sec. 1.162-              
          12(a), Income Tax Regs.                                                     
               Cost incurred to raise livestock may be deducted or                    
          capitalized at the option of the taxpayer.  See sec. 1.162-12(a),           
          Income Tax Regs.  In contrast, under the applicable version of              
          the controlling regulation, the cost of acquiring, as opposed to            
          raising, a sporting animal, such as a race horse, is considered             
          an investment in capital.  A breeding fee, or stud fee, is                  
          classified as either a cost of “raising” or a cost of “acquiring”           
          an animal depending upon which party bears the risk of loss that            
          the breeding process is unsuccessful.  Duggar v. Commissioner,              
          71 T.C. 147 (1978); Ellis v. Commissioner, T.C. Memo. 1984-50.              
               In this case, petitioners were guaranteed a live foal in the           
          stallion service contract involving Hilarious Astro, and it                 
          appears that a similar guaranty was in effect in the contract               

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