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construction of the barns and the round pen, gradation and
installation of irrigation lines, and installation of the pipe
corrals and fencing. Petitioners also installed benches with a
view of the arena and a fino board, which is used to hear the
sound of the paso fino’s four-beat gait. Petitioners spent
$6,546 on corrals and arenas, but the record does not reflect
clearly the total cost for all horse-related improvements.
The ranch is modest and functional. It does not have a
swimming pool or a tennis court. There is a sign for the ranch
near the street, making it identifiable to passersby and to
people looking for the ranch.
During the years at issue and through trial, petitioners
resided at the ranch. In 1993, Mr. McKeever applied for a loan;
on his loan application, he listed the ranch as his residence,
not as an income-producing property. In 1998, petitioners had
the ranch appraised. The appraisal valued the ranch at $409,000.
Petitioners’ Books and Records
The ranch has an office with a separate entrance where
petitioners keep a library of videos and the books and records
for their horse activity. From 1987 through the years at issue,
Mrs. McKeever provided bookkeeping services for the horse
activity. Petitioners used one of their then-existing checking
accounts (709 account) to pay expenses associated with their
horse activity. The records kept consisted of copies of
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