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4. Expectation That Assets Used in the Activity Would
Appreciate in Value
“The term ‘profit’ encompasses appreciation in the value of
assets, such as land, used in the activity.” Sec. 1.183-2(b)(4),
Income Tax Regs. Petitioners argue that their expectation that
their ranch and their horses would appreciate in value indicates
a profit motive. Respondent disagrees for several reasons.
First, respondent argues that petitioners engaged in two separate
activities: petitioners bred and raised horses, and they owned a
ranch. Second, respondent argues that petitioners have produced
no evidence showing that appreciation in their horses would cover
their past losses. Petitioners argue that their ranch is a
business asset and that their assets (the ranch and the herd)
have increased in value by approximately $500,000, thus
demonstrating that their expectation of asset appreciation is
reasonable.
Petitioners purchased the land primarily for reasons
related to their horse activity; profit from the property’s
increase in value was a secondary consideration. Petitioners’
ownership of the ranch and their horse-related activities are
considered a single activity for purposes of determining expected
asset appreciation under section 1.183-2(b)(4), Income Tax Regs.
See Engdahl v. Commissioner, 72 T.C. at 668 n.4.
Petitioners were in the fifth year of their horse operation
when they purchased the ranch in 1991 for approximately $316,000.
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