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As of the time of trial, the majority of petitioners’ herd
consisted of home-foaled horses. The horses acquired by purchase
had a total fair market value of $103,500. Petitioners’ tax
returns reflect that the cost of the purchased horses was
$87,838. Thus, the purchased horses have increased in value by
approximately 18 percent.
Petitioners argue that the appreciation shown by the assets
used in the activity is powerful corroboration of their claimed
profit motivation. Respondent argues that to prevail regarding
this factor, petitioners’ objective must be to realize a profit
on the entire operation. See Bessenyey v. Commissioner, 45 T.C.
261, 274 (1965), affd. 379 F.2d 252 (2d Cir. 1967).
We agree with petitioners that the question to be addressed
here is not the ultimate issue in this case, i.e., petitioners’
profit motivation, but whether the assets used in the activity
were expected to appreciate in value. See sec. 1.183-2(b)(4),
Income Tax Regs. We find petitioners had a bona fide expectation
that at least some of the business assets would increase in
value. That those assets actually increased in value weighs in
11(...continued)
of horses with similar bloodlines. With respect to Adelita LaCe,
we do not believe that Dr. Cortelezzi’s estimation of $3,500 was
realistic, considering that the mare’s health problems preclude
her use as a brood mare or riding horse. Our determination of
value is based on our review of the record.
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