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7. Amount of Occasional Profits
The amount of profits earned in relation to the amount of
losses incurred, the amount of the investment, and the value of
the assets in use may indicate a profit objective. See sec.
1.183-2(b)(7), Income Tax Regs. The opportunity to earn
substantial profits in a highly speculative venture may be
sufficient to indicate that the activity is engaged in for profit
even though only losses are produced. See id. In determining
whether the taxpayer entered into the activity for profit, a
small chance of making a large profit may indicate the requisite
profit objective. See id.
In 11 years of operation, petitioners’ horse activity has
never turned a profit. Classic fino horses that win at the
national level can sell for prices in excess of $250,000.
Petitioners claim to be focusing on that market and hope that one
day their herd will produce such a horse. Petitioners’ professed
belief that a champion horse could generate a substantial amount
of revenue and correspondingly large profits may be indicative of
profit motivation. See Dawson v. Commissioner, T.C. Memo. 1996-
417.
Under the circumstances of this case, however, we agree
with respondent that the possibility of a speculative profit is
insufficient to outweigh the complete absence of profits over a
period of 11 years. During the years at issue, none of
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