Victor A. and Marion W. Prieto - Page 12




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               Petitioners reported the following adjusted gross income               
          (AGI):                                                                      
                         Year                   AGI                                   
                         1991                $343,212                                 
                         1992                235,390                                  
                         1993                181,237                                  
                         1994                290,909                                  
                         1995                293,567                                  
                         1996                785,116                                  
                         1997                157,006                                  
                         1998                245,474                                  
          After excluding the losses (and ordinary income) reported by the            
          horse activity, petitioners’ “readjusted” AGI is as follows:                
                         Year                Readjusted AGI                           
                         1991                $490,330                                 
                         1992                601,740                                  
                         1993                609,184                                  
                         1994                664,603                                  
                         1995                665,421                                  
                         1996                771,413                                  
                         1997                612,630                                  
                         1998                682,525                                  
          From 1991 through 1998, petitioners’ readjusted AGI averaged                
          $635,981.                                                                   
               G.   Petitioners “Attempts” To Cut Costs                               
               During the years in issue, petitioners spoke with Nicole               
          about cutting the horse activity’s costs and increasing its                 
          income.  Petitioners, however, only discussed with Nicole the               
          fact that the horse activity was losing money; petitioners never            
          informed Nicole of the amount of the losses (which totaled                  
          hundreds of thousands of dollars).                                          






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