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manner as other profit-making horse-breeding operations, made
changes in their method of operations to increase profitability,
and attempted to diversify their activities to make a profit.
Petitioners’ situation is distinguishable from the taxpayers
in Engdahl. Petitioners offered no evidence to show that their
horse-breeding activity was unprofitable due to unexpected
adverse market conditions. Nor did they show that the activity
was similar to other profit-making horse-breeding operations.
Petitioners did not make changes to their operation in an attempt
to make it profitable.1 Indeed, Dr. Harrington testified that he
was unwilling to expand the operation because it was not cost
effective to do so. Finally, Dr. Harrington made no attempt to
diversify the operation in order to earn a profit. Dr.
Harrington’s continuation of the inherently money-losing
operation belies petitioners’ contention that petitioners engaged
in the activity to make a profit.
1Petitioners argued on brief that they made several changes
to improve profitability. First they claim they “switched” to a
“well-known Appaloosa Foundation bloodline”. In fact, the only
stallion that they have ever used was Provoking. We do not
understand what they mean by a “switch”. Second, they claim that
they identified a special niche market of producing palomino
Appaloosas and attempted to expand to meet market demand. In
fact, petitioners did not attempt to expand and have not been
able to sell their two best foals (calling into question the
level of demand). Finally, petitioners point out that Dr.
Harrington has developed farrier, veterinarian, training, and
marketing skills. While he may have developed or improved his
skills, these were not significant changes made to improve
profitability and did not have the effect of improving
profitability.
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