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The third factor is the time and effort expended by the
taxpayer. The fact that a taxpayer devotes much of his personal
time to an activity may indicate an intention to derive a profit,
particularly if there are no substantial personal or recreational
aspects to the activity. Sec. 1.183-2(b)(3), Income Tax Regs.
Dr. Harrington did devote substantial time to the horse-
breeding activity. However, we believe there were substantial
personal and recreational aspects to the activity. Moreover, Dr.
Harrington did not give up his regular job as a social work
professor to pursue making a living from the horse-breeding
activity. This was a pleasurable sideline for Dr. Harrington,
not a source of his livelihood. The time and effort Dr.
Harrington devoted to the activity (3 or 4 hours per day caring
for the horses) was not inconsistent with the time one might
expect to devote to a hobby of this kind.
The fourth factor is the expectation that assets used in the
activity may appreciate in value. Sec. 1.183-2(b)(4), Income Tax
Regs. Petitioners argue that their land has appreciated in value
(due mostly to the general increase in land values in the area,
but also, to some undefined extent, due to improvements
petitioners made to the land). Petitioners argue that the
increase in the value of their land should be taken into account
in determining whether their horse-breeding activity was
profitable.
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