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Section 1.183-1(d)(1), Income Tax Regs., provides:
If the taxpayer engages in two or more separate
activities, deductions and income from each separate
activity are not aggregated either in determining
whether a particular activity is engaged in for profit
or in applying section 183. Where land is purchased or
held primarily with the intent to profit from increase
in its value, and the taxpayer also engages in farming
on such land, the farming and the holding of the land
will ordinarily be considered a single activity only if
the farming activity reduces the net cost of carrying
the land for its appreciation in value. Thus, the
farming and holding of land will be considered a single
activity only if the income derived from farming
exceeds the deductions attributable to the farming
activity which are not directly attributable to the
holding of the land (that is, deductions other than
those directly attributable to the holding of the land
such as interest on a mortgage secured by the land,
annual property taxes attributable to the land and
improvements, and depreciation of improvements to the
land).
In the case at hand, there is no evidence in the record that the
horse-breeding activity contributed marginal profits to help
reduce the cost of holding the land. Even excluding the items
attributable to the land, the horse-breeding operation incurred
substantial losses. Therefore, the holding of petitioners’ land
is a separate activity from the horse-breeding activity.
The improvements petitioners claim to have made to the land
may increase their tax cost (basis) in the land and thus reduce
the taxable gain they will realize upon sale of the land. Sec.
1001(a). The increase in the value of petitioners’ land does not
support petitioners’ argument that Dr. Harrington engaged in
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