Julius Lee Harrington and Mary Lou Ziter - Page 16




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               The sixth factor is the taxpayer’s history of income and               
          losses with respect to the activity.  Sec. 1.183-2(b)(6), Income            
          Tax Regs.  Petitioners have had 9 straight years of substantial             
          sustained losses.  During these 9 years, petitioners had gross              
          receipts of only $6,807, while incurring expenses of $117,183.              
          There was no material decrease in their losses over time.                   
               Petitioners argue that they are still in the 15-year startup           
          phase of the activity, and that losses are expected during the              
          startup phase.  Losses during the startup phase of an activity              
          are not currently deductible.  Sec. 195(a).  The losses must be             
          capitalized, and an election made to amortize the losses over a             
          period of not less than 60 months after the startup phase ends.             
          Sec. 195(b).  Therefore, even if petitioners were able to                   
          establish that their horse-activity losses were incurred during             
          the startup phase of the activity, they would not be entitled to            
          deductions for the years in issue.  See McKelvey v. Commissioner,           
          T.C. Memo. 2002-63.                                                         
               Moreover, we do not accept petitioners’ argument that these            
          losses were incurred in the startup phase of the activity.                  
          Petitioners made no significant change to their operations during           
          the 9-year period of operations.  They did not expand, have not             
          sought to expand, and do not intend to expand their business in a           
          material way.  Nothing about their horse-breeding operation                 
          requires a prolonged startup period.  By their own testimony,               






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