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During the years in issue, petitioner operated Caduceus
Thoroughbreds in conjunction with Sun State Farm, an
S corporation. Petitioner and Fillipo Santoro (Santoro) formed
Sun State Farm in 1986 to develop a modern and complete
thoroughbred horse facility capable of dealing with all facets of
the thoroughbred industry. In 1986, Sun State Farm purchased a
36-acre parcel of land in Wickenburg, Arizona (the farm). The
farm was flat, was zoned for farming, had good access to nearby
highways, and had a good water supply. Petitioner, with the help
of his uncle and ranch manager, made certain improvements to the
farm, including constructing barn facilities for the horses.
Horses that Caduceus Thoroughbreds owned were boarded at the
Sun State Farm facility from 1986 through 1996. Caduceus
Thoroughbreds deducted boarding fees totaling $416,236 that were
paid to Sun State Farm from 1986 through 1996.
Petitioner and Santoro dissolved Sun State Farm after a
“falling out” in 1996. Petitioner’s horses remained at the
property, and petitioner continued to market his thoroughbreds
using the name Sun State Farm.
Petitioner wrote a business plan in 1995 for Caduceus
Thoroughbreds that was a supplement to a plan written for Sun
State Farm in 1987. Although the name on the 1995 business plan
had changed, petitioner had not significantly changed the
operations.
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