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Petitioners decided to change the direction of their
operation by going into mare breeding. In 1976, the year that
petitioners began their breeding activity and completed a
Schedule F, Profit or Loss From Farming, for their horse breeding
endeavor, they purchased a second Arabian horse, Emkay Asmara
(Asmara), a yearling filly. This horse was petitioners’ first
breeding mare. Asmara was bred first with Amerigo and a foal was
born in 1977, which died several hours later. Asmara was then
bred to Bak, owned by Paramont Arabians (Paramont). Paramont
became interested in Asmara, and, as a result, petitioners worked
out a trade arrangement, whereby Paramont would keep Asmara in
foal and petitioners would obtain a higher quality filly than
Asmara. When petitioners had the veterinarian examine the
Paramont filly on their premises, it was determined that the
filly had a major breeding fault. The filly was returned and
petitioners received back Asmara in foal. The foal was born in
1978 but only lived for 10 days. Petitioners brought Asmara back
to Paramont for breeding.
Paramont was interested in Asmara because they had a
potential buyer for her. Petitioners sold Asmara to Paramont and
acquired Ms. Bak in 1979, a mare born in 1976. On September 1,
1981, petitioners entered into a mare lease agreement with Keg
Arabian. The Keg Arabian stallion named Pattrone was bred to Ms.
Bak for the purpose of obtaining a marketable foal. The first
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