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The record does not contain a copy of the envelope in which
petitioners mailed their 1995 return.
On petitioners’ Federal income tax returns for 1993, 1994,
and 1995, petitioners deducted Schedule F expenses of $22,665,
$38,738, and $25,162, respectively. Petitioners also deducted
Schedule C expenses of $1,072 and $1,365 for tax years 1993 and
1994, respectively.
In a notice of deficiency for the 1993, 1994, and 1995
taxable years, respondent determined that petitioners did not
engage in their horse breeding activity or their NSA water and
air filtration activity with an actual and honest objective of
making a profit, and that the expenses incurred in connection
with each respective activity were therefore deductible only to
the extent of income earned from that activity. Respondent
further determined that petitioners are liable for accuracy-
related penalties for all years in issue, and additions to tax
for failure to timely file their 1994 and 1995 returns.
K. Discussion
Section 162 allows deductions for ordinary and necessary
expenses paid or incurred in carrying on a trade or business. To
be engaged in a trade or business, “the taxpayer must be involved
in the activity with continuity and regularity and * * * the
taxpayer’s primary purpose for engaging in the activity must be
for income or profit.” Commissioner v. Groetzinger, 480 U.S. 23,
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