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against the losses from the operation of the activity may
indicate a profit objective. Sec. 1.183-2(b)(4), Income Tax
Regs.
Petitioners testified that they expected their horses to
increase in value. They further testified that during the years
in issue, their “herd” could have sold for $30,000 to $50,000.
However, they did not provide any evidence besides their own
belief of the value of their horses. Petitioners argue that the
insurance coverage on Ms. Bak of $40,000 is “third party”
evidence of the value of the horses. We note that the insurance
coverage was for Ms. Bak in 1981, 12 years prior to the earliest
year in issue, and petitioners failed to provide the actual
policy showing the basis of this valuation. Even assuming their
figure was the true market value of their herd, this would
compensate them for only about one-quarter of $179,543, their
total losses incurred from 1992 through 1998.
To be profitable, the horse breeding activity would need to
produce future net earnings and appreciation in an amount greater
than $179,543. Petitioners failed to produce any evidence to
show that their activity had a reasonable chance of recovering
their reported losses. See Bessenyey v. Commissioner, 45 T.C.
261, 274 (1965), affd. 379 F.2d 252 (2d Cir. 1967).
This factor favors respondent’s position.
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