Robert A. and Sheila D. Routon - Page 7

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          Petitioners’ uncontradicted expert testimony is that petitioners’           
          horses and land are worth approximately $2 million.                         
               E.   Taxpayers’ Financial Status                                       
               Petitioners had modest resources yet consistently invested             
          nearly half their annual income in Ascension because they                   
          sincerely believed that they would eventually turn a profit.                
          Petitioners were shrewd, hardworking, diligent, and levelheaded.            
          We do not believe that they would squander their hard-earned                
          money on an extravagant hobby.                                              
               F. Amount of Profits                                                   
               Although Ascension produced only losses, the opportunity to            
          earn substantial profits in a highly speculative venture is                 
          sufficient to indicate that the activity is engaged in for                  
          profit.  Sec. 1.183-2(b)(7), Income Tax Regs.  For example, “it             
          may be found that an investor in a wildcat oil well who incurs              
          very substantial expenditures is in the venture for profit even             
          though the expectation of a profit might be considered                      
          unreasonable.”  Sec. 1.183-2(a), Income Tax Regs.                           
               Petitioners were simply poor marketers who lacked the                  
          requisite reputation in the industry, but they had quality horses           
          and a venture that could be profitable if they changed their                
          business practices.  For example, petitioners’ expert witnesses             
          indicated that syndication of one of Diamond Bask’s offspring,              
          Diamonds N Jazz, would be quite profitable.                                 

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