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paid petitioner $22,000 for the use of the Rialto property. On
her 1996 Federal income tax return, petitioner reported a rental
loss of $12,357 as a result of significant repair expenses
incurred upon acquisition of the property. From 1997 to 2003,
petitioner reported average annual rental income of $7,871.
During the years in issue, petitioner reported rental income of
$7,944, $6,659, and $7,202, respectively.
C. Petitioner’s Horse Activity
1. Background
Petitioner was raised around horses and showed horses as a
child and young adult. In 1984, petitioner purchased her first
horse, Feyras Raehele.
In 1988, petitioner commenced her horse activity at Falling
Water Way under the name “Falling Water Arabians”. Petitioner
dealt only with purebred Arabian horses. At the time she started
her activity, petitioner did not know how many Arabian horse
breeders operated in California.
During the years in issue, petitioner used Falling Water Way
for breeding, training, and working the horses. However, because
petitioner has only 1.48 acres at Falling Water Way, she often
took the horses to Gavilan Hills to exercise and train them.
During the years in issue, petitioner wormed and vaccinated
her horses. Petitioner also ordered supplies and paid bills
related to her horse activity.
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