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After concessions by respondent, only two issues remained at
trial. The first issue was whether petitioner operated her horse
showing and breeding activities with the objective of making a
profit. The second issue was whether the addition to tax under
section 6651(a)(1) is appropriate. We discuss both issues in
detail below.
Discussion
1. Horse Showing and Breeding Activities
Section 183 specifically precludes deductions for activities
not engaged in for profit except to the extent of the gross
income derived from such activities. Sec. 183(a) and (b)(2).
Deductions are not allowable for activities that a taxpayer
carries on primarily for sport, as a hobby, or for recreation.
Sec. 1.183-2(a), Income Tax Regs. For a taxpayer’s expenses in
an activity to be deductible under section 162, Trade or Business
Expenses, or section 212, Expenses for Production of Income, and
not subject to the limitations of section 183, a taxpayer must
show that the taxpayer engaged in the activity with an actual and
honest objective of making a profit. Hulter v. Commissioner, 91
T.C. 371, 392 (1988); Dreicer v. Commissioner, 78 T.C. 642, 645
(1982), affd. without opinion 702 F.2d 1205 (D.C. Cir. 1983);
Hastings v. Commissioner, T.C. Memo. 2002-310. Although a
reasonable expectation of a profit is not required, the
taxpayer’s profit objective must be actual and honest. Dreicer
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