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This factor favors petitioners’ position.
4. The Expectation That Assets Used in the Activity
Would Appreciate in Value
The term “profit” encompasses revenue from operations and
appreciation in the value of assets such as land. Sec. 1.183-
2(b)(4), Income Tax Regs.
Thus, the taxpayer may intend to derive a profit from
the operation of the activity, and may also intend
that, even if no profit from current operations is
derived, an overall profit will result when
appreciation in the value of land used in the activity
is realized since income from the activity together
with the appreciation of land will exceed expenses of
operation. * * * [Id.]
Petitioners argue that their expectation of profit is
evidenced by the fact that a gross profit will be produced upon
the sale of a third offspring. This argument is not supported by
credible evidence. For example, petitioners’ depreciation
schedule reflects that they purchased one blue and gold macaw for
$750 in 1997. Yet, in 2000, petitioners sold three blue and gold
macaws for $750.
Respondent claims that petitioners could not have expected
ERE’s assets to appreciate so much in value as to produce an
overall profit because ERE’s current operating expenses each year
exceeded its gross receipts by a wide margin. Respondent points
out that petitioners could not realize an overall profit even if
ERE’s property appreciated.
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Last modified: March 27, 2008