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We agree with respondent. During 2000 and 2001, ERE’s
current operating expenses significantly exceeded its gross
receipts. The cost to feed the animals alone exceeded the
revenue from animal sales in the above years. Despite the rising
costs, petitioners continued to acquire more animals, spending
$97,797 on livestock purchases in 2000 and 2001. Petitioners
could not have reasonably expected an overall profit from their
breeding activity.
Moreover, petitioners could not have expected that any
appreciation in ERE’s land would offset the losses. According to
petitioners’ financial statement for 2000, ERE’s assets had an
adjusted basis of $1,353,009, and ERE’s land and improvements had
an appraised current value of $109,260.
Petitioners are correct that they need prove only a bona
fide expectation of profit. However, ERE’s enormous losses
relative to its gross receipts lead us to conclude that
petitioners could not have reasonably believed their breeding
activity would result in an overall future profit.
This factor favors respondent’s position.
5. Petitioners’ Past Success in Other Activities
The fact that a taxpayer has engaged in similar activities
and converted them from unprofitable to profitable enterprises
may indicate that the taxpayer is engaged in the present activity
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Last modified: March 27, 2008