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In 1999, petitioners arrived at the conclusion that their
horse-boarding activity would never be profitable irrespective of
their years of detailed business analyses and budget projections.
Sometime in 2000, petitioners decided to sell Sugar Tree as an
ongoing business. By doing so, petitioners had to maintain the
property and the boarding activity to show it to prospective
buyers as an ongoing business. Petitioners began to share their
intent to sell with colleagues in the horse-boarding and breeding
business in the area. After listing the property in 2001 for
$1,495,000, and placing advertisements in at least one national
horse breeding periodical, petitioners sold the farm in 2003 for
$1,275,000.
Respondent mailed to petitioners on May 2, 2003, a notice
of deficiency for taxable years 1999 and 2000. At the time of
the filing of the petition, and pursuant to Rule 171, petitioners
requested that the case be conducted as a small tax case. Before
the trial, however, petitioners’ attorney requested, pursuant to
Rule 171(c), an order directing that the small case designation
be removed. Respondent raised no objection to petitioners’
request, and filed an answer on March 28, 2006, the trial date.
Respondent also requested in his answer that the deficiencies for
taxable years 1999 and 2000 be increased to $42,215 and
$35,028.05, respectively. The increased deficiencies are a
result of respondent’s misapplication of the provisions of
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