Nature of the Case
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Facts
P has been a practicing orthodontist since 1946. P's retirement from his orthodontic practice was imminent, and P and his wife began considering what business they might enter to supplement P's retirement income. They began to research a horse breeding operation and learned that the start-up phase of an American saddle-bred breeding operation was 5 to 10 years. P decided in 1964 to establish a horse-breeding operation and began with four horses. They boarded the horses and had them trained off their premises. In order to make their operation more profitable, they purchased the property in 1967, and have conducted their horse-breeding activities there since. Their residence occupies approximately one-fifth of the 2½-acre ranch. Ps constructed a 7-stall stable (convertible to 12 stalls), a tack room capable of storing 7 to 8 tons of hay, five fenced pastures, and a holding corral. Ps planted the pasture and installed an irrigation system for the pasture land. Up to 1973, Ps registered 10 purebred American saddle-bred horses with the American Saddle Bred Registry in Louisville, Ky. Their brood mares produced 11 live foals and had 4 stillborn foals or miscarriages. By the end of 1973, three had been sold, and those remaining were in training off the premises or were being held in pasture. In 1973, petitioners had nine horses. Ps spend an average of 35 to 55 hours per week caring for the horses and maintaining the improvements on the ranch. P's horses were trained by a professional trainer. P's horses were exhibited by their trainer at 10 shows and won eight awards. P's social life at home is not structured around either the horse business or people associated with horses. Ps maintained books and records of their horse operation following procedures suggested by their certified public accountant. P maintained one checking account from which checks for personal use, the orthodontic practice, and the horse operation were drawn. The allocation of each check to one of the above three purposes was noted on the check stub; expenses were subsequently distributed to accounts on separate ledgers maintained for the orthodontic practice and the horse operation. Income from the horse operation was deposited in a savings account separate from other personal savings accounts. P had nothing but losses from 1964 through 1975. P blamed losses for conditions beyond his control. As of December 31, 1977, the fair market value of the ranch, including improvements, was approximately $225,000; petitioners' cost was $83,146. In addition, petitioners' remaining four horses had appreciated in value by approximately $18,750. By the time of trial, petitioners had abandoned hopes of making a profit on their horse operation and were winding down their operation preparatory to terminating it. The ranch was for sale. The IRS disallowed the losses from 71-73 and the claimed investment tax credits based holding that P's horse operation was an activity not engaged in for profit.
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