Victor Prieto and his wife (plaintiffs) worked together at Prieto’s private practice for orthopedic surgery. The Prietos spent a significant amount of time on the business, and Victor’s average yearly net income exceeded $600,000. When their children became interested in horses, the Prietos began purchasing, training, showing, and selling horses. The Prietos’ children also began competing in events and were allowed to pick out which horses to buy. The Prietos hired 18-year-old Nicole Shahinian to train the horses and instruct their children how to ride. Shahinian was a “junior” rider and did not have any business or training experience. From 1991 to 1998, the Prietos’ horse business operated at an average yearly loss of over $300,000. The Prietos did not keep strict records of the horse business, and any records that were kept had many inconsistencies. When their children reached the age of 18 years, the Prietos stopped operating the horse business. The Prietos deducted their losses as business expenses on their federal taxes. The commissioner of internal revenue (commissioner) (defendant) determined deficiencies in the Prietos’ taxes and assessed penalties. The Prietos petitioned for a redetermination.