The Case:

In January $2022,$ Renee Harding and her husband were divorced after $20$ years of marriage. She received a substantial property settlement that included the house and an adjoining office set on five acres of land. Two$-$thirds of the office and the land were used by Renee$$s daughter for horse stables and a riding arena.

Her annual alimony allowance allows Renee to live a comfortable life without working. Renee had never worked outside of the house, spending her time instead taking classes, traveling and playing tennis. In $2007,$ Renee earned a bachelors degree in art from a nearby state university.

For several years, Renee owned two purebred terriers as pets, and she developed an interest in raising, breeding, and showing them for profit. To keep herself busy after the divorce, Renee decided to purchase five terriers to start breeding in February $2022.$

Renee had part of the office converted into a ten$-$pen kennel. She purchased an advertisement in Dog World for her services as a breeder, and signed onto the breeding network. In the summer of $2022,$ Renee attended several dog shows across the country, and spent a lot of time with friends because the shows sponsored many social activities.

Renee maintained detailed records for each terrier purchased, with space for all the stud fees, receipts from the sale of puppies, and the cost of caring for the dog. The closest veterinarian was twenty minutes away. In December $2022,$ Renee sold one puppy from her first litter of five. The net loss from the operation in $2022$ was $$25,406.$

You have recently been promoted to senior accountant at DCH CPAs. Your first action as senior is to delegate the duties of a new tax engagement with Renee Harding to Stuart Staff, an associate. You instruct Stuart to write up a tax research letter telling Renee the correct tax treatment for her loss from the dog breeding activities. A week later, Stuart emails you the following letter for your review comments

You need to redraft the letter to send to Renee. Recognizing that Stuart needed to do some additional research, you decide to start from the beginning rather than relying on his initial conclusions. Re$-$draft the tax research letter telling Renee the correct tax treatment for her loss from the dog breeding activities in proper form to address the review comments you wrote up for Stuart. Use only the Internal Revenue Code and the Treasury Regulations for authority.

You will submit two documents $$ review comments and letter to client.