Russell is employed as a prosecutor for the town of Swansee. He also works 15–20 hours a week raising purebred Labradors. Over the last 7 years, he has reported an average net income from this activity of $7,000 per year. However, in two of those years, he had losses of $3,000 and $4,000. He believes he could make more money from the activity if he kept better records, was less stubborn, and listened more to the advice of his cousin who has won national awards in dog breeding.

Identify the tax issue(s) posed by the facts presented. Determine the possible tax consequences of each issue that you identify.