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insurance, utilities, and lease expenses in connection with the
5-4 Ballroom/Supper Club. Although respondent in his posttrial
brief points out that petitioners offered no explanation of these
expenses, respondent also states that “common sense dictates the
conclusion that petitioner had to maintain utilities, provide
liability and fire insurance and rent equipment as a consequence
of [petitioner’s] rehabilitation activities.” Respondent also
acknowledged that “property taxes relate to the ownership of the
building”, but asserts that petitioners failed to prove what
portion of the tax and licenses expense represented property
taxes. Respondent nevertheless does not argue that petitioners’
Schedule C expenses must be disallowed for lack of
substantiation; rather, respondent argues only that “the expenses
for insurance, utilities, lease expense and taxes and licenses,
to the extent not allocable to rental activity,[17]will have to be
capitalized” as indirect costs of production under section 263A.
Respondent takes a similar position with respect to the
expenses petitioners claimed on their 1991 Schedule C, arguing
only that the expenses are indirect costs of production under
17To the extent the expenses are allocable to petitioners’
rental activity, respondent acknowledges that the expenses may be
deductible under sec. 212(2). Thomason v. Commissioner, T.C.
Memo. 1997-480. However, respondent notes that, for 1990 and
1991, petitioners already deducted the maximum Schedule E losses
permitted by the passive loss limitation of sec. 469, and,
therefore, allowing any part of petitioners’ Schedule C expenses
to be deducted on Schedule E will not produce any additional
deductible losses in 1990 and 1991.
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