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by filing an amended U.S. Individual Income Tax Return, Form
1040X, and claimed a refund for 1986.
In the notice of deficiency, the Commissioner determined
that petitioner was not in the business of constructing and
selling houses. As a result, petitioner's claimed $179,596
ordinary loss was recharacterized as a capital loss. Because
section 12112 limits the deductibility of capital losses of
individual taxpayers to $3,000 a year, respondent also denied the
claimed net operating loss carryback deduction.
The parties have stipulated that if respondent's
determination is sustained, petitioner's taxable income for 1986
must be increased by $73,967. The parties have also stipulated
as to certain other adjustments that were taken into account in
the deficiency notice.
Section 165(a) generally allows taxpayers to deduct any
losses sustained during the taxable year that are not compensated
for by insurance or otherwise. Section 165(c) limits the scope
of this deduction for individuals. Petitioner claims that the
deduction in controversy is an ordinary loss, allowable under
section 165(c)(1) as a loss "incurred in a trade or business."
If a loss is characterized as capital, however, it is
subject to even stricter treatment than ordinary losses under the
2 Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years at issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
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Last modified: May 25, 2011