John and Louisa A. Hodel - Page 2

          determined deficiencies in petitioners' Federal income taxes for            
          1986 and 1987 in the respective amounts of $3,475 and $4,258.               
               The parties have reached agreement concerning most of the              
          adjustments involved in respondent's determinations, and the                
          issues remaining for decision are:  (1) Whether petitioners are             
          entitled to capitalize certain expenses attributable to their               
          farming business and claimed as current deductions on Schedules F           
          of their 1986 through 1990 Federal income tax returns; and (2)              
          whether petitioners are entitled to a refund of an overpayment in           
          1986 attributable to the carryback of a net operating loss (NOL)            
          incurred in 1989.  For ease of discussion, we address each issue            
               Some of the facts have been stipulated and are so found.               
          The stipulation of facts, stipulation of settled issues, and                
          exhibits received into evidence are incorporated herein by this             
          reference.  Petitioners resided in Apopka, Florida, at the time             
          their petition was filed.  References to petitioner are to John             
          Farming Expenses                                                            
               On November 14, 1985, petitioners purchased 100 percent of             
          the stock of Federal Citrus Corp. (FCC), a corporation engaged in           
          the citrus grove business.  The assets of FCC include 46 acres of           
          land, irrigation systems, fixtures attached to the land, and                
          fencing.  During 1985, petitioners cleared the land and replaced            
          the citrus grove with ornamental ligustrum seedlings.  They                 

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