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maintained the residence as their homestead. Petitioners
financed the purchase of the real property with a bank loan in
the amount of $299,000. On their 1990 and 1991 Forms 1040, U.S.
Individual Income Tax Returns, petitioners claimed Schedule A
mortgage interest deductions of $32,450 and $34,636,
respectively, for interest paid on the real property loan. The
correct amounts of interest paid on the real property loan were
$5,000 for 1990 and $28,067 for 1991. On their 1990 and 1991
Forms 1040, petitioners claimed Schedule A real property tax
deductions of $2,500 and $2,056, respectively, for taxes paid on
the real property. The correct amounts of real property taxes
paid were $2,377 for 1990 and $232 for 1991.
During 1990, Mr. Mitchell had a business loan with Groos
Bank. On Schedule C to their Form 1040 for 1990, petitioners
claimed interest expense of $9,600 in relation to the Groos Bank
loan. The correct amount of interest expense for 1990 on this
loan was $1,399.
On June 1, 1990, petitioners filed a voluntary chapter 11
petition in bankruptcy. No tax returns were ever filed for the
bankruptcy estate. In a Second Amended Disclosure Statement
filed in the bankruptcy proceeding February 1, 1991, petitioners
represented that the filing of the bankruptcy petition was
required by the scheduled foreclosure sale on their real
property. They also asserted the following:
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