National Industrial Investors, Inc. - Page 16

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            depreciation and interest expenses and the expenses of Sale by                             
            Owner and Far Western.                                                                     
                  (a)  Respondent contended that petitioner did not establish                          
            that prior year losses were based on deductible business expenses                          
            under section 162, rather than on nondeductible personal expenses                          
            under section 262.  Moreover, petitioner's own accountant could                            
            not vouch for the accuracy of NII's extant books and records, and                          
            virtually no other testimony concerned their accuracy.  The fact                           
            that respondent prevailed on this issue at trial confirms that                             
            her position was substantially justified.                                                  
                  (b) Interest expense deductions for several loans secured                            
            by the Burke property, including the San Francisco Loan, also                              
            formed part of the claimed net operating losses from years prior                           
            to 1989 and 1990.  The property collateralized a $75,000 loan                              
            from a group of investors (Investor Group loan) from June 10,                              
            1982, until October 29, 1985.  On September 27, 1985, Owens                                
            Financial Group, Inc., lent petitioner $85,000 (Owens loan).                               
                  Respondent conceded in her opening statement that                                    
            petitioner was entitled to deduct the interest on the San                                  
            Francisco Loan in 1989 and 1990 (see supra pp. 10-11), but did                             
            not concede the deductibility of the 1988 interest on that loan,                           
            which substantially contributed to petitioner's net operating                              
            loss for that year.  Documents verifying the purpose of interest                           






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