National Industrial Investors, Inc. - Page 24

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            contends that because the note was nonrecourse and the Burke                               
            Property could be exchanged by petitioner under section 1031                               
            without repaying the note, petitioner's liability on the note was                          
            uncertain.  We find respondent's logic less than compelling.                               
                  Even assuming that petitioner could have exchanged the Burke                         
            Property without repaying the McMahon Note, an exchange partner                            
            would reduce his valuation of the Burke Property according to the                          
            note's balance.  And, consequently, petitioner would receive less                          
            in the exchange.  In economic terms, petitioner's burden was                               
                  As for petitioner's other deductions from the loss years,                            
            petitioner has introduced only its unaudited books of original                             
            entry and other accounting records based upon them.  While we                              
            believe that petitioner's witnesses testified truthfully and that                          
            petitioner's management was not dishonest, its books are                                   
            unreliable.  Petitioner cannot substantiate all of its deductions                          
            for the current years in issue, years in which it supposedly kept                          
            its underlying documentation.  For example, petitioner's mileage                           
            logs for the Malibu contained miles allocable to the Cougar.                               
            Petitioner included part of the fees paid to Charles for                                   
            investigating prospective exchange properties under "professional                          
            services" rather than "fees".  Petitioner's books standing alone                           
            fail to prove that petitioner incurred the other deductions from                           
            the loss years.                                                                            

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Last modified: May 25, 2011