Loren F. Paullus and Donna Paullus - Page 22

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               The membership fees for Ridgemark Golf and Country Club                
          increased from $700 in 1971, when Ridgemark was formed, to                  
          approximately $14,000 in 1990, when it was sold to the members.             
               Petitioners deducted $292,773 for depreciation on Schedule F           
          of their 1989 Federal income tax return with respect to certain             
          farm property.  Respondent determined that the depreciation                 
          deduction claimed by petitioners exceeded the allowable amount by           
          $191,637.  The parties agreed that the proposed adjusted capital            
          gain of $213,993 would be reduced to $174,030.  Petitioners have            
          conceded the remaining adjustments.                                         
               The parties agree that Ridgemark “exchanged” the unit 10               
          property for the Paicines property.  The disagreement concerns              
          whether the unit 10 property was held primarily for sale in the             
          ordinary course of Ridgemark’s business.  Respondent contends               
          that Ridgemark was a real property dealer and that the exchange             
          of the unit 10 property was merely a continuation of established            
          subdivision activities.  Ridgemark contends that the unit 10                
          property was sold to liquidate its assets, and that the offsite             
          improvements were merely a condition of the sale.  Petitioners              
          bear the burden of establishing that respondent’s determination             
          is erroneous.  Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115           
               Generally, section 1001(c) requires that gain or loss on the           
          sale or exchange of property shall be recognized.  Section                  

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