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to deduct the $12,500 business bad debt expense because
petitioners had not established that the debt became worthless in
1990, nor had petitioners proven that the debt was a business bad
debt such that a partial amount of the debt could be deducted
under section 166(a)(2). Respondent determined that the
remaining expenses of $25,226 claimed on Schedule C were not
allowable because petitioners had not established that
petitioner's real estate development and marketing activity
constituted a trade or business under section 162.
Alternatively, respondent determined that, if petitioner's
activity did constitute a trade or business, the expenses
represented startup expenses that should have been capitalized
under section 195 pursuant to an appropriate election by
petitioners. Substantiation of the expenses claimed by
petitioners is not at issue.4 Respondent made no adjustments to
the Schedule E rental income and expenses reported by
petitioners.
4
In the notice of deficiency, $12,710.29 and $548,
respectively, for mortgage interest expenses and real estate
taxes that were disallowed as trade or business expenses were
allowed as itemized Schedule A deductions. The mortgage interest
expense of $12,710.29, which related to the Bridgewater and
Clinton properties, was treated as investment interest under sec.
163(d)(3), and, after applying the limitation of sec. 163(d),
$5,348 was allowed as a deduction for 1990, with the remainder
allowed as a carryforward of disallowed interest under sec.
163(d)(2). Respondent further allowed petitioners an itemized
deduction of $1,389 for State income taxes and disallowed the
standard deduction of $5,450 claimed by petitioners on their 1990
return.
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