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are not allowed pursuant to Internal Revenue Code
Section 212 because it has not been established
that the property is held for the production of
income. The allowable passive activity losses
have been adjusted to reflect the disallowance
of this loss, figured as shown on the attached
Exhibits #1 through #6.
The notice of deficiency also determines, as an "alterna-
tive position", that the loss attributable to the Cloudia
is subject to the limitation set forth in section 183.
The notice of deficiency states as follows:
Alternatively, if the determination set forth
above is not sustained for the taxable year ended
December 31, 1990, see the alternative position
pursuant [sic] under Section 183 of the Internal
Revenue Code attached.
* * * * * * *
Expenses incurred in connection with an activity
not engaged in for profit are generally deduct-
ible only to the extent of income from such
activity. However, those expenses which would
otherwise be allowable under the Internal Revenue
Code are deductible even if they exceed the
income from the activity, but reduce the amount
of income against which other expenses can be
offset. The other expenses then offset the
reduced income in the following order: (1)
operating expenses other than depreciation and
(2) depreciation and other basis adjustment
items. Accordingly, your taxable income for
taxable year ended December 31, 1990, is
decreased $557. * * *
Notwithstanding the amount of the adjustment set forth
in the explanation quoted above, respondent determined an
adjustment with respect to petitioner's passive activity
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