Douglas E. Kahle - Page 3

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            Background                                                                                
                  This case was submitted fully stipulated under Rule 122.                            
            The stipulation of facts and attached exhibits are incorporated                           
            herein by this reference and found accordingly.                                           
                  Petitioner is an individual residing, at the time the                               
            petition in this case was filed, in Virginia Beach, Virginia.                             
            The returns for the periods here involved were filed with the                             
            Internal Revenue Service at Norfolk, Virginia.  Petitioner's                              
            individual return for the taxable year 1988 was filed                                     
            delinquently on July 24, 1991.  Petitioner's individual return                            
            for the taxable year 1989 was filed delinquently on January 16,                           
            1992.                                                                                     
                  Petitioner was general partner of the Pilot House Associates                        
            II partnership (Associates).  Associates built the Pilot House                            
            condominium project (Project), and the condominium units were                             
            owned by Associates until sold.  Associates constituted, for                              
            purposes of section 469, a nonpassive activity of petitioner for                          
            the taxable years 1988 and 1989.  Associates reported the                                 
            following gross receipts and cost of goods sold for the years at                          
            issue.                                                                                    
                                                   1988                  1989                        
                  Gross receipts                $469,281                $297,239                      
                  Cost of goods sold               477,473              302,000                       
                  Gross income                  $(8,192)                $ (4,761)                     
            Petitioner's shares of Associates' nonpassive losses were as                              
            follows:                                                                                  




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