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to five rooms or one-fifth of all expenses of the Orange County
residence as deductible home office business expenses.
Respondent's Audit
On audit, respondent did not dispute that petitioner's
consulting and his computer and real estate rental activities
constituted trade or business activities. Respondent, however,
disallowed numerous expenses claimed on petitioners’ original
Federal income tax returns on the grounds, among others, that
petitioners had not substantiated many of the claimed expenses
and that the timber farm, Tahiti Property, and Lear jet
activities in which petitioners were engaged did not constitute
trade or business activities under section 162, nor for-profit
investment activities under section 212.
With exception of expenses claimed relating to the Tahiti
Property, respondent now stipulates that essentially all of
petitioners' claimed expenses have been substantiated as to
amount and payment, but not necessarily as to character.
The primary remaining adjustments will be addressed in the
following sequence: (1) Whether petitioners’ timber farm
constituted a for-profit trade or business activity under
section 162 and whether petitioners' Tahiti Property constituted
a for-profit investment activity under section 212; (2) whether
the percentage of timber farm general expenses that should be
capitalized as part of the capital costs of the water reservoir
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