Peter S. Pau and Susanna H. Pau - Page 9

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          from Sanrio was reported on the Schedules C attached to                     
          petitioners' 1990 return.                                                   
               D.  Petitioners' Explanation of Unreported Sanrio Income               
               From 1978 to 1984 petitioners lived in Boise, Idaho, where             
          they engaged in real estate transactions.  In 1983, they acquired           
          an interest in Regent Properties (Regent), a 40-acre real estate            
          development in Boise.  In 1984, petitioners stopped paying equity           
          into Regent, which had generated losses for them.  Since then,              
          they have not been actively involved in the property.  At trial,            
          petitioner was unaware of Regent's status, although the Paus                
          still held their interest in it.                                            
               Since 1986, petitioners had wanted to take advantage of                
          projected losses from Regent but had been unsuccessful, because             
          their ordinary income could not be applied against capital losses           
          from the property.  Petitioner hoped to treat the $840,000 as a             
          capital gain and to apply $300,000 to $350,000 of capital losses            
          from Regent against it if and when such losses were realized.               
          Petitioners deliberately did not report the $840,000 of income              
          from Sanrio on their 1990 income tax return, because they wanted            
          to wait until the losses were realized, in order to report the              
          income and the losses simultaneously.  Therefore, they thought it           
          would be easier to file an amended return to report the                     
          additional income, rather than to report it on the original                 
          return for 1990 and later file an amended return to claim a large           

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