Peter S. Pau and Susanna H. Pau - Page 15

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          penalty under section 6663.  Petitioners' reply denied receipt of           
          the $150,000.                                                               
               The parties have since stipulated that petitioners omitted             
          only the following items of income from their Schedules C                   
          attached to their 1990 return:  (1) The consultation fee of                 
          $150,000 paid to Susanna d.b.a. Sand Hill on March 20, 1990, by             
          Meiyan; and (2) the sum of $840,000 paid to petitioners on                  
          October 30, 1990, by Sanrio.  The parties agree that section                
          6662(a) applies to the deficiency attributable to the unreported            
          income to the extent that the Court concludes that section 6663             
          is inapplicable.                                                            
          II.  The Mortgage Interest Deduction                                        
               Until 1989, petitioners owned a condominium in San Mateo,              
          California, that they used as their primary residence.  In 1989,            
          after their move, petitioners subsequently reclassified the                 
          condominium as rental property.  In that year, petitioners also             
          purchased a home in Hillsborough, California, for use as their              
          primary residence and they have since lived there at all times.             
          The purchase price of the residence was $1,780,000.  Petitioners            
          have a mortgage on the Hillsborough residence, the original                 
          principal amount of which was $1,330,000.                                   
               In 1990, petitioners claimed a home mortgage interest                  
          deduction on Schedule A of $107,226.  Despite having actually               
          paid a greater amount of mortgage interest, petitioners limited             

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