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Real Estate Losses
In the notice of deficiency, respondent disallowed all
expenses, totaling $22,104, claimed by petitioners on Schedule E
with respect to four real properties, on the grounds that
petitioners failed to establish that the expenses were "paid or
incurred during the taxable year" or were "ordinary and
necessary". In addition, respondent disallowed the depreciation
claimed on Schedule E with respect to three of the properties,
totaling $8,203, on the grounds that petitioners failed to
establish their basis in each property or its depreciable
character. Respondent now concedes that petitioners have
substantiated the expenses and the depreciation claimed with
respect to the three residential properties (Hearthwood, River
Stone, and Windsor), but seeks to challenge the net losses from
these properties on the grounds that petitioners have failed to
substantiate the amount of rental income and have failed to
establish that they were in the business of renting property or
holding property for profit. With respect to the Mississippi
land, respondent challenges the net loss on the foregoing grounds
as well as on petitioners' failure to substantiate some of the
expenses.
Petitioners object to respondent's raising their failure to
substantiate rental income on the grounds that it is a new issue.
In the notice of deficiency, respondent specifically
disallowed the Schedule E expenses and the depreciation for each
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Last modified: May 25, 2011