- 5 -
Thus, petitioners did not include as income in 1989 the $21,900
amount of the second deed.5
Respondent argues that petitioners improperly excluded the
amount of $21,900 attributable to the second deed from their
income. Thus, respondent concludes that petitioners' gain should
be calculated as follows:
Selling price $61,000
Mortgages assumed by buyers
or property subject to (not new) -0-
Contract price 61,000
Cost or other basis $15,000
Depreciation -0-
Adjusted basis 15,000
Commissions and expenses 1,561 (16,561)
Gross profit 44,439
Cash in year of sale 39,100
Taxable gain to be reported in 1989
($39,100 x $44,439/$61,000) 28,484
On their 1992 income tax return, petitioners deducted
$33,560 as a business bad debt on Schedule C. The amount of
$33,560 represented the following: (1) $21,900 in unpaid
principal from the second deed, (2) $9,160 in accrued interest
and late fees, and (3) $2,500 in legal expenses. On Schedule C
of their 1993 return, petitioners deducted $3,171 as legal
expenses also associated with the legal action discussed above.
On their 1992 Form 1040, petitioner's Schedule C reflects
"Real Estate (Rental, Buying & Selling)" as petitioner's
5 In fact, petitioners did not include the $21,900 as
income in any other year.
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