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the Branch property. The utility payments included the portion
used by petitioners and others as a personal residence.
Petitioners did not report as rental income on their 1993 Federal
tax return Volm’s payments of utility expenses or the real estate
taxes. Petitioners, likewise, did not claim the interest or
depreciation paid or incurred in connection with the liquor store
business' rental of the Branch property.
Other than the payment of utilities and taxes by Volm’s,
rent payments were not made during the 1992 or 1993 tax years
because of Volm’s startup cash-flow problems. Beginning in 1994,
Volm’s began paying $3,000 monthly rent payments to petitioners.
The purchase price of the Branch property was $700,000, and
petitioners incurred settlement costs of over $60,000. The
purchase price of the property was allocated 57 percent to the
land and 43 percent to the building. Petitioners obtained an
$800,000 Small Business Administration loan (SBA loan) to
purchase the Branch property. The seller of the Branch property
retained a security interest in the property to secure seller-
financed debt of $280,000. Although the sister-in-law was
designated as a purchaser, she did not contribute any money
toward the purchase of the Branch property and did not make any
mortgage payments on the loans secured by the property. During
1993, petitioners made interest payments of $69,193.40 and
$21,163.68 on the SBA and seller-financed loans, respectively.
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