Chad A. and Katherine J. Lincoln - Page 2

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          Code in effect for the year at issue, and all Rule references are           
          to the Tax Court Rules of Practice and Procedure.                           
               The issues for decision are:  (1) Whether petitioners are              
          required to include in income capital gain from the sale of                 
          investment property; (2) whether certain interest payments and              
          taxes that petitioners reported as Schedule E deductions from               
          rental real estate income should be redesignated as Schedule A              
          itemized deductions; and (3) whether petitioners are liable for             
          an accuracy-related penalty pursuant to section 6662(a).                    

                                  FINDINGS OF FACT                                    
               The parties have stipulated some of the facts, which are so            
          found.  The stipulation of facts is incorporated herein by this             
          reference.  At the time the petition was filed, petitioners were            
          husband and wife whose primary residence was in Carmel,                     
          California.                                                                 
               On July 12, 1976, petitioners purchased a house in Pacific             
          Grove, California, for $48,351.  They resided in this house for             
          approximately 4 years before converting it into rental property.            
               On April 7, 1992, petitioners purchased a 5-acre lot in Big            
          Sur, California, for $160,316.  Their purchase offer contained no           
          contingencies.  Borrowing against a personal line of credit,                
          petitioners paid the seller of the property, Marcia D’Esopo,                
          $35,316 as a cash downpayment and assumed a note for the balance            
          of the purchase price.  In July 1992, petitioners began work to             




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