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provisions of section 469 do not apply to deny petitioner a
deduction for the full loss from this activity.
We now examine respondent’s alternative theory that
petitioner was merely incurring employee business expenses, which
were partially reimbursed and the excess is deductible on
Schedule A. This issue requires us to determine whether the
expenses claimed were properly attributable to a separate
activity of renting the equipment or whether the expenditures
pertained to petitioner’s activity of being an employee. The
latter expenses are deductible on Schedule A as an itemized
deduction. After a careful review of this record, we conclude
that the expenses claimed on Schedule C for car and truck,
equipment rental use, and location travel pertain to the rental
activity and are allowable as Schedule C deductions. Petitioner
has not clearly shown how the other claimed expenses pertain to
the rental activity, and therefore we hold that they are only
deductible as unreimbursed employee business expenses on Schedule
A.
In view of the above, we further hold that petitioners are
not liable for the accuracy-related penalty. The adjustment
required by shifting some expenses from Schedule C to Schedule A
will reduce the loss claimed on Schedule C, increase adjusted
gross income by a like amount, and increase the 2-percent floor
limiting the deduction of unreimbursed business expenses.
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