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managing, and renovating apartment complexes. After Heights
acquired an apartment complex and assumed the mortgage thereon,
petitioner bought the underlying mortgage note from the holder with
the intent of selling it at a premium. Since Heights’ inception,
petitioner has purchased seven discounted promissory notes; at the
time of trial, he had not resold any of them.
Also in 1997, petitioner formed Museum Place (Museum), an LLC
in which he was a 1-percent general partner and a 40-percent
limited partner.2 Museum is in the business of purchasing and
renovating apartment properties. Petitioner did not purchase or
sell promissory notes with respect to any of Museum’s business
transactions.
Petitioners’ 1993 Federal Income Tax Return
Petitioners filed their 1993 Federal income tax return on
April 17, 1995. On their return, petitioners deducted as a
Schedule C business expense legal fees totaling $197,234.
Notice of Deficiency
In the notice of deficiency, respondent determined that
petitioners’ legal fees were not deductible as a Schedule C
business expense but rather were allowable as a Schedule A
miscellaneous itemized deduction. As a consequence of this
recharacterization (1) the amount of the deduction was decreased
2 Petitioner owns 35 percent of Museum directly and 5
percent indirectly through petitioner’s control of British
American Properties of Houston, Ltd.
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