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On November 1, 1989, BMS and the 1203 Partnership executed a
document entitled “Real Estate Lease”. This document indicates
that the leased premises are “one thousand square feet, more or
less, and parking lot in back of building” and that the monthly
rental is $720. The term of the lease starts November 1, 1989.
The document is signed by Phil Maltzahn, General Partner, on
behalf of the 1203 Partnership and by Mike Martin, President, on
behalf of BMS. There is a handwritten notation on the document
stating “Current lease in effect”.
Petitioners timely filed their 1994, 1995, and 1996 joint
Federal income tax returns. On Part II of their Schedules E,
Supplemental Income and Loss, petitioners reported income from
the 1203 Partnership of $15,355, $11,933, and $4,920 for 1994,
1995, and 1996, respectively. This income consists of
petitioner’s share of the net rental income from the real estate
and office building owned by the partnership.
During the 3 years at issue, petitioners owned several
rental units which generated losses in each year. They also had
passive activity loss carryovers from prior years. Petitioners
offset the rental income received from the 1203 Partnership
against passive losses from petitioners’ other rental real
estate. After consideration of the passive activity loss
limitations, petitioners claimed passive activity losses in the
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