Joseph A. Morcos and Joann M. Morcos - Page 3

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          After concessions,1 the issues for decision are:  (1) Whether the           
          deductions petitioners claimed on their 1996 and 1997 Federal               
          income tax returns with respect to the rental of rooms in their             
          personal residence are subject to the limitation imposed by                 
          section 280A(c)(5); and (2) whether petitioners properly                    
          calculated depreciation expenses with respect to their rental               
               The stipulation of facts and the accompanying exhibits are             
          incorporated herein by reference.  Petitioners resided in Wayne,            
          Pennsylvania, at the time their petition was filed with the                 
               In 1983 petitioners paid $125,000 for a 1-acre property in             
          Radnor Township, Pennsylvania.  The property includes the                   
          following improvements:  a three-story, 4500 square foot                    
          Victorian style house (main house); a two-story, 1200 square foot           
          carriage house (carriage house); landscaped grounds; a swimming             
          pool; and a pool house with shower facilities and a full kitchen.           

               1  Petitioners concede respondent’s adjustment to their                
          Schedule C, Profit or Loss From Business, depreciation.                     
          Respondent concedes that petitioners are entitled to Schedule C             
          deductions for entertainment and travel expenses and that                   
          petitioners are entitled to deduct $5,231 of legal expenses                 
          incurred in connection with their residential rental activity.              
          The adjustments to itemized deductions in the notice of                     
          deficiency are computational adjustments which will be affected             
          by the outcome of the other issues to be decided.                           

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