Douglas and Carole Ritter - Page 4

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          income of $10,864 from these properties.  Petitioners did not               
          employ a real estate agent to manage any aspect of the                      
          apartments.  Rather, petitioner handled the advertising for the             
          apartments, rented the apartments, collected the rents, and did             
          all of the maintenance, including painting, plumbing repairs,               
          etc.  Petitioner spent at least 30 hours a week managing the                
          apartments.  For the purpose of the New York State social                   
          services, it has been determined that during 1996 the rental                
          apartments were assets of petitioners’ trade or business.                   
               On Schedule A, Itemized Deductions, of their 1996 Federal              
          income tax return petitioners deducted $4,656 paid to Wilmington            
          Trust as investment interest.  Respondent disallowed the                    
               Section 163(d)(1) limits a noncorporate taxpayer’s deduction           
          for investment interest to “the net investment income of the                
          taxpayer for the taxable year.”  Section 163(d)(4)(A) defines               
          “net investment income” as the excess of investment income over             
          investment expenses.  Section 163(d)(4)(B) provides that                    
          “investment income” is the sum of the gross income from property            
          held for investment plus the ordinary gain attributable to the              
          disposition of such property.  Section 163(d)(5)(A)(ii) defines             
          “property held for investment” as, inter alia,4 any interest held           

          4   Investment income also includes interest, dividends,                    
          annuities, or royalties not derived in the ordinary course of a             
          trade or business.  See secs. 163(d)(5)(A)(i), 469(e)(1).                   

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