Lucian T. Baldwin, III - Page 38

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          dependent upon a profit motive, such as interest and taxes.                 
          Section 183(b)(2) allows the deductions that would be allowable             
          only if the activity was engaged in for profit, but only to the             
          extent that gross income derived from the activity exceeds the              
          deductions permitted by section 183(b)(1).                                  
               For 1989 and 1990, respondent disallowed all of LFI’s                  
          deductions, determined LFI’s corrected S corporation income, and            
          adjusted petitioner’s income accordingly.  In so doing,                     
          respondent does not appear to have allowed petitioner any                   
          adjustment for allowable deductions under section 183(b) except             
          with respect to Granot Loma’s real estate taxes.18  This approach           
          appears to be inconsistent with the approach taken by respondent            
          for 1991 and 1992, which effectively allowed petitioner to deduct           
          LFI’s expenses to the extent of LFI’s income.19                             
               Respondent takes the position that LFI did not own Granot              
          Loma and, consequently, may not deduct depreciation attributable            
          to the property.  Respondent also contends that LFI’s other                 
          expenses were not substantiated, that personal and capital                  
          expenditures are not deductible, and that petitioner “failed to             
          allocate and prove which deductions, if any, are not for personal           

               18For each of the years at issue, respondent increased                 
          petitioner’s real estate tax deduction on Schedule A of                     
          petitioner’s Federal income tax returns for the real estate taxes           
          attributable to Granot Loma, presumably because he determined               
          petitioner owned Granot Loma.                                               
               19Respondent also disallowed petitioner’s deduction of LFI’s           
          loss for 1988.  However, LFI did not report any income for 1988.            

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