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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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