Michael A. McGrath and Frances Y. McGrath - Page 19




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               The Lease does not show that petitioners and TUP 130                   
          intended to treat the entire cost of the Improvements as a rent             
          substitute.  The Lease contains provisions which give petitioners           
          a rent holiday for the first 6 months after the day the Bakery              
          was first opened for business to the public; these provisions               
          underlie the parties’ stipulation as to the $18,739.  Beyond                
          these provisions, however, the Lease is silent as to whether                
          petitioners and TUP 130 intended to treat the remaining cost of             
          the Improvements as a rent substitute.                                      
               The surrounding circumstances also do not show that                    
          petitioners and TUP 130 intended to treat the cost of the                   
          Improvements as a rent substitute beyond the 6-month rent                   
          holiday.  Rather, petitioners’ 1995 tax return, certain of                  
          petitioners’ proposed findings of fact and statements on brief,             
          and a portion of Michael’s testimony belie petitioners’                     
          contention that they should be allowed to deduct the cost of the            
          Improvements under section 162(a)(3) as rent expense.                       
               Petitioners did not report any rent or lease expenses on the           
          Schedule C attached to their 1995 tax return.  Petitioners                  
          claimed a deduction of $103,388 for “repairs and maintenance” on            
          the Schedule C attached to the 1995 tax return; the $103,388                











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