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Although petitioners permitted the 5401-9 S. Broadway
property to be used for certain events during 1992 and 1993, we
nevertheless conclude, based on our review of all the relevant
facts and circumstances, that petitioners did not actually
operate a restaurant/nightclub facility for profit during those
years.9 Consequently, we hold that the Schedule C deductions at
issue in this case, including those that gave rise to the
contested NOLs, were not incurred by petitioners in carrying on
an existing Schedule C trade or business and, therefore, are not
deductible under section 162(a).10
III. Capitalization of Production Costs Under Section 263A
Respondent contends that, even if we concluded that
petitioners operated a restaurant and nightclub during 1992 and
1993, section 263A required petitioners to capitalize those
expenses they deducted on their Schedules C and E for 1990
through 1993 that qualify as production costs under section 263A.
Petitioners contend, however, that respondent did not determine
9In addition, expenses relating to the startup of a
business that are incurred before that new business is
functioning are not deductible under either sec. 162 or 212.
Sec. 195; Hardy v. Commissioner, 93 T.C. 684, 687-693 (1989).
10On brief, respondent concedes that, if and to the extent
petitioners’ claimed 1992 and 1993 Schedule C expenses are
substantiated, 25 percent of such “Schedule C expenses” are
allocable to the portion of the 5401-9 S. Broadway building used
by petitioner for rental purposes and may be deducted as Schedule
E expenses by petitioners under sec. 212, subject to the passive
loss limitation of sec. 469.
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