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entire amount of the loans from First National was paid into the
Atherton project. Thus, petitioners did not provide any
reasonable evidentiary basis for estimating the deductible
expenses that were paid with proceeds of those loans. For
similar reasons, petitioners did not establish what amounts of
the interest payments were made on account of expenditures for
the Atherton project.22
6. Other Expenses (“Soft Costs”)
Petitioners claim that they incurred certain “soft costs”23
in constructing the Atherton houses and that those soft costs
were not a part of the loans from Pacific, First National, or
California Federal. They contend that those loans covered only
22Relatedly, in petitioners’ reply brief, they point to a
$120,012 excess passive investment carried over from 1991. On a
Schedule E, Supplemental Income and Loss (From rents,
partnerships, estates, trusts, REMICs, etc.), attached to their
1991 return, petitioners reported expenses from a rental property
located at Atherton. Those expenses consist of $469 insurance,
$113,812 mortgage interest paid to banks, $1,200 taxes, $4,231
utilities, and $300 gardening. Petitioners claim that $6,200
($120,012 minus $113,812 interest expense) of this amount is
allowable in computing their NOL for 1992. We disagree.
Petitioners provided no substantiation for those purported
expenses other than their return. Further, it is conceivable
that those expenses were paid from the construction loan proceeds
and not from petitioners’ own resources.
23Mr. Butler testified that banks normally refer to “hard
costs” and “soft costs”. Soft costs include legal fees, owner’s
insurance, utilities, and other costs not related to the
construction of the job. Hard costs include architect fees,
permit fees, management fees, and job insurance. Costs relating
to business vehicles would normally be soft costs, unless they
were related to the construction job.
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