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A. Whether Payments Made by the Bitker Partnership on
Indebtedness Owed by Petitioners Are Rental Expenses of
the Bitker Partnership or Constructive Distributions to
Petitioners From the Bitker Partnership
The Bitker partnership claimed a deduction for interest it
paid on mortgages against petitioners’ farmland. Respondent
disallowed the deduction. That disallowance resulted in increases
in petitioners’ distributive shares of partnership farming income,
which is reported on Schedule F.
Respondent determined that the interest on the mortgages
represented petitioners’ individual expenses (as opposed to
partnership expenses) reportable as rental expenses on Schedule E
of petitioners’ returns and that the deductibility of that interest
is subject to the passive loss rules of section 469. Those
adjustments resulted in increases in petitioners’ self-employment
tax. The parties agree that the interest payments totaled $242,964
in 1996 and $128,988 in 1997 and that petitioner husbands each
constructively received half of each year’s payment. Moreover,
petitioners concede the reclassification of the claimed Schedule F
interest expenses on the Bitker partnership’s returns as Schedule
E rental expenses on petitioners’ returns; further, they
acknowledge that the losses from their rental real estate activity
are subject to the passive loss limitations of section 469.
Petitioners contend, however, that the principal and interest paid
by the Bitker partnership should be treated as payments by it for
use of petitioners’ land. In effect, petitioners are asserting
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