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($232,490), taxable income of $0, and a refund amount due of
$33,600 from withholdings.3
On June 18, 2002, respondent issued to petitioners a
statutory notice of deficiency for 1998. Therein respondent
disallowed, in full, the $448,120 loss claimed by petitioners on
the Schedule C for Shrike Cars. Expenses of $8,086 were
disallowed for lack of substantiation. As to the balance of
$440,034, although respondent conceded that the underlying
expenditures were substantiated by petitioners, respondent
nonetheless determined that the loss was not allowable.
Respondent concluded that the expenditures should be capitalized
rather than expensed, “since pursuant to section 195 of the
Internal Revenue Code the amounts are determined to be start-up
and/or organizational expenditures.” Alternatively, the notice
disallowed the loss for failure to establish that the activity
was engaged in for profit.4 No adjustments were made to the
3 The Forms W-2, Wage and Tax Statement, attached to
petitioners’ return show Federal income tax withholding of
$33,588. The source of the $12 discrepancy is not explained by
the record.
4 At trial, respondent conceded the hobby loss issue and is
no longer pursuing disallowance of petitioners’ claimed Shrike
Cars loss on grounds that the activity was not engaged in for
profit.
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