Dennis E. and Paula W. Lofstrom - Page 1

                                   125 T.C. No. 13                                    

                               UNITED STATES TAX COURT                                

                   DENNIS E. AND PAULA W. LOFSTROM, Petitioners v.                    
                    COMMISSIONER OF INTERNAL REVENUE, Respondent                      

               Docket No. 4667-03.           Filed November 22, 2005.                 

                    Ps are Mr. Lofstrom (H) and Paula Lofstrom (W-2).                 
               H was previously married to Dorothy Lofstrom (W-1).  In                
               satisfaction of his alimony obligations to W-1, H                      
               transferred his $29,000 interest in a contract for deed                
               to W-1, along with $4,000 in cash.  Ps deducted as                     
               alimony the value of the contract for deed.  In                        
               addition, Ps claimed to operate the first floor of                     
               their residence as a bed and breakfast (B&B) and                       
               deducted related expenses.  H, a retired doctor, also                  
               claimed to be engaged in the business of writing for                   
               profit and Ps deducted expenses attributable to H’s                    
               writing activities.                                                    
                    1.  Held:  A contract for deed is a third-party                   
               debt instrument under sec. 1.71-1T(b), Q&A-5, Temporary                
               Income Tax Regs., 49 Fed. Reg. 34455 (Aug. 31, 1984).                  
               Ps may not deduct as alimony the value of a contract                   
               for deed transferred to W-1 because it does not                        
               constitute a cash payment.  Id.; see secs. 61(a)(8),                   
               71(a), 215(a) and (b).                                                 

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