Michael D. and Christine R. Alexander - Page 4

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          purchased using credit cards.  Petitioners deducted the interest            
          payments on the credit card debt on Schedule F, Profit or Loss              
          From Farming, in prior taxable years.                                       
               In or before 1998, petitioners obtained a home equity loan             
          and used the proceeds to pay off the credit card debt incurred in           
          connection with the equipment.  Petitioners paid $5,8712 of                 
          interest on the home equity loan in 1998 and claimed that amount            
          as an interest expense deduction on their Schedule F.                       
               Respondent determined that the interest expense was not paid           
          or incurred in connection with the tree farm and, therefore,                
          should not be deducted on Schedule F.  Instead, respondent                  
          determined that the interest expense should be deducted on                  
          Schedule A, Itemized Deductions.                                            
          2.   The Seamstress Business                                                
               In 1998, Mrs. Alexander operated a seamstress business from            
          petitioners’ home.  During that year petitioners’ son, Steven,              
          was a 21-year-old college student in California.  When Steven               
          returned home for the summer, he assisted Mrs. Alexander with the           
          seamstress business.  Steven performed a variety of tasks such as           
          purchasing supplies, drafting sewing patterns, and cleaning Mrs.            

               2 All amounts are rounded to the nearest dollar.                       

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Last modified: May 25, 2011