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petitioners in a bench opinion dated January 11, 2005. We
incorporate herein the facts set forth in that opinion.
Background
In 1996, Soraya Malowney decided to start a business
involving the rehabilitation and sale of real estate. Mrs.
Malowney had previous experience in the design and refurbishing
of several homes, some of which were her former personal
residences. After researching and evaluating several properties,
she purchased, for $110,000, property located at 215 Northwest
74th Street in Lawton, Oklahoma. After purchasing the property,
she discovered that it required an extensive amount of work. In
October 1996, she began the renovation process and substantially
completed the project by June 1997.
In 1997, petitioners hired a real estate agent and listed
the property for $214,000. In 1999, after hiring another agent
and reducing the sales price, petitioners sold the property for
$162,667. On Schedule C, Profit or Loss From Business, of their
1999 Federal income tax return, petitioners claimed a $52,046
business loss (i.e., sales proceeds of $162,500 less purchase
price of $110,000, improvements of $95,736, commissions of
$7,625, and other expenses of $1,185).
On August 28, 2003, respondent issued petitioners a notice
of deficiency relating to 1999 and determined that petitioners
were not in a trade or business. On November 12, 2003,
petitioners, while residing in Abilene, Texas, filed their
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