Scott and Soraya Malowney - Page 2

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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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