Tax Memorandum

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Tax file memorandum

Subject:Profit or Loss from business

I. Facts:
In early 2010, Walter Hodges became interested in the real estate market so he initiated his investigation into the real estate market. Mr. Hodges intended to acquire real estate with the intentions for investment or rental. Mr. Hodge has no previous knowledge or exposure to any real estate rental or investment industry. As a result, Mr. Hodges began in Spring 2010 to advertise and expose his business through various promotional avenues such as business cards, flyers, and customer relations. As Mr. Hodges promoted his business, he also completed a business plan for buying, remodeling, and renting property. Furthermore, in October 2010, Mr. Hodges would enhance his real estate investment skills by paying $25,000 for training classes. Later in November 2010, two objectives were achieved by Mr. Hodges, obtained a $45,000 loan for his business from the Small Business Administration and obtained an employer ID number from the IRS. A month later, on December 2010, Mr. Hodges opened a checking account along with a credit card in the name of the business. During the last six months of 2010, Mr. Hodges was persistent and attempted several time to purchase properties to utilize for his investment or rental but he was unsuccessful until he acquired a property December 30, 2010. Mr. Hodges intended on renting his newly acquired property a month later on January 2011 but was not successful in renting it until March 2011. As a result of Walter Hodges new business venture, for tax year 2010 he filed a Form 1040 U.S. Individual Income Tax Return with an attached Schedule C on which he would show a business loss of $29,000. The $29,000 would include the cost of training classes, automobile expense, meals and entertainment, computer and software expenses, and supplies. However, the IRS disallowed the deduction of $29,000 because the alleged that Walter Hodges was not in a trade or business...
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