                       T.C. Memo. 2003-342



                     UNITED STATES TAX COURT



          PAUL S. AND SHARON E. TALCHIK, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket No. 12419-02.            Filed December 16, 2003.


     Paul S. and Sharon E. Talchik, pro se.

     Leonard T. Provenzale, for respondent.



                       MEMORANDUM OPINION


     COUVILLION, Special Trial Judge: Respondent determined a

deficiency of $13,974 in petitioners' Federal income tax for

1999.1


     1
          Unless otherwise indicated, all section references
hereafter are to the Internal Revenue Code in effect for the year
at issue. All Rule references are to the Tax Court Rules of
Practice and Procedure. The petition was filed pursuant to sec.
7463. At trial, pursuant to Rule 171(c), petitioners moved,
                                                   (continued...)
                                - 2 -


     The sole issue for decision is whether petitioners are

entitled to an itemized deduction for the year 1999 for

investment interest under section 163(d)(1) in an amount greater

than the amount allowed by respondent in the notice of

deficiency.

     Some of the facts were stipulated, and those facts, with the

annexed exhibits, are so found and are incorporated herein by

reference.    Petitioners' legal residence at the time the petition

was filed was Ft. Lauderdale, Florida.

     Petitioners filed a joint Federal income tax return for

1999.    That return included a Schedule A, Itemized Deductions, on

which they claimed a deduction of $47,780 for investment interest

relating to numerous capital gain transactions reflected on

Schedule D, Capital Gains and Losses, of their return.    In the

notice of deficiency, respondent determined that petitioners were

entitled to a $225 deduction for investment interest and

disallowed $47,555 of the $47,780 claimed on the return.    No

other adjustments were made to petitioners' return.


     1
      (...continued)
without objection from respondent, to remove the case from
consideration under sec. 7463. The Court granted petitioners'
motion, and respondent thereafter filed an answer of general
denial. The deficiency in the notice of deficiency is $13,974.
No concessions have been made by respondent; however, in a
posttrial brief, respondent stated the deficiency to be $13,215
with no concessions or explanation for the $756 discrepancy. The
Court assumes the $13,215 recited in respondent's brief is in
error, and the deficiency at issue is $13,974.
                               - 3 -


     On Schedule D of their 1999 return, petitioners reported

$47,555 in short-term capital gains.   That amount was offset,

however, by a short-term capital loss carryover from 1998 of

$74,836, leaving a $27,281 net short-term capital loss carryover

to future years.

     Petitioners also reported long-term capital gains of $29,535

during 1999 that were also totally offset by a long-term capital

loss carryover from 1998 of $99,122.   This left petitioners with

a $69,587 long-term capital loss carryover to future years.

     Petitioners reported dividend and interest income of $225 on

their 1999 return.   Additionally, petitioners reported on a

Schedule E, Supplemental Income and Loss, net income of $17,569,

of which $17,428 came from the rental of a commercial building at

Ft. Lauderdale, Florida, and $141 from an apartment partnership.

     Respondent determined that $47,555 of the investment

interest deduction claimed by petitioners was not deductible as

investment interest under section 163(d).   The $225 amount that

was allowed by respondent represented the equivalent interest and

dividend income reported by petitioners that respondent agreed

represented investment income and, thus, entitled petitioners to

an itemized deduction for investment interest equal to the

investment income they reported.   Sec. 163(d)(5)(A)(i), (d)(4),

(d)(1).   Respondent has not questioned petitioners' payment of

the $47,780 in interest; consequently, there is no substantiation
                                 - 4 -


issue with respect to the $47,555 at issue.2   Respondent's basis

for disallowance of the $47,555 interest deduction is that

petitioners had no investment income in excess of the dividend

and interest income of $225 since their short-term and long-term

capital gains for 1999 were totally offset by capital loss

carryovers from 1998.

     Section 163(d)(1) limits a noncorporate taxpayer's deduction

for investment interest to "the net investment income of the

taxpayer for the taxable year".    Section 163(d)(4)(A) defines

"net investment income" as the excess of investment income over

investment expenses.    Investment income includes interest,

dividends, annuities, or royalties not derived in the ordinary

course of a trade or business.    Secs. 163(d)(5)(A)(i), 469(e)(1).

Respondent, therefore, correctly characterized petitioners'

interest and dividend income as investment income and allowed

petitioners an investment interest expense deduction equal to

that amount, $225.   Investment income also includes "net gain

attributable to the disposition of property held for investment".

Sec. 163(d)(4)(B)(ii)(I).    Although petitioners realized capital

gains during 1999, which they reported on Schedule D of their

return, petitioners also sustained capital losses in prior years,



     2
          Since the sole issue is based on a question of law, the
Court decides this case without regard to the burden of proof.
Sec. 7491(a).
                                - 5 -


and those losses carried over to 1999.    Under section

1212(b)(1)(A) and (B), net short-term and net long-term capital

losses realized in one year are treated, respectively, as short-

term or long-term capital losses in the succeeding tax year.

Thus, the net short-term and net long-term carryover losses from

petitioners' 1998 tax year constituted short-term and long-term

capital losses on petitioners' 1999 return.    These carryover

losses totally offset the capital gains petitioners realized

during 1999.    Therefore, under section 163(d)(4)(B), petitioners,

during 1999, did not realize any income that would be considered

net income attributable to the disposition of property held for

investment.    Respondent, therefore, correctly disallowed

petitioners' investment interest deduction to the extent the

deduction exceeded their net investment income.    Under section

163(d)(2), any investment interest that is disallowed as a
                              - 6 -


deduction is carried forward and deductible in succeeding taxable

years to the extent of net investment income in those years.3




                                      Decision will be entered

                                      for respondent.




     3
          On their income tax return for 1999, petitioners also
reported Schedule E income of $17,569 from two sources, the
rental of a commercial building and an apartment partnership.
Although petitioners, in their petition and at trial, did not
allege or claim the $17,569 to be net investment income, the
Court, nevertheless, after trial, ordered the parties to address
this income item since, under sec. 163(d)(4)(B), "investment
income", in part, includes gross income from "property held for
investment", subject, however, to limitations under sec.
163(d)(5)(A)(ii). Based on the reports filed by the parties, the
Court is not satisfied that the $17,569 in income is outside the
realm of the limitations of sec. 163(d)(5)(A)(ii).
