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Respondent determined deficiencies in petitioners’ Federal
income taxes of $12,172 for 1997 and $16,016 for 1998 and
accuracy-related penalties of $2,434 for 1997 and $3,203 for 1998
under section 6662(a). The issues for decision are: (1) Whether
petitioners are entitled to deduct losses from an S corporation;
(2) if not, whether such losses are deductible as proprietorship
losses; and (3) whether petitioners are liable for the accuracy-
related penalties for 1997 and 1998.
The stipulated facts and exhibits received into evidence are
incorporated herein by reference. At the time the petition in
this case was filed, petitioners resided in Tucson, Arizona.
Background
During the years at issue, petitioner Martin Higbee was
employed as a professor at the University of Arizona in Tucson.
Petitioner Suzanne Higbee worked as a ticket agent for U.S.
Airways.
Petitioners acquired property in Tucson, Arizona, to be used
as a "bed and breakfast". They began operating sometime in 1996.
The property was a four-bedroom house. Petitioners resided in
the house during the years at issue.
The records of the Arizona Corporation Commission reflect
the incorporation of Cactus Quail Enterprises, Inc. (corporation)
on October 20, 1995, for purposes of carrying on the
"HOTEL/MOTEL" business. The named corporate officers were
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