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identify and prorate those expenses of home use water
purification systems. They explained that the home use aspect
was “overlooked” in their Federal income tax returns because it
was no more than 2 percent of the total revenue.
Because petitioners have not been able to substantiate the
amounts of expenses or establish their ownership and operation of
the approximately 70 vending machines, we hold that they are not
entitled to deduct the claimed expenses.
C. Petitioners’ Obligation To Report Gross Income From the
Vending Machines
Petitioners contend, in the alternative, if they are not
entitled to deduct vending machine depreciation and deductions
claimed on their Schedules C for 1986 and 1989, then they
incorrectly reported the gross receipts from those same vending
machines. Petitioners reported gross receipts from the vending
machines of $163,001 and $72,817 on their 1986 and 1989 Schedules
C, respectively. Respondent contends that petitioners
constructively received income from their corporations.
The notice of deficiency makes no determination concerning
the income or its source reported on petitioners’ Schedules C.
Respondent’s determination regarding the Schedules C simply
involved the disallowance of the claimed deductions. For
purposes of trial and briefing, respondent argues that
petitioners did not establish their entitlement to the
depreciation or other deductions in connection with the vending
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