Frederic S. Clayton and Marlene B. Clayton - Page 2

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            Revenue Code as in effect for the year at issue, and Rule                                    
            references are to the Tax Court Rules of Practice and Procedure.                             
                  After concessions by the parties, the sole issue is whether                            
            respondent correctly calculated petitioners' deficiency for                                  
            taxable year 1985.  This case was submitted without a trial                                  
            pursuant to Rule 122.  The facts related herein were either                                  
            stipulated or derived from statements of various individuals that                            
            the parties stipulated could be considered in this proceeding.                               
                                              Background                                                 
                  Petitioners resided in Brookline, Massachusetts, at the time                           
            they filed the petition herein.  Petitioners timely filed their                              
            1985 joint Federal income tax return.  On audit in 1988,                                     
            respondent determined an adjustment in the amount of $16,812 for                             
            taxable year 1985.  Petitioners agreed to the adjustment and                                 
            waived restrictions on assessment of the additional tax due.                                 
                  Petitioners incurred net operating losses (NOL or NOLs) in                             
            1987 and 1988 and reported the losses on their joint Federal                                 
            income tax returns (Forms 1040) for those years.  In December                                
            1990, petitioners filed a Form 1040X, Amended U.S. Individual                                
            Income Tax Return, for taxable year 1985, carrying back the NOL                              
            arising in taxable year 1988 (first amended return).  As a result                            
            of the first amended return, petitioners had an overpayment of                               
            $97,312.  The prior assessment of $16,812, however, was still                                
            due.  On February 11, 1991, respondent reduced the overpayment by                            






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