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employed activity. Petitioners filed a Schedule C, Profit or
Loss From Business, with their 1992 return that described
petitioner's activity as research and development. At trial,
petitioner testified that he was the creator of software for
internet use relating to national health information and patient
care management. He presented a lengthy list of clients, from
all parts of the United States, which included doctors,
hospitals, medical schools, scientific institutions, health
organizations, academies, and government or quasi-government
agencies.
On the 1992 Schedule C of their return, petitioners reported
$500 gross income from petitioner's activity, expenses of
$16,053, and a net loss of $15,553. In the notice of deficiency,
respondent disallowed all the expenses claimed but allowed
petitioners a deduction of $510 for telephone expenses that
petitioner had substantiated during the audit process. The
telephone expenses allowed had not been claimed on petitioners'
1992 return.3
The expenses claimed by petitioners on their Schedule C,
which respondent disallowed, are the following:
3
The adjustment in the notice of deficiency of $15,543 is
based upon a disallowance of all the expenses claimed, $16,053
less $510 allowed for telephone expenses, which petitioners had
not claimed on the return. Respondent did not reduce the $15,543
by the $500 gross income reported for the reason that petitioners
failed to establish that any of the expenses claimed had been
paid or incurred.
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