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Although certain books and records relating to the property were
provided to Ms. McConaughy, it is unclear from the record whether
the farm status determination letters from Cascade County ASCS
had been provided to her at the initial meeting.
Ms. McConaughy issued her examination report by letter dated
June 9, 1995 (the 30-day letter). Insofar as relevant for our
purposes, the 30-day letter proposed to disallow the losses
claimed on Schedules F of petitioners' 1992, 1993, and 1994
Federal income tax returns. The following explanation for the
proposed disallowance was provided:
Because the amount of income you receive each year is
fixed by the federal government, no amount of effort or
management skill on your part can increase it.
Therefore, it has been determined that, at this point
in your operation, you are not yet in business.
In order to report income and expenses on Schedule F,
you must be in the business of farming. Because you
are not, the use of Schedule F is not appropriate.
The examination report reclassified the CRP income and
expenses as rental income. The report explained the adjustments
as follows:
Previous court rulings have determined that, when CRP
income is not farm income, it is reported as rental
income. Your CRP income for the three years shown has
been reclassified as rental income and the allocable
expenses reclassified as rental expenses.
The expenses allocated to the rental income are only
the ones that are directly connected with the
maintenance of the real estate.
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