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Petitioners operated the restaurant until their lease expired in
1997.
The law and accounting firm of Lorenzo Wilson Tijerina (Mr.
Tijerina) maintained Villa Cabana's financial records and
prepared petitioners' 1994 Federal income tax return. Mr.
Tijerina's firm kept Villa Cabana's financial records and
canceled checks for the 1994 and 1995 tax years, but misplaced
the canceled checks during an office move. Mr. Tijerina's firm
was unable to locate the canceled checks in time for trial.
In the notice of deficiency for the 1994 tax year,
respondent disallowed petitioners' claimed Schedule C business
expense deductions in the amount of $22,400. Petitioners did not
file a 1995 Federal income tax return. Accordingly, in separate
notices of deficiency, respondent determined, using Bureau of
Labor Statistics (BLS) data, that petitioners, who resided in a
community property State, were each taxable on income of $19,775,
as well as community property interest income of $55 for the 1995
tax year which they failed to report.
At trial, petitioner conceded that they earned gross income
in the amount of $83,083.90 from the operation of the Villa
Cabana restaurant in the 1995 tax year.
OPINION
1. Schedule C Expense Deductions for the 1994 Tax Year
Section 162(a) allows a taxpayer to deduct "all the ordinary
and necessary expenses paid or incurred * * * in carrying on any
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