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farming income, on Schedules F of their 1988 and 1989 Federal
income tax returns. Petitioners failed to report $9,793.70 and
$2,941.20 of the diverted refund checks on petitioners' 1988 and
1989 income tax returns, respectively. Respondent correctly
disallowed $13,367.60 of cost of goods sold claimed by
petitioners on Schedule F attached to their 1988 Federal income
tax return. Petitioners, for 1989, failed to report taxable fee
income from clients totaling $16,322. Petitioners did not fail
to report $750 in fee income from D & D Supply for 1989, as
determined by respondent.
OPINION
We first consider whether petitioners are liable for the
additions to tax under section 6651(a)(1) for their failure to
file Federal income tax returns for 1988 and 1989. Section
6651(a)(1) imposes an addition to tax for a taxpayer's failure to
file a timely return unless the taxpayer can establish that such
failure "is due to reasonable cause and not due to willful
neglect". The addition to tax is 5 percent of the amount
required to be shown on the return for each month beyond the
return's due date, not to exceed 25 percent. Sec. 6651(a)(1).
Petitioners must show that their failure to timely file
Federal income tax returns for 1988 and 1989 was due to
reasonable cause and not due to willful neglect. Rule 142(a);
United States v. Boyle, 469 U.S. 241, 245 (1985). The parties
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