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net loss of about $8,000). That year, petitioner was attending
an M.B.A. program in Finance. He also earned about $28,000
working on a part-time basis. In 1996, Ms. Chester's Schedule C
business was on the rebound (earning a net profit of $8,794).
That year, Ms. Chester also earned income from two other sources
in the total amount of $3,309.53. In 1996, petitioner was still
attending the M.B.A. program for about half the year (he received
his M.B.A. in Finance in May 1996), and he earned $30,593.09
working on a part-time basis.
Faced with financial difficulties, petitioner urged Ms.
Chester to withdraw funds from her retirement account. He
assured her that once he earned his M.B.A. in Finance, he would
obtain a high paying position and that they would thereafter
replenish her retirement savings. Thus, during 1995 and 1996,
Ms. Chester made a series of withdrawals from her retirement
account totaling $47,382 for 1995 and $22,030 for 1996 (gross
distributions). Funds were distributed in the form of checks and
were deposited in a joint bank account maintained and used by
both petitioner and Ms. Chester.
Petitioner filed joint returns with Ms. Chester for 1995 and
1996. On the 1995 return, petitioner and Ms. Chester reported a
taxable pension and annuities distribution in the amount of
$45,500. On the 1996 return, however, they failed to report any
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