William E. and Barbara J. Flanagin - Page 5




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          this time, the Z-100 Lifeline's circulation was between 400 and              
          500 people.                                                                  
               In April 1992, PHI began shipping the SCSI board.  By August            
          1992, PHI had sold 45 SCSI boards.  In September 1993, PHI sold              
          the remainder of the 60 SCSI boards.                                         
               During 1992 and 1993, Mr. Flanagin also attempted to develop            
          software that allowed additional drivers to be used with the SCSI            
          board.                                                                       
          II.  Other Background Information                                            
               Mr. Flanagin kept receipts for the various computer-related             
          expenses he incurred in conducting his software development                  
          activity.  He kept no other books and records of financial                   
          information.  Mr. Flanagin did not maintain a budget or financial            
          projections for his software development activity.  He kept no               
          records of projects undertaken or hours worked on specific                   
          projects.  Mr. Flanagin never prepared any marketing or financial            
          plans or projections.  At no time did Mr. Flanagin undertake any             
          study of what costs he might incur in attempting to develop                  
          working software for the SCSI board.                                         
               Petitioners deducted expenses related to the software                   
          development activity on Schedule C of their tax returns.                     
          Petitioners reported the following income, receipts, and                     
          expenses:                                                                    







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