Dennis L. and Sharon E. Hayden - Page 3

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          attached to the partnership return, Leddos elected under section             
          179 to expense $17,500 of the $26,650 invested in equipment.                 
          This deduction flowed through to petitioners' 1994 Federal income            
          tax return on Schedule E.2                                                   
               Petitioner Dennis L. Hayden (petitioner) is a certified                 
          public accountant whose practice includes a substantial amount of            
          tax work.  Petitioner operated and practiced an accounting                   
          business as a sole proprietorship.  The proprietorship has                   
          employees and maintains an account for "payroll" taxes that                  
          includes employment taxes paid to the Federal Government.  During            
          the 1994 taxable year, petitioner paid petitioners' 1993 Federal             
          income tax liability in the amount of $9,284 from the bank                   
          account of the proprietorship, and that amount was charged to the            
          sole proprietorship's account for "payroll" taxes.  On the                   
          proprietorship's Schedule C attached to petitioners' joint 1994              
          Federal income tax return, petitioner deducted $17,630 as                    
          "payroll" taxes, which amount included petitioners' 1993 Federal             
          income tax liability of $9,284.  The correct amount of the                   
          "payroll" taxes paid by the accounting practice for 1994 was                 
               Upon examination, respondent disallowed the $17,500 section             
          179 deduction and the portion of the deduction claimed on                    
          Schedule C that was expended for Federal income taxes.                       
          Respondent further determined an accuracy-related penalty was due            

               2  Leddos qualifies as a so-called small partnership under              
          sec. 6231(a)(1)(B), and the partnership provisions of secs. 6221             
          through 6233 do not apply.                                                   

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