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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
$8,346.
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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