Dennis L. and Sharon E. Hayden - Page 10

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          "'[T]axable income' means gross income minus the deductions                  
          allowed".  Sec. 63(a).  Gross income is derived from gross                   
          receipts less cost of goods sold.  See Beatty v. Commissioner,               
          106 T.C. 268, 273 (1996); sec. 1.61-3(a), Income Tax Regs.                   
          Furthermore, as pointed out above, the determination of the                  
          taxable income of a partnership is essentially the same as with              
          an individual.  Sec. 703(a).  There is no indication that in                 
          enacting the taxable income limitation in section 179(b)(3)(A)               
          Congress did not understand and intend these terms to have their             
          settled meaning.                                                             
               In short, section 1.179-2(c)(2), Income Tax Regs., flows                
          directly from the requirements of section 179(b)(3)(A) and                   
          (d)(8), is consistent with the statutes and their legislative                
          histories, and is valid.  Therefore, respondent's determination              
          on this issue is sustained.                                                  
          2.  Section 6662-Penalty                                                     
               Section 6662(a) imposes a penalty with respect "to any                  
          portion of an underpayment of tax required to be shown on a                  
          return" which is attributable to negligence or disregard of rules            
          or regulations.  Sec. 6662(b)(1).  The penalty is in an amount               
          "equal to 20 percent of the portion of the underpayment to which             
          this section applies."  Sec. 6662(a).                                        
               Petitioners claimed on Schedule C a deduction in the amount             
          of $17,630 as "payroll taxes".  Of that amount, $9,284 was                   
          payment made for petitioners' 1993 Federal income tax liability.             
          Section 275(a)(1) provides:  "No deduction shall be allowed for *            

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