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1990 tax return on October 15, 1991. For 1990, petitioners (1)
reported the sale of the office building and purchase of the
seven houses as a like-kind exchange under section 1031, (2)
deducted a bad debt and Schedule C expenses, and (3) claimed that
they overpaid their 1990 Federal income tax by $1,495.
B. The Audit of Petitioners' 1990 Return
E. Mitzi Morrow (Morrow), a revenue agent, began to audit
petitioners' 1990 return around June 1992. Petitioner met with
Morrow on August 13, 1992, and gave her evidence supporting most
of petitioners' Schedule C expenses. He did not give Morrow
documentary evidence that showed petitioners' basis in the like-
kind exchange properties. The documents that he gave Morrow did
not convince her that petitioners were entitled to a bad debt
deduction.
Around September 1992, petitioners hired Albert H. Feldman
(Feldman), a C.P.A., to help them with the audit. Feldman and
Morrow met on September 30, 1992. Feldman gave Morrow more
documents on November 25, 1992.
On December 14, 1992, Morrow asked Feldman for more
information. Morrow did not hear from petitioners or Feldman
after December 14, 1992.
Morrow reviewed petitioners’ case on May 17, 1993. She
disallowed petitioners' bad debt loss because she concluded that
petitioners had not substantiated their claim that they had lent
money to a third party. She also concluded that petitioners were
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