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Petitioners are a married couple. Throughout the year in
issue, petitioner-husband (Mr. Margolis) was self-employed as a
photographer and petitioner-wife (Mrs. Margolis) was self-
employed as a textile designer.
In June 1992 Mrs. Margolis became associated with Leo Art
Studios, Inc. (Leo Art), located in Manhattan, New York. She
received $14,180 from Leo Art in 1992 from the sale of her
textile designs. Leo Art paid Mrs. Margolis by checks ranging in
amount from $350 to $800. Mrs. Margolis deposited the first
three checks she received from Leo Art, each in the amount of
$500, to petitioners' account at National Westminster Bank. Mrs.
Margolis cashed the remaining checks.
Petitioners resided in a three bedroom apartment in Kew
Gardens, New York. One of the bedrooms was converted into a work
area utilized exclusively by Mrs. Margolis throughout 1992 as a
home office. Mrs. Margolis used the home office mainly to
prepare her textile designs.
On their 1992 Federal income tax return, petitioners claimed
a net Schedule C loss for Mr. Margolis' photography business in
the amount of $11,121. Petitioners reported $13,621 in
unemployment compensation income received by Mrs. Margolis.
Petitioners did not report any income or claim any loss for Mrs.
Margolis' textile design business.
In the notice of deficiency, respondent determined that
petitioners failed to report $14,755 in self-employment income
earned by Mrs. Margolis as a textile designer.
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