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Further, using the bank deposits method of income
reconstruction, respondent determined that petitioners received
additional unreported self-employment income. Respondent
determined that during 1992 petitioners deposited $42,964 to
their bank account. Gross receipts from Mr. Margolis' business
accounted for $12,918 of the deposits, and Mrs. Margolis'
unemployment compensation accounted for $13,621 of the deposits.
As for Mrs. Margolis' self-employment income from Leo Art
(separately determined and therefore otherwise taxed), respondent
determined that petitioners had deposited only $4,470 to their
bank account. Respondent therefore determined that petitioners
had additional unreported self-employment income in the amount of
$11,955; i.e., $42,964 less $12,918, $13,621, and $4,470.
Initially, petitioners denied that Mrs. Margolis had
received any self-employment income during the year in issue.
Subsequently, but before trial in this case, petitioners
submitted a "corrected" Form 10403 through which they conceded
that Mrs. Margolis had received self-employment income in the
amount of $14,180 from Leo Arts. In the corrected return,
however, petitioners claimed that Mrs. Margolis had incurred
$6,978 in Schedule C expenses, including an $890 mortgage
interest expense4 and a $4,502 home office expense.
3 The "corrected" Form 1040 was never actually filed with
respondent.
4 At trial it became apparent that petitioners actually
intended to claim a deduction for an interest expense as opposed
(continued...)
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