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materials” expenses of $21,270; (2) “allowable” auto/business
expenses of $8,540; and (3) “allowable” office/household expenses
of $5,132. The total amount of expenses claimed was $34,942,
resulting in a net loss of $33,368. The expenses are the
combined expenses from Mr. and Mrs. Richards’ separate
activities. There are attachments to the Schedule C which
separate the expenses.
Respondent disallowed the $34,942 of expenses and calculated
self-employment tax (and the self-employment tax deduction) on
the $1,574 of income. Respondent also disallowed a loss
carryover of $15,892 from 1993 and determined that petitioners
are liable for the accuracy-related penalty.
For the years 1991 to 1993, 1995, and 1996, petitioners’
returns reflected the following income and expenses for their
activities:
Year Income1 Expenses Profit/(loss)
1991 --- $28,307 ($28,307)
1992 --- 29,103 (29,103)
1993 --- 30,616 (30,616)
19952 --- --- (24,278)
1996 $814 30,877 (30,063)
1 While petitioners received income from their activities
in 1991 to 1993, this income was reported on line 7 of their Form
1040 as wages.
2 Only the Form 1040 was provided showing the net loss.
1. Writing Activity
In the 1940's, Mr. Richards’ first job as a writer was
writing stage material for Bob Crosby’s band. He wrote comical
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