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The issues are whether petitioners are entitled to
deductions for alleged expenses incurred in the construction of a
home for the mother of petitioner Richard Dean Smiley
(petitioner) and whether petitioners are liable for the section
6662(a) penalties.
The facts may be summarized as follows. Petitioners resided
in Blaine, Minnesota, at the time the petition was filed. Before
1984 petitioner had manufactured bedroom furniture. In 1984,
petitioner sold the business and began constructing single unit
houses. In 1991, petitioner quit that business and became a
"house husband". In 1994, petitioner entered into an agreement
with his mother whereby he agreed to construct a house for her in
Detroit Lakes, Minnesota. According to petitioner, his mother
owned a lot in Detroit Lakes that she quit-claimed to him. On
August 3, 1994, petitioner and his mother entered into a written
contract whereby petitioner sold the lot and a "house built new"
to her for $200,000. The closing date specified was February 1,
1995.
Petitioner commenced construction on the house in August
1994. Sometime in November 1994, the partially built house was
severely damaged in a storm. Petitioner allegedly had insurance
on the house; the insurance company, however, has not paid for
the storm damage. Apparently, petitioner continued to work on
the house. On April 28, 1995, petitioner and his mother executed
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