Robert and Joyce Dirkse - Page 9

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               In 1995, the Internal Revenue Service audited petitioners’             
          1994 return and determined that no change thereto was required.             
               Petitioners did not maintain a business bank account during            
          the years at issue; revenues and expenses for each of the Schedule          
          C activities were channeled through their personal checking                 
          Notice of Deficiency                                                        
               In the notice of deficiency, respondent determined that                
          petitioners’ Schedule C activities were neither entered into for            
          profit nor were the claimed expenses relating thereto                       
          substantiated.  (Subsequently, respondent conceded that most of the         
          claimed expenses were paid or incurred.)  Consequently, respondent          
          disallowed the deductions attributable to those activities for 1995         
          and 1996 ($102,845 and $120,278, respectively).  Respondent                 
          alternatively determined that the losses from petitioners’ Schedule         
          C activities constituted passive activity losses that were subject          
          to the deduction limitations of section 469.  Moreover, respondent          
          imposed section 6662(a) accuracy-related penalties for the years in         
          Schedule C Activities                                                       
               The primary issue is one of fact:  whether petitioners entered         
          into or carried on all or any of their Schedule C activities with           

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Last modified: May 25, 2011