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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
account.
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
issue.
OPINION
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