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II. Schedule A Versus Schedule C Deduction Disallowance
All of respondent’s proposed adjustments decrease expenses
claimed on the Schedule C and, correspondingly, increase
petitioners’ adjusted gross income for 1994. Petitioners claim
that, based upon “guidelines set out in audits of prior years”,
they treated a portion of the expenses listed on the Schedule C
as Schedule A itemized deductions on the premise that the
expenses were associated with Randall’s wages from Wells Fargo
Bank rather than with his own financial planning business. In
fact, an attachment to line 46 of the Schedule C lists “other
expenses”, totaling $76,180, and reduces the total by $39,084
which, instead, is deducted on line 20 of the Schedule A as
unreimbursed employee expenses. Petitioners argue that, because
a portion of the expenses listed on the Schedule C was, in
effect, not taken on the Schedule C but taken, instead, on the
Schedule A, a portion of the disallowance of those deductions
should, likewise, be a disallowance of the itemized deductions
reflected on line 20 of the Schedule A.5 Respondent argues that
5 Although petitioners do not indicate the tax benefit to
be derived from their requested reattribution of a portion of
respondent’s proposed deduction disallowances, we surmise that
one such benefit is the resulting reduction in the loss of
petitioners’ itemized deductions under sec. 68(a)(1) and (b),
which, for 1994, equals 3 percent of petitioners’ adjusted gross
income in excess of $111,800. By restoring deductions to
Schedule C, petitioners reduce adjusted gross income and,
thereby, reduce their loss of itemized deductions under sec.
68(a)(1) and (b). There is also an increase in petitioners’
(continued...)
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