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Respondent bears the burden of production with respect to
penalties. See sec. 7491(c). We further discuss section 7491(c)
infra. See sec. II.B.1.
We address infra two questions concerning new matter. See
sec. II.A.2.
II. The J. Shirleys
A. Deficiency in Tax
1. Introduction
Alexion Trust reported gross receipts of $179,791 from an
activity described as computer consulting. After deducting
claimed expenses totaling $78,260, including $42,000 paid as
rental to Caralan Trust, it reported a net profit from such
activity of $101,531. After deducting a claimed charitable
contribution of $94 from such net profit, it reported “Adjusted
total income” of $101,437. It then deducted that amount on
account of an income distribution (in such amount) to Caralan
Trust. Caralan Trust reported as income both the income
distribution of $101,437 and the rental payment of $42,000
received from Alexion Trust; it also reported $4 of interest
income. Caralan Trust computed a depreciation deduction of
$19,896 on account of property that the J. Shirleys used as (and
in) their personal residence. Caralan Trust deducted $77,234 on
account of distributions of income in the amounts of $13,753 and
$63,481 to the J. Shirleys and C E Shirley Trust, respectively.
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