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Mr. Favero filed Forms 1116, Foreign Tax Credit, with his
1995, 1996, and 1997 tax returns and claimed foreign tax credits
in the approximate amount of the wages he earned as a merchant
seaman.4 In 1996 and 1997, Mr. Favero claimed foreign earned
income exclusions for the approximate amount of wages he earned
as a merchant seaman.
In 1995, petitioners filed a Schedule C claiming a loss of
$13,210. The principal business listed on the Schedule C is
“Other Apparel + Accessory Stores”. No income was reported from
the business. In 1995 and 1996, petitioners filed Schedules E
reporting net losses of $1,420 in 1995 and $2,870 in 1996 from
the rental of real estate.
Respondent determined petitioners are not entitled to
foreign earned income exclusions for the years in issue and
disallowed $12,087 of the Schedule C deduction petitioners
claimed in 1995. Respondent also disallowed the following
expenses petitioners claimed on their Schedules E: (1) Auto and
travel expenses of $2,000 in 1995 and $1,500 in 1996; (2) an
insurance expense of $2,000 in 1996; and (3) mortgage interest
expenses of $388 in 1995 and $244 in 1996.
4 Because petitioners had taxable income of zero after
claiming itemized deductions and exemptions for each of the 3
years, they were unable to use the foreign tax credit to offset
their U.S. income tax liability. Respondent, therefore, made no
adjustments in the notices of deficiency for the foreign tax
credits petitioners claimed.
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Last modified: May 25, 2011