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$27,828.81. On December 27, 1994, petitioner wrote his attorney
requesting that he file suit against BMI and file a lien against
BMI. Such action was not taken by petitioner's attorney because
the requested work went beyond what the attorney was required to
do under the prepaid legal services agreement. Petitioner did
not independently pursue legal action against BMI, nor did
petitioner receive any money from BMI as he had demanded in his
November 21, 1994, letter to BMI. Further, BMI did not ship any
further materials to petitioner. Although petitioner at trial
contended he made continued demands on BMI on his own and through
his attorney up to November 1995, there was no written
documentation offered into evidence to support these claims, nor
was any documentary evidence offered regarding communications
between petitioner and BMI during 1996. During 1996, petitioner
contends he came to realize that he would not recover any amount
from BMI.
On their 1996 Federal income tax return, petitioners filed a
Schedule C, Profit or Loss From Business, on which they reported
their transaction with BMI as a business activity for "Sales of
Medical Response Systems". They reported no gross receipts,
$25,800 cost of goods sold, and negative gross income of $25,800.
Petitioners claimed office expenses of $120 and a net loss of
$25,920. In the notice of deficiency, respondent disallowed the
$25,800 cost of goods sold and $927 in itemized deductions
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