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account of a failed business as part of a chapter 13 bankruptcy
proceeding, and (5) various expenses related to two rental
properties. Finally, we must decide whether petitioners are
liable for an addition to tax under section 6651(a)(1) and an
accuracy-related penalty under section 6662(a).
Background
Petitioners contest respondent’s determinations with regard
to their 1996 and 1997 tax years. In the notice of deficiency,
respondent disallowed the following deductions for 1996: (1) A
$3,000 capital loss, (2) $57,099 in expenses listed on
petitioners’ Schedule A, Itemized Deductions, (3) $5,487 in
expenses listed on petitioners’ Schedule C, Profit or Loss From
Business, and (4) $25,811 in expenses listed on petitioners’
Schedule E, Supplemental Income and Loss. After concessions, the
parties agreed that petitioners are entitled to: (1) The $3,000
capital loss, (2) $7,070 in itemized deductions,1 (3) $3,567 in
Schedule C expenses (with the remainder still in dispute), and
(4) the $25,811 Schedule E expenses.
With regard to the 1997 tax year, respondent disallowed the
following deductions: (1) A $3,000 capital loss, (2) $41,172 in
1 The parties agreed that petitioners are entitled to
deduct the following amounts: (1) $822 for taxes, (2) $1,189 for
interest, (3) $1,500 for charitable contributions, (4) $484 for
union dues, and (5) $3,075 for unreimbursed employee expenses.
We remind the parties that when making their Rule 155
calculations, miscellaneous itemized deductions must be adjusted
for the 2-percent floor. See sec. 67.
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