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Petitioners bought no property from unrelated third parties on
which to build houses for sale.
After the June 4, 1998, meeting with petitioner and
Mr. Brown, the examining agent made no further request for the
items included in the previously issued IDR's but did make
certain third parties contacts.
On January 15, 1999, the IRS issued to petitioners a report
of proposed adjustments to their Federal income taxes for 1995
and 1996. The examining agent's letter enclosing the report
states that she obtained information indicating that petitioners
had lived on the Vallecito property and concludes that "I have
not received adequate information to justify that you are in a
business." The letter further informs petitioners that the loss
for 1995 has been disallowed, and the small profit for 1996 has
been "reversed out". Mr. Brown met with the examining agent to
discuss the proposed adjustments and later provided the agent
some additional information.
The additional information was in the form of a letter, with
enclosures, dated February 11, 1999. The letter primarily
addresses the issue of whether the Vallecito property was
petitioners' personal residence or was held for sale in the
ordinary course of business. The letter recites petitioners'
position that it was not their personal residence. Petitioners
admit in the letter, however, that they used the Vallecito
property as an office from February to October 1995, that they
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Last modified: May 25, 2011