Greg McIntosh and Sheila R. McIntosh - Page 5

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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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