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stored their furniture in the house, that the property was
occupied by petitioners' cousin from December 1995 through March
1996, and that the house was covered by a homeowner's insurance
policy in their names. The letter, however, enclosed other
letters written by third parties that were intended to show that
petitioners had not used the house as a personal residence.
Respondent, on the other hand, had obtained third party
information suggesting that petitioners had resided in the
Vallecito property. Respondent also obtained a "Real Estate
Transfer Disclosure Statement" signed by petitioners on July 19,
1995, indicating that the sellers, petitioners, were occupying
the property.
On May 5, 1999, the examining agent asked petitioners to
agree to extend the period for the assessment of income tax.
Through Mr. Brown, in a letter dated May 10, 1999, petitioners
declined to extend the period for assessment.
A statutory notice of deficiency for the years 1995 and
1996, along with a very detailed explanation of the items of
adjustment to petitioners' income, was issued on July 21, 1999.
Mr. Brown sent to the IRS a letter dated September 2, 1999,
with enclosures. The enclosures were intended to be
"documentation for two issues that were raised in the Notice of
Deficiency and one issue being raised by the taxpayers". Among
the enclosures was documentation showing that petitioners had in
March 1996 contracted to sell the Vallecito property to
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