Greg McIntosh and Sheila R. McIntosh - Page 6

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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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