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Petitioners reported the following amounts of income,
expenses, and losses from their farm on their tax returns for
1995, 1996, and 1997:
Year Income Expenses (Loss)
1995 -0- $8,818 ($8,818)
1996 -0- 7,468 (7,468)
1997 -0- 9,012 (9,012)
Petitioners listed 502 North Hickory as rental property on
Schedules E, Supplemental Income, of their 1996 and 1997 returns
but not their 1995 return. They reported on the Form 4797, Sales
of Business Property, attached to their 1997 return that they
placed in service on July 1, 1994, a residential rental property
having a basis of $74,861, reduced by depreciation of $6,728, and
sold it in 1997 for $60,000, producing a $14,186 loss.
Petitioner prepared petitioners’ returns for 1995, 1996, and
1997.
F. Examination of Petitioners’ Returns
The examination in this case began after July 22, 1998.
OPINION
A. Burden of Proof on the Farm Loss and Rental Property Issues
We first consider who bears the burden of proof on the farm
loss and rental property issues. Under section 7491, the burden
of proof is placed on the Secretary in any court proceeding if
the taxpayer: (1) Has complied with substantiation requirements
under the Internal Revenue Code; (2) has maintained all records
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