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expenditures with income in the same taxable period. The
adjustment proposed was to disallow the deduction in 1994 of
downpayments on five contracts identified by petitioner as signed
in 1994 where it appeared the trees were not cut and sold by him
until 1995.
Unreported Income
During the examination of petitioners' return for 1994,
petitioner advised the examining agent that he had some income
that was not reported on the return. The examining agent
performed a source and application of funds analysis that
indicated petitioners had spent $5,061 more than reported funds
available. Petitioner explained that he had sold a tractor that
cost $550 for $1,050, and he recalled getting a $5,000 loan from
his brother.
Consideration by Appeals Division
Petitioners' argument that their lack of ownership in the
trees precluded them from having an "inventory" and their
explanation for the unreported income were not accepted by the
examiner. Petitioners took their case to the Appeals Division of
the IRS (Appeals).
In Appeals, petitioners were represented by an enrolled
agent (EA) through whom they argued that as owners of an economic
interest in timber they were entitled as lessees to deduct the
payments at issue in the year paid. By a letter dated April 20,
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