Jeffrey D. and Bonita L. Woodlee - Page 4

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                    Gross income                  $136,871                            
                    Car and truck expenses        13,847                              
                    Depreciation/sec. 179                                             
                    expense deduction             1,031                               
                    Insurance                          719                            
                    Office expense                5,950                               
                    Rent/lease                    828                                 
                    Supplies                      110,775                             
                    Taxes/licenses                2,500                               
                    Total expenses                135,650                             
                    Net Profit                    1,221                               
          According to the Schedule C, the above items were reported in               
          accordance with the cash method of accounting.  The Schedule C              
          further suggests that petitioner “started or acquired this                  
          business” before 1994.                                                      
               Although petitioners claimed a $110,775 deduction for                  
          supplies in 1994, only $81,449 of that amount had been paid as of           
          the close of that year.  The balance, $29,326, was paid in                  
          installments made during later years.                                       
               In the notice of deficiency, respondent disallowed that                
          portion of the deduction for supplies that represented unpaid               
          expenses.  Other adjustments made in the notice of deficiency are           
          not in dispute.                                                             
               In general, under the cash method of accounting, income is             
          recognized in the year of actual or constructive receipt, and               
          expenses are deductible in the year of actual payment.  Sec.                
          1.446-1(c)(1)(i), Income Tax Regs.  Respondent, pointing to the             

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