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Ballantyne Backelsberg (Carolyn), Russell and Clarice’s daughter.
For the taxable year 1995, Carolyn provided Mr. Feldmann with
information regarding intangible drilling costs (IDCs) paid by
Russell in the taxable year 1995. A portion of the IDCs deducted
by Russell in 1995 had actually been reimbursed to him by
Ballantyne Oil and Gas, Inc. during that year. Mr. Feldmann was
not informed that Russell had been reimbursed for approximately
$97,790 of those expenses. The amount Russell claimed as a
Schedule E deduction for production taxes in the taxable year
1995 was based on the information provided to Mr. Feldmann.
On June 16, 1999, respondent issued notices of deficiency to
the estate for its taxable years 1994 and 1995. In addition to
other adjustments, respondent disallowed the estate’s claimed
theft loss of $560,900 in 1994 on the grounds that the estate had
not established (1) there was a theft loss and (2) the theft loss
was the estate’s to claim. In its petition, the estate alleged
that respondent erred in increasing its income by $560,900
because that amount was the income of Russell and was not taxable
to the estate.
On July 21, 1999, respondent issued a notice of deficiency
to Russell and Clarice for their taxable years 1993, 1994, and
1995. In addition to other adjustments, respondent increased
Russell and Clarice’s gross income for 1994 by $751,988.
Respondent identified this adjustment under the heading “ORDINARY
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