James D. Horn - Page 8

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          in full the taxes and penalty shown as owing by their 1992 and              
          1994 returns.                                                               
               Shortly after March 18, 1996, Agent Urrutia proposed                   
          substantial adjustments to petitioner’s returns.  On the 1991               
          return, Agent Urrutia found that an exchange of five duplexes and           
          rental properties owned by petitioner for a turkey ranch owned by           
          Horn Construction did not qualify for section 1031 exchange                 
          treatment, requiring petitioner to recognize $497,000 in capital            
          gain.  With respect to tax years 1992 and 1993, Agent Urrutia               
          took the position that $338,163 and $429,000, respectively, of              
          losses petitioner claimed should be disallowed because they had             
          been incurred by Horn Enterprises.  These adjustments eliminated            
          the net operating loss carrybacks from 1993 that petitioner and             
          his former spouse claimed on their 1990 and 1991 amended returns.           
               Agent Urrutia also proposed late-filing and accuracy-related           
          penalties for all years in issue.  In order to persuade Agent               
          Urrutia to concede the proposed penalties, petitioner submitted             
          to Agent Urrutia medical records showing petitioner had been                
          suffering psychiatric problems that, he argued, prevented him               
          from timely and correctly preparing and filing his income tax               
               On April 24, 1996, Agent Urrutia and his manager, Faith                
          Priest, met at the Modesto office of the Internal Revenue Service           
          with petitioner, petitioner’s former spouse, Donna Kay Horn,                

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