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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
returns.
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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