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Bitker reported $80,000 of rental income from two parcels of
farmland in Norman County, Minnesota. Petitioners did not report
any income from rental real estate on their 1997 Forms 1040.
C. The Notices of Deficiency
In September 1998, an agent of respondent began an examination
of the Bitker partnership’s 1996 and 1997 Forms 1065 and
petitioners’ 1996 and 1997 Forms 1040. Mr. Mostoller represented
both the Bitker partnership and petitioners during the examination.
The agent requested that petitioners extend the period for
assessment of tax for 1996 and 1997. They declined to do so. As
a consequence, petitioners did not have an opportunity to have the
proposed changes for 1996 and 1997 reviewed by the Appeals Office
of the Internal Revenue Service.
The agent calculated that, as of December 31, 1995, the
partners had negative capital accounts totaling $1,144,343 and the
Bitker partnership had short-term debt of $734,576 and long-term
debt of $1,222,236. The agent determined that (1) for 1996 the
Bitker partnership had a profit of $334,263, interest income of
$12, and a short-term capital gain of $50,234 and (2) for 1997 it
had a profit of $260,411 and interest income of $39. The agent
also determined that the following amounts constituted personal
expenses of petitioners and that the Bitker partnership’s payment
of the expenses constituted distributions by the partnership to the
partners (discrepancies attributable to rounding):
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