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income of $127, (3) Finley Kumble ordinary loss of $1,251, and
(4) itemized deductions of $57.
Discussion
Petitioners and respondent provide the following alternative
computations of petitioners’ additional taxable income:
Petitioners’ Computation Respondent’s Computation
Additional Taxable Income Additional Taxable Income
COD income $9,482.17 $36,332
$2,000 credit (2,000.00) (2,000)
Finley Kumble
interest income 127.00 Already accounted for
Capital loss (18.00) Already accounted for
Finley Kumble
ordinary loss (1,251.00) Already accounted for
Itemized deductions (57.00) Already accounted for
Total: 6,283.17 34,332
Petitioners argue the two-step process described above was
not the proper method to compute and allocate COD income to
petitioner. They complain that the two-step process resulted in
an allocation of COD income to petitioner that substantially
exceeds his percentage interest in profits and losses as shown by
his Schedule K-1 for 1992, the taxable year in issue.
Petitioners also argue respondent’s Rule 155 computation did not
take the adjustment items into account.
Issue 1. Whether the Proper Method Was Used To Compute
and Allocate Finley Kumble COD Income to Petitioner
Petitioners argue that, in accordance with Finley Kumble’s
1992 Form 1065 and Schedule K-1, petitioner’s increased
distributive share of Finley Kumble’s COD income should be
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