Ralph W. Emerson and Suzanne O. Emerson - Page 9

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               Four minutes after petitioner filed the second amended                 
          complaint, the parties filed a request for dismissal, which the             
          court entered the same day.                                                 
          Federal Tax Return                                                          
               Petitioners filed their Federal income tax return for 1998,            
          reporting taxable income of $108,004.08 and tax of $24,907.                 
          Petitioners reported wages paid to petitioner of $141,000 from              
          Summus Group, Ltd., shown on a W-2, Wage and Tax Statement.                 
          Petitioners received a Form 1099-MISC, Miscellaneous Income, from           
          ProGuard for $90,684.92 of nonemployee compensation.  When                  
          preparing petitioners’ return, Stevenson was told that the                  
          lawsuit settled after the parties agreed that a claim for                   
          personal injury could be added by petitioner and that the payment           
          was made based on physical injury.  Stevenson did not review the            
          entire second amended complaint or the other two complaints prior           
          to preparing petitioners’ return.                                           
               Petitioners included an attachment to their return, with a             
          copy of the Form 1099, stating that the $90,684.92 was                      
          “excludable from taxpayer’s taxable income pursuant to section              
          104(a)(2)” and was therefore not reported on their return as                

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