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Forste. While this fact may be relevant in certain situations,
we do not think that it should be given much weight in this case.
Other than the Forms W-2 themselves, there is no evidence
regarding why DHS reported the payments as taxable income.
Petitioners claim that Mr. Forste simply allowed the withholding
to continue without objection because it satisfied part of his
obligations to make estimated tax payments. Petitioners’ 1996
income tax return shows that even with the withholding by DHS,
they owed over $5,000 in tax when the 1996 return was due. Given
the fact that the Internal Revenue Service (IRS) had examined
petitioners’ returns for prior years on three separate occasions
and agreed that the DHS payments were excludable, it would appear
that petitioners could have notified DHS of the results of those
examinations and requested that withholding be discontinued.
Indeed, the IRS had advised Mr. Forste to attach documentation of
the prior examinations to his future returns to show that the
amounts received from DHS were excludable.
Obviously the evidence presents us with a difficult task.
This no doubt accounts for the parties’ extensive arguments over
who has the burden of proof in light of section 7491. Although
this case is very close, we find that petitioners have presented
credible evidence; i.e., sufficient evidence upon which to base a
decision that the payment of $25,130 pursuant to paragraph 1 of
the settlement agreement was made in settlement of Mr. Forste’s
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