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expenses, nor did any salesman do so. In addition, Southeast
directly paid the motel expenses for each salesman.
Southeast issued to Mr. Fugitt a Form 1099 for the taxable
year 1999 in the amount of $19,125. The amount reported on the
Form 1099 consisted of total sales commissions and per diem
payments of $16,475 and $2,650, respectively.
Petitioners timely filed a Form 1040, U.S. Individual Income
Tax Return, for 1999. Petitioners attached to their return two
Schedules C-EZ, Net Profit From Business, relating to the sale of
used car and used merchandise. On the Schedules C-EZ,
petitioners reported gross receipts totaling $7,854. Petitioners
did not report on their return any of the amount reported on the
Form 1099 issued by Southeast.
In the notice of deficiency, respondent determined that
petitioners failed to report self-employment income of $19,125
for the taxable year 1999. Respondent also determined that
petitioners were liable for an accuracy-related penalty due to
substantial understatement of tax under section 6662(a)(1) and
(d)(1).
At trial, Mr. Fugitt testified that he regarded his
arrangement with Southeast as akin to going to school to learn
how to sell recreational vehicles. Although he conceded that he
was paid sales commissions, he estimated the amount to be “about
$900”. Mr. Fugitt also conceded that he received total per diem
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