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Hughes (Ms. Hughes), worked at the Camelot Inn. During the
taxable years in issue, Ms. Hughes worked full-time as a school
psychologist. Ms. Hughes had a house in Allegany, New York, and
resided in the house with her son. Petitioner lived in Ms.
Hughes’ Allegany house during the years in issue.
Petitioner reported income and expenses from the bed and
breakfast activity on his individual Federal tax returns for the
taxable years 1994 through 1997 on Schedules C, Profit or Loss
From Business, as follows:
Gross Income Total Expenses Total Losses
Tax Year Reported Claimed Claimed
1994 $152 $26,284 $26,132
1995 3,872 38,909 35,037
1996 2,325 57,457 55,132
1997 5,254 53,223 47,969
Additionally, for the taxable years 1996 and 1997 petitioner
reported zero income in each year and claimed losses of $1,384
and $1,065, respectively, on Schedules F, Profit or Loss From
Farming, with respect to beef cattle activity. Petitioner did
not own any cattle in either 1996 or 1997. Petitioner also
claimed losses for the taxable years 1994 and 1995 of $3,198 and
$4,040, respectively, with respect to beef cattle activity, on
his Schedules F. Petitioner also reported income of $185 and
claimed a loss of $824 in 1997 with respect to a woodworking
activity. The record is otherwise silent about this activity.
On his 1996 and 1997 Federal tax returns, petitioner claimed
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