Manuel Francisco Palomo and Jane Lyon Potter - Page 4

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                    for finding and hiring instructors.  As part of her                                                                                                    
                    responsibilities, Ms. Potter promoted the after-school program                                                                                         
                    through advertising.  In 1999, Ms. Potter received checks from                                                                                         
                    Smith, payable to her, in the amount of $3,038.  Petitioners                                                                                           
                    received a Form 10992 on which Smith reported to the Internal                                                                                          
                    Revenue Service (IRS) that Ms. Potter received $3,038 of income                                                                                        
                    in 1999.  Petitioners did not report this amount as income on                                                                                          
                    either their 1999 Form 1040, U.S. Individual Income Tax Return,                                                                                        
                    or their 1999 Form 1040X, Amended U.S. Individual Income Tax                                                                                           
                    Return.                                                                                                                                                
                              In March 1999, both Ian Potter, Ms. Potter's father, and her                                                                                 
                    sister Susan Potter became seriously ill.  Petitioners determined                                                                                      
                    that it was necessary to travel to Florida so they could tend to                                                                                       
                    their ill relatives.  Petitioners withdrew $14,389 from a                                                                                              
                    qualified retirement plan (IRA) to help pay for medicines, food,                                                                                       
                    their flights to and from Florida, and other expenses related to                                                                                       
                    Mr. Potter's and Susan's illnesses.  Mr. Potter died on June 29,                                                                                       
                    1999, and Susan died on July 31, 1999.  Petitioners did not pay                                                                                        
                    rent for Mr. Potter or Susan, and they did not keep track of                                                                                           
                    their expenses while in Florida.                                                                                                                       
                              Petitioners timely filed their 1999 Federal income tax                                                                                       
                    return.  Petitioners filed a Form 1040X on or about April 16,                                                                                          


                              2 A copy of the form was not produced at trial.  The Court                                                                                   
                    assumes the form was a Form 1099-MISC, Miscellaneous Income.                                                                                           





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