David M. Priestly, Jr. - Page 4

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          petitioner’s return.  The $10,537 adjusted gross income reported            
          on her return takes into account the above items of income and              
          the loss reported on the Schedule C.                                        
               A personal exemption deduction, a dependency exemption                 
          deduction for an individual not listed on the return, and the               
          standard deduction applicable to a head of household are                    
          subtracted from the adjusted gross income and result in reported            
          taxable income of $2,237.  Applying the section 1 income tax rate           
          applicable to a head of household, petitioner’s spouse reported             
          an income tax liability of $336, which was reduced to zero by a             
          claimed credit for child and dependent care expenses.  The $1,344           
          refund claimed on the return consists of an $804 earned income              
          credit, plus $540 of Federal income tax withholdings.                       
               Petitioner’s 1988 Federal income tax return was examined.              
          As a result, respondent issued a notice of deficiency in which a            
          deficiency of $8,118 in petitioner’s 1988 Federal income tax was            
          determined.  It appears that the deficiency results from the                
          disallowances of the earned income credit and the deductions                
          claimed on the Schedules C.  The details of the examination and             
          deficiency determination cannot be determined with precision                
          because respondent’s administrative file has been destroyed.3               

               3 According to respondent, the file was destroyed “in the              
          ordinary course of business”.  We interpret this to mean that the           
          destruction of the file was consistent with respondent’s record             
          retention requirements.  In any event, petitioner does not claim            
          that the file was destroyed for other reasons.                              

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