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between expense reimbursements and payments for IMC’s purchase of
petitioner’s old tools.
Respondent determined deficiencies for each of petitioners’
taxable years 1996, 1997, 1998, and 1999. In a notice of
deficiency dated August 28, 2003, respondent adjusted
petitioners’ income for each year to include the amounts of the
checks from IMC. As a result of respondent’s adjustments to
petitioners’ gross income, petitioners were no longer entitled to
the earned income credits claimed on their returns for 1996,
1997, 1998, and 1999. The parties stipulated that petitioners
are entitled to the child tax credit for 1998 and 1999.
Respondent also conceded that petitioners were entitled to
miscellaneous itemized deductions, limited under section 67(a) to
the extent the expenses exceeded 2 percent of petitioners’
adjusted gross income, for the expenses petitioner paid on behalf
of IMC in each year. On brief, respondent conceded an additional
$3,181.82 of petitioners’ expenses for 1996. The only expenses
listed by petitioner that were not allowed as miscellaneous
itemized deductions by respondent in either the notice of
deficiency or on brief were those made by petitioner before March
1996. Respondent treated the amounts petitioners received from
IMC in exchange for petitioner’s old tools as wage income.
Respondent also determined that petitioners were liable for an
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