Anthony J. and Denise D. Sadberry - Page 13

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          before October 31, 2000.  Petitioner merely endorsed the check              
          over to Southern Farm Bureau.                                               
               In the notice of deficiency and accompanying explanations,             
          respondent determined that petitioners failed to include on their           
          original and amended returns the taxable annuity proceeds of                
          $61,548.12  Respondent adhered to the $6,154.94 penalty that                
          petitioners self-assessed on their amended return for the                   
          $61,549.38 taxable portion of early distributions by Southern               
          Farm Bureau and Glenbrook.  Respondent included the previously              
          unreported SFB and Glenbrook distributions as gross income,                 
          determined that self-employment tax was due, and allowed a                  
          corresponding deduction for one-half of such tax.  Respondent               
          reduced petitioners’ exemptions deduction under section 151(d)              
          because of adjusted gross income greater than $189,950.  Finally,           
          respondent determined that a 20-percent accuracy-related penalty            
          was due for substantial understatement of tax under section                 
          6662(a).                                                                    
               The first issue is whether petitioners received taxable                
          annuity proceeds of $61,548. Section 61(a)(9) provides that                 




               12   The combined amount of taxable annuity proceeds                   
          reported on Forms 1099-R by Southern Farm Bureau and Glenbrook is           
          actually $61,549.38.  Respondent admitted a $1.38 error in                  
          petitioners’ favor on the amount of annuity proceeds includable             
          as income and did not seek an increased deficiency.                         





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