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income from real estate rentals; and (b) was derived from Mr.
Arnold’s personal services. Thus, petitioners received $17,995
in self-employment income that Pacific paid to Mr. Arnold in 2001
for labor provided by Mr. Arnold. We sustain respondent’s
determination that the $17,995 that petitioners reported as
leased payroll income is self-employment income.
2. Whether Petitioners May Deduct $28,067 As Leased
Payroll Expenses
Petitioners contend that they may deduct the following
$28,067 in expenses related to their leased payroll activity:
(a) $14,396 for labor; (b) $10,471 for interest; and (c) $3,200
for repairs and improvements. We disagree for reasons stated
below.
a. Labor Expenses
Petitioners contend that Mr. Arnold paid $14,396 for labor
in 2001. Petitioners rely on Forms W-2, Wage and Tax Statement,
and Forms 1099-MISC, Miscellaneous Income, showing payments made
to various individuals in 2000. A taxpayer may deduct ordinary
and necessary expenses paid or incurred during the taxable year
in carrying on any trade or business. Sec. 162(a).
The forms have several different employer identification
numbers (EIN), none of which match petitioners’ Social Security
numbers. The forms do not show that either petitioner paid
$14,396 for labor or that the payments relate to Mr. Arnold’s
leased payroll activity. Petitioners do not explain why 2000
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