Edward W. and Edith M. Arnold, et al. - Page 14

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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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