Gary E. and Rebecca L. Hurley - Page 3

                                        - 2 -                                         
               Respondent determined deficiencies of $4,938 and $6,838 in             
          petitioners’ Federal income taxes for the years 1998 and 1999,              
          respectively, and the accuracy-related penalty under section                
          6662(a) of $1,367.60 for 1999.                                              
               After concessions by respondent,2 the issues remaining for             
          decision are:  (1) Whether petitioners are entitled to exclude 30           
          percent of petitioner husband’s salary from gross income due to             
          his 30 percent disability; (2) whether petitioners are entitled             
          to an additional mortgage interest deduction of $5,567 under                
          section 461(g)(2) for 1999; and (3) whether petitioners are                 
          liable for the section 6662(a) penalty for 1999.  One other                 
          adjustment, petitioners’ miscellaneous itemized deduction, is a             
          computational adjustment that is resolved by the Court’s holding            
          on the other issues.                                                        
               Some of the facts were stipulated.  Those facts, with the              
          exhibits annexed thereto, are so found and made part hereof.                
          Petitioners’ legal residence at the time the petition was filed             
          was Paso Robles, California.                                                

               2Respondent incorrectly amortized points petitioners paid in           
          the refinancing of their home mortgage over a 30-year period and            
          based part of the $5,567 disallowed interest on that calculation.           
          At trial, respondent conceded that petitioners had a 15-year                
          mortgage, and the points paid should be amortized over a 15-year            
          period.  In addition, respondent conceded that petitioners were             
          entitled to an additional deduction of $866 in interest for 1999            
          based on evidence petitioners presented before trial.                       

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