Bill J. Malone, Jr. and Sarah J. Malone - Page 8

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               On a Schedule C, Profit or Loss From Business, included with           
          each of petitioners’ joint Federal income returns for 1997                  
          through 2001, petitioners reported income and expenses from                 
          Malone Music as follows:                                                    
                         Gross               Total          Total                     
          Year      Income Reported     Expenses Claimed    Losses Claimed            
          1997      $550                $27,898             $27,348                   
          1998      1,777               28,074              26,297                    
          1999      1,917               8,553               6,636                     
          2000      2,559               23,123              20,564                    
          2001      5,758               26,060              20,302                    
               The gross income from Malone Music reported on the Schedules           
          C for the years in issue is primarily attributable to services              
          provided by H and R.4  The deductions claimed on the Schedules C            
          for the years in issue consist almost entirely of amounts paid              
          for music lessons for the Malone children and the cost of musical           
               In the notice of deficiency for each year in issue,                    
          respondent disallowed all of the deductions claimed on the                  
          Schedule C and imposed a section 6662(a) accuracy-related                   
          penalty.  Other adjustments made in the notice of deficiency are            
          computational and need not be addressed.                                    

               4  A small amount of Malone Music’s income for each year in            
          issue is attributable to services provided by B.                            
               5  For example, the only deduction claimed on the 1999                 
          Schedule C ($8,553) is for “music instruction” expenses of the              
          Malone children.  In 1998, petitioner spent $11,560 for two                 
          violins.  The cost of those violins is claimed as a deduction on            
          the Schedule C included with petitioners’ 2000 return.                      

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