Ramiro and Maria Martinez - Page 3

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          her principal business or profession was housekeeping and that              
          she received gross receipts and a net profit of $3,790.                     
          B.   The Notice of Deficiency                                               
               On January 26, 2004, respondent issued a Notice of                     
          Deficiency in which he adjusted petitioners’ business income from           
          $14,840 to $20,710.  Respondent adjusted petitioners’ business              
          income based on Forms 1099 submitted to the Internal Revenue                
          Service by third-party payers.  The Forms 1099 provided as                  
               Payer of income      Payee of income    Amount paid                    
               Life Bank                Ramiro Martinez      $2,000                   
               Dr. Yury Geylikman       Ramiro Martinez     3,000                     
               Alpa Construction, Inc.  Ramiro Martinez       5,020                   
               Svetella Design, Inc.    Ramiro Martinez     3,750                     
               Fresh Paint Art                                                        
               Advisor, Inc.          Maria Martinez        3,790                     
               County of Los Angeles                                                  
               Auditor Controller     Maria Martinez        3,150                     
               Total Amount                                                           
               Reported                                     20,710                    
          As a result of his adjustment to petitioners’ business income,              
          respondent also adjusted petitioners’ self-employment tax, self-            
          employment tax deduction, and earned income credit.  Petitioners            
          acknowledge that they received the amounts reported on the Forms            
          C.   Mr. Martinez’s Self-Employment Income                                  
               Mr. Martinez was paid for his construction work in                     
          installments by check.  Mr. Martinez testified that he would cash           
          the checks he received and divide the proceeds with other workers           

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