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During its fiscal tax year ended October 31, 1997, Red Wing
sold a tugboat for $1.5 million. This sale was reported on Form
4797, Sale of Business Property, attached to its Form 1120S for
that year. Red Wing also claimed a $701,410 interest paid
deduction on that return. The parties agreed that the $701,410
interest paid deduction was improper, and Red Wing did not pay
any of the claimed deduction during its fiscal tax year ended
October 31, 1997.
Notices of Deficiency and Procedural Background
Respondent issued separate notices of deficiency to
petitioners on August 8, 2001, with regard to their 1997 joint
Federal income tax return, and on October 23, 2002, with regard
to their 1998 joint Federal income tax return. In their timely
joint petitions, petitioners asserted that Ms. McClelland was
entitled to innocent spouse relief under section 6015(b), or in
the alternative, under section 6015(f).
On April 21, 2003, Ms. McClelland had Mr. McClelland served
with a Petition for Dissolution of Marriage. In Minnesota, the
term “dissolution” is synonymous with “divorce”. Minn. Stat.
Ann. sec. 518.002 (West 2003). The record does not reflect that
the dissolution of marriage was finalized by the date of trial.
Ms. McClelland retained separate counsel in this case after she
served Mr. McClelland with a Petition for Dissolution of
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