Wayne Payne and Dorene J. Payne - Page 17

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          in 1994 by the amount stated in the notice of deficiency.4  See             
          A.J. Concrete Pumping, Inc. v. Commissioner, supra.                         
          IV. HRDC’s Deductions                                                       
               Petitioners next argue that Mr. Payne received the cash from           
          the extras in lieu of rent payments from HRDC for its office                
          space, which petitioners owned in their personal capacities.  On            
          their personal income tax return for 1994, petitioners reported             
          rental income of $23,241 from HRDC for the use of the office                
          space, but HRDC did not claim a corresponding deduction for rent            
          paid on its 1994 return.  As a result, respondent reduced                   
          petitioners’ income for 1994 by $23,241.  At trial, Mr. Gunderson           
          testified that he completed the return on the basis of                      
          information given to him by HRDC, which did not include canceled            
          checks for rent paid, and that it was a mistake to include the              
          income on petitioners’ return.  Mr. Payne testified that there              
          were often times that HRDC owed rent to petitioners but could not           
          afford to pay it, such as in 1994.  He claimed that he thought              
          the amount reported as rental income on the 1994 return was                 

               4The amount of the understatement determined in the notice             
          of deficiency is $222,735.  It is unclear how respondent arrived            
          at this figure, since the individual adjustments result in an               
          understatement of $232,565.56 ($215,039.34 unreported income plus           
          $20,526.22 disallowed deduction).  The difference does not appear           
          to be the result of respondent’s negative adjustment to                     
          petitioners’ rental income, because that adjustment was made to             
          petitioners’ adjusted gross income, not HRDC’s income.  Because             
          respondent argues only the figure in the notice of deficiency,              
          petitioners are liable for tax on the lower amount.                         

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