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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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