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they overstated their mortgage interest expense as a result of
their participation in the Bauspar program.
B. Examination of the Thompsons’ 1978-1981 Returns
The Thompsons experienced audit problems with their 1978 tax
return that were due, in part, to their failure to attach to the
return a Form W-2, Wage and Tax Statement, showing the amount of
income tax that Continental Airlines had withheld from Mr.
Thompson’s wages. In early to mid-1986, the Thompsons’ personal
counsel, Samuel M. Huestis (Huestis), negotiated a settlement of
their income tax liability for 1978. The record does not
disclose the terms of that settlement.
On May 5, 1983, the Los Angeles District Director issued a
statutory notice of deficiency with respect to the Thompsons’
1979 taxable year, disallowing Kersting deductions of $39,477 and
determining a deficiency in tax of $18,161. The notice of
deficiency also determined a negligence addition of $908 under
section 6653(a). On July 11, 1983, the Thompsons filed a pro se
petition in this Court seeking a redetermination of the
deficiency and addition.
On June 13, 1984, the Honolulu District Director issued a
statutory notice of deficiency with respect to the Thompsons’
1980 taxable year, disallowing Kersting deductions of $72,840 and
determining a deficiency in tax of $24,838. On September 4,
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