Gary C. and Maru E. Johansen - Page 5

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          Deductions, and on their Schedule C, Profit or Loss From                    
               By letter dated September 14, 2004, respondent sent to                 
          petitioners a letter of proposed deficiency (30-day letter),                
          along with an examination report.  The 30-day letter notified               
          petitioners that they had a right to request a conference with an           
          Appeals officer if they did not agree with the changes shown on             
          the examination report.                                                     
               By letter dated September 27, 2004, TCO Harris informed                
          petitioners that he was reluctant to issue a statutory notice of            
          deficiency without a reply to the proposed changes from                     
          petitioners.  He offered petitioners an opportunity to discuss              
          the proposed adjustments in the examination report.  TCO Harris             
          also stated in the letter that he would recommend the issuance of           
          a notice of deficiency if petitioners failed to respond.                    
               By a notice of deficiency dated January 4, 2005, respondent            
          determined for 2002 a deficiency in petitioners’ Federal income             
          tax of $14,220 and a section 6662(a) accuracy-related penalty of            
          $2,844.  The notice also asserted computational adjustments for             
          tuition and fees, self-employment adjusted gross income, self-              
          employment deduction, and an additional tax for early withdrawal            
          from an individual retirement account.                                      
               In early January of 2005, petitioners retained a C.P.A.,               
          Martin A. Kapp (Mr. Kapp), to file a petition with the Court and            
          to assist them in negotiating with respondent.                              

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