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the Company had paid petitioner in 2001 the above $148,744 as
nonemployee compensation.
On April 3, 2002, petitioners signed and filed with
respondent their 2001 joint Federal income tax return on which
petitioners reported no income and no legal fees with respect to
petitioner’s employment discrimination lawsuit and the
arbitration award.
On October 6, 2003, respondent mailed to petitioners a 30-
day letter proposing to include in petitioners’ income for 2001
the $148,744 reflected by the payments made by the Company in
2001 on the arbitration award. Also, in the 30-day letter,
respondent, apparently for lack of substantiation, proposed to
deny petitioners any deduction for legal fees relating to the
arbitration award.
On February 2, 2004, respondent mailed to petitioners a
notice of deficiency in which respondent treated as petitioner’s
“other income,” not as Schedule C income, the $148,744 the
Company paid in 2001 on the arbitration award and in which
respondent, for apparent lack of substantiation, did not allow
any deduction for legal fees relating to the arbitration award.
On February 3, 2004, petitioners signed and filed with
respondent an amended joint Federal income tax return for 2001 on
which petitioners reported as income on a Schedule C the $148,744
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