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$27,000 payment.6 The 2002 return reported as income the
$400,000 settlement fee that had been paid to petitioner by Bank
of America and included a Schedule C, Profit or Loss From
Business, relating to an activity with the principal business
purpose described as “Real Estate Investments”. The return
reflected a loss of $31,261 from the Schedule C activity.
Petitioners’ 2002 Federal income tax return was selected for
examination. They were issued information document requests by
the IRS and were requested to substantiate the deductions claimed
on Schedule C of their 2002 return. When petitioners did not
provide the requested documents timely, respondent issued a 30-
day letter proposing to disallow all of the claimed Schedule C
expenses. Petitioners protested the proposed deficiency and
engaged the services of an enrolled agent; however, the agent was
unable to resolve the matter with respondent’s Appeals Office.
Respondent then issued to petitioners a notice of deficiency
determining a deficiency of $14,241 in their Federal income tax
for 2002. In the notice of deficiency, respondent disallowed all
of petitioners’ claimed Schedule C deductions for 2002 for the
reason that
Since you did not establish that the business expense
shown on your tax return was paid or incurred during
6The unpaid portion of the $94,659 is not at issue in this
case, and there are indications in the record that petitioners
made subsequent payments on the 2002 liability.
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Last modified: November 10, 2007