-5-
II. Disallowed Deductions and Other Amounts Claimed by
Petitioners
A. Interest
On Schedule E of their 2002 return, petitioners deducted
$10,045 in interest. Neither petitioner paid any interest to
PCI.
B. Labor Expenses
On Schedules E of their 2002 and 2003 returns, petitioners
deducted $16,757 and $24,171, respectively, of labor expenses.
Respondent concedes that petitioners paid $3,122.52 in labor
expenses for 2003 (attributable to services performed by William
Ray).
C. Western Timber Farms, Inc.
On each of their 2002 and 2003 returns, petitioners claimed
a Schedule E loss relating to an entity known as Western Timber
Farms, Inc.
D. Orion: Cost of Goods Sold/Capital Loss
On Schedule C, Profit or Loss From Business, of their 2002
return, petitioners claimed $40,000 in cost of goods sold related
to Orion Venture (Orion). The “Principal business or
professional activity code” entered on the Schedule C for Orion
is 523900, which the Schedule C instructions state is for “Other
financial investment activities (including investment advice)”.
On their 2002 and 2003 returns, petitioners indicated that
they did not have an interest in a financial account in a foreign
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