J. Ramsay Farah and Elizabeth Farah - Page 12

               On September 24, 2001, petitioners had most of the                     
          furnishings of the Berlin house packed and shipped to Hagerstown.           
          On October 27, 2001, both the Berlin house and the South Point              
          Road lot were sold to one buyer for a total of $1,300,000.  At              
          the closing, the settlement company prepared separate form HUD-1            
          settlement sheets for the Berlin house and the South Point Road             
          lot.  Petitioners did not know there would be separate settlement           
          sheets for the two properties until the day of the closing.  The            
          separate settlement sheets allocated $800,000 of the sales                  
          proceeds to the Berlin residence and $500,000 to the South Point            
          Road lot.  The allocation of the $1,300,000 between the two                 
          properties was not negotiated by petitioners or the buyer.  The             
          settlement sheet for the South Point Road lot listed the Family             
          Partnership as the owner.  No change in ownership of the South              
          Point Road lot was recorded between its purchase in 1991 by the             
          Family Partnership and its sale in 2001.                                    
          Petitioners’ 2001 Return and the Notice of Deficiency                       
               On August 15, 2002, petitioners filed their joint Form 1040,           
          U.S. Individual Income Tax Return, for 2001.  On the Schedule C,            
          Profit or Loss From Business, attached to their return,                     
          petitioners reported gross receipts of $16,798 and expenses of              
          $93,145, resulting in a loss of $76,347.  Some of the expenses on           
          the Schedule C related to Dr. Farah’s employment with Sierra.               
          Dr. Farah did not maintain his own records for his work                     

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