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etc., for 2001 reported petitioner’s distributive share of KCP
losses was $31,689.7 Petitioner deducted his share of the losses
on his 2001 Federal income tax return. From 1990 through 2003,
KCP did not generate a profit.
E. The Audit
In July 2004, respondent began the audit of petitioner’s
2001 return. Respondent requested documentation from petitioner:
(1) Establishing that he owned the medical equipment including
purchase invoices, settlement sheets, and receipts; (2)
substantiating the medical equipment’s FMV and depreciable basis;
(3) identifying bank accounts used in his medical equipment
rental business including the bank account records; and (4)
substantiating his adjusted basis in KCP.
To substantiate his basis in the medical equipment,
petitioner provided a handwritten depreciation schedule for the
medical equipment titled “Depreciation 2005”8 with no supporting
documentation other than a copy of the promissory note for the
loan from Farmers Bank. Petitioner also provided a Form 1099-
MISC, Miscellaneous Income, for 2001 from KCPI indicating it had
paid $16,662 to petitioner as rent for its use of the medical
equipment in 2001. This form was not filed with the IRS.
7 Schedule E loss of $31,337 + Schedule F loss of $13,933
($45,270) x petitioner’s 70 percent ownership (.70) = $31,689.
8 Although the schedule was titled “Depreciation 2005”, it
listed the medical equipment depreciation deduction amounts from
2001 through 2006.
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