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reported a net loss of $14,719 for 2001, $12,041 for 2002, and
$13,796 for 2003. The net losses included expenses claimed for
the business use of their home, $455 for 2002 and $398 for 2003.
Petitioners’ net loss from business in 2003 included a deduction
of $150 for meals and entertainment expenses.
Respondent initially chose petitioners’ 2001 and 2002 tax
returns for examination. The examination was later extended to
include the 2003 return. Petitioners failed to provide to the
examiner any books or records for the business save for
reconstructed mileage for 2001 and 2002. Petitioners produced
copies of Forms 1098, Mortgage Interest Statement, for 2001
showing mortgage interest of $9,384.63, and for 2002 showing
mortgage interest of $9,254.42 and real estate taxes of $945.12.
Respondent adjusted petitioners’ mortgage interest expenses for
2001 and 2002 and their real estate tax deduction for 2002 to
comport with the amounts reported on the Forms 1098. Respondent
also increased petitioners’ Schedule C income to “equal” the
total amount of expense deductions,1 but for 2003 respondent
disallowed the deduction for meals and entertainment expenses.
Discussion
Generally, the Commissioner’s deficiency determinations are
1Respondent’s adjustments increased petitioners’ income for
2002 and 2003 to equal their claimed business deductions except
for office-in-home expenses, in effect allowing an “excess”
deduction for office-in-home expenses as claimed by petitioners.
There was no deduction for office-in-home expenses in 2001.
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Last modified: November 10, 2007