Larry J. and Sherilyn Wadsworth - Page 2

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                                     Background                                       
               Petitioners jointly filed Federal income tax returns for               
          2001 and 2002.  Petitioners attached a Schedule E, Supplemental             
          Income and Loss, to each return.  On their Schedule E for 2001,             
          petitioners reported $534,424 of total income.  The only item               
          reported on the Schedule E was nonpassive income from Gold Coast            
          Medical Services (Gold Coast), a partnership.  On their Schedule            
          E for 2002, petitioners reported $345,546 of total income.  As in           
          2001, the only item petitioners reported on their 2002 Schedule E           
          was nonpassive income from Gold Coast.                                      
               During February 2004 petitioners prepared and filed Forms              
          1040X, Amended U.S. Individual Income Tax Return, for 2001 and              
          2002.  On the Form 1040X for 2001, petitioners reported a                   
          $990,700 reduction in adjusted gross income, as well as                     
          associated increases in exemptions and itemized deductions.  On             
          the Form 1040X for 2002, petitioners reported a $165,116                    
          reduction in adjusted gross income, as well as associated                   
          increases in exemptions and itemized deductions.  Petitioners               
          attached amended Schedules K-1, Partner’s Share of Income,                  
          Credits, Deductions, etc., to their Forms 1040X for 2001 and                
          2002.  The amended Schedules K-1 reveal that the sole cause for             
          the reduced income, increased exemptions, and increased itemized            
          deductions reported on petitioners’ 2001 and 2002 Forms 1040X was           
          a reduction in petitioner Larry J. Wadsworth’s (Mr. Wadsworth)              






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