Joseph D. & Elizabeth M. Dunne - Page 14

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               On October 7, 2005, respondent mailed petitioners a                    
          statutory notice of deficiency for 1997 and 1999.  Respondent               
          determined that Mr. Dunne remained a 50-percent shareholder of              
          FRC throughout 1997 and that petitioners should have reported Mr.           
          Dunne’s pro rata share of FRC’s items of income and loss as shown           
          on the Schedule K-1 for 1997.                                               
               Regarding 1999, respondent determined that $20,000 of legal            
          expenses that petitioners claimed as a deduction on their                   
          Schedule C, Profit or Loss From Business, should be disallowed.             
          However, this amount should be included as a miscellaneous                  
          itemized deduction on petitioners’ Schedule A, Itemized                     
          Deductions.  These legal expenses related to Mr. Dunne’s disputes           
          over the settlement agreement.  Respondent further determined               
          that petitioners realized, but failed to report on their 1999               
          return, a $15,000 capital gain.  However, there is no evidence in           
          the record as to the source of this alleged capital gain.                   
               Respondent stated that Mrs. Dunne was not entitled to relief           
          from joint liability under section 6015 for either 1997 or 1999.3           
               Finally, respondent determined that petitioners were liable            
          for additions to tax for failure to file timely income tax                  
          returns for both 1997 and 1999.                                             

               3 Respondent found that there were no grounds to grant Mrs.            
          Dunne relief for tax year 1999 because she did not submit a Form            
          8857 for that year, and Mrs. Dunne has conceded this issue.                 

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