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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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Last modified: March 27, 2008