Donald P. and Margie C. Osborne - Page 3

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          assets relating to 2001 and 2002.  In addition, Ms. Miller used a           
          bank deposits analysis to determine petitioners’ unreported                 
               On December 6, 2004, respondent issued petitioners a notice            
          of deficiency relating to 2001 and 2002.  In the notice of                  
          deficiency, respondent determined that petitioners were not                 
          entitled to portions of the deductions claimed on their returns,            
          had failed to report gross receipts income, had improperly                  
          calculated cost of goods sold, and were liable for section                  
          6662(a) accuracy-related penalties.                                         
               On March 11, 2005, petitioners, while residing in Colorado,            
          filed their petition with the Court.                                        
               Petitioners contend that they are entitled to the Schedule C           
          deductions relating to 2001 and 2002 for Don Osborne Enterprises.           
          Section 162(a) allows as a deduction all the ordinary and                   
          necessary expenses paid or incurred during the taxable year in              
          carrying on a trade or business.  Petitioners must maintain                 
          sufficient records to substantiate the deductions.  See sec.                
          6001; sec. 1.6001-1(a), Income Tax Regs.                                    
               At trial, petitioners produced canceled checks, credit card            
          statements, insurance records, and other documentary evidence               
          that respondent had previously taken into account in the                    

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