T.C. Summary Opinion 2005-118
UNITED STATES TAX COURT
N. THOMAS RYAN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 13239-02S. Filed August 10, 2005.
N. Thomas Ryan, pro se.
Francis Mucciolo and Michael D. Zima, for respondent.
PANUTHOS, Chief Special Trial Judge: This case was heard
pursuant to the provisions of section 7463 of the Internal
Revenue Code in effect when the petition was filed. The decision
to be entered is not reviewable by any other court, and this
opinion should not be cited as authority. Unless otherwise
indicated, all subsequent section references are to the Internal
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Revenue Code in effect at relevant times, and all Rule references
are to the Tax Court Rules of Practice and Procedure.
Respondent determined deficiencies in petitioner’s Federal
income taxes and additions to tax under section 6651(a)(1) and
(2) and section 6654(a), as follows:
Additions to Tax
Year Deficiency Sec. 6651(a)(1) Sec. 6651(a)(2)1 Sec. 6654(a)
1997 $37,341 $8,176 -- $1,629
1998 20,875 4,696 -- 664
1999 27,562 6,201 -- 967
1
The notice of deficiency did not include an amount for this addition.
After concessions1 by the parties, the issues for decision
are: (1) Whether petitioner’s horse training and breeding
activity during 1997, 1998, and 1999 was an activity not engaged
in for profit within the meaning of section 183; (2) whether
petitioner is entitled to joint filing status for married
individuals under section 1(a)(1) for 1997, 1998, and 1999; (3)
whether petitioner is entitled to long-term capital gain
treatment on the 1997 sale of approximately 700 shares of
securities; and (4) whether petitioner received nonemployee
compensation of $10,800 in 1997.
1
Petitioner concedes that he is liable for the additions
to tax under sec. 6651(a)(1) and sec. 6654(a) for the tax years
in issue. Respondent concedes that petitioner is not liable for
additions to tax under sec. 6651(a)(2) for the tax years in
issue.
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Some of the facts have been stipulated, and they are so
found. The stipulation of facts, the stipulation of settled
issues, and the attached exhibits are incorporated by this
reference. Petitioner resided in Brooksville, Florida, at the
time the petition was filed.
At the time the notice of deficiency was issued, petitioner
had not filed Federal income tax returns for 1997, 1998, and
1999. Respondent determined: (1) That petitioner received wage
income for each tax year in issue; (2) that petitioner was
entitled to a standard deduction for married filing separate
status; (3) that petitioner received income on the sale of
certain securities in 1997 which is taxable as short-term capital
gain rates; and (4) that petitioner received nonemployee income
in 1997.
Petitioner does not dispute that he received wage income in
the amounts determined by respondent. Petitioner does, however,
dispute the filing status, the characterization of capital gain
income, and a portion of the omitted nonemployee income.
Immediately before trial, petitioner submitted penciled returns
for the years in issue in which he claimed the following losses
for a horse breeding activity:
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Horse Breeding Activity
Gross
Year Income Expenses Loss1
1997 --- $28,884 ($28,884)
1998 --- 31,878 (31,878)
1999 --- 33,131 (33,131)
1
At trial, petitioner asserted that expenses (and losses) for
1997 and 1998 were $24,327.81 and $32,382.45, respectively.
Respondent asserts that the horse breeding activity did not
constitute an activity engaged in for profit under section 183,
and that petitioner is not entitled to those losses. For
convenience, we will combine our findings and discussion herein.
I. Burden of Proof
Generally, the burden of proof is on the taxpayer. Rule
142(a)(1). Under section 7491, the burden of proof shifts from
the taxpayer to the Commissioner if the taxpayer produces
credible evidence with respect to any factual issue relevant to
ascertaining the taxpayer’s tax liability. Sec. 7491(a)(1).
It appears that the examination of the years in issue
commenced after the effective date of section 7491. Petitioner
has conceded that he has not satisfied any of the criteria of
section 7491(a)(1) or (2). We conclude that the burden of proof
remains on petitioner for the years in issue.
II. General Background
Petitioner was employed as a full-time emergency room
physician during the tax years in issue. He received taxable
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wage income of $229,176 in 1997, $231,587 in 1998, and $276,600
in 1999. Petitioner worked for EMSA Contracting Services, Inc.
(EMSA), during 1997, 1998, and 1999, and for Florida EM-I Medical
Services, Inc. (EM-I), during 1999. He worked 12-hour shifts and
was scheduled to work 12 to 18 shifts each month.
In 1997, petitioner also worked part time as a medical
director for Florida Regional EMS (Florida EMS). In 1998 and
1999, petitioner worked for Health Central (HC).2
During the years in issue, petitioner was married to Janene
Ryan. Petitioner and his wife owned and bred horses.
III. Horse Activity
A. General
The deductibility of a taxpayer’s expenses attributable to
an income-producing activity depends upon whether that activity
was engaged in for profit. See secs. 162, 183, 212. Section 162
provides that a taxpayer who is carrying on a trade or business
may deduct ordinary and necessary expenses incurred in connection
with the operation of the business. Section 212 provides for a
deduction for expenses paid or incurred in connection with an
activity engaged in for the production or collection of income,
or for the management, conservation, or maintenance of property
held for the production of income.
2
The record is unclear regarding the nature of
petitioner’s work at HC.
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Section 183 specifically precludes deductions for activities
not engaged in for profit except to the extent of the gross
income derived from such activities. Sec. 183(a) and (b)(2).
For example, deductions are not allowable for activities that a
taxpayer carries on primarily as a sport or hobby or for
recreation. Sec. 1.183-2(a), Income Tax Regs. For a taxpayer’s
expenses in an activity to be deductible under section 162 or
section 212, and not subject to the limitations of section 183,
the taxpayer must show that he engaged in the activity with an
actual and honest objective of making a profit. Hulter v.
Commissioner, 91 T.C. 371, 392 (1988); Dreicer v. Commissioner,
78 T.C. 642, 645 (1982), affd. without opinion 702 F.2d 1205
(D.C. Cir. 1983); Hastings v. Commissioner, T.C. Memo. 2002-310.
Although a reasonable expectation of a profit is not required,
the taxpayer’s profit objective must be actual and honest.
Dreicer v. Commissioner, supra at 645; sec. 1.183-2(a), Income
Tax Regs. Whether a taxpayer has an actual and honest profit
objective is a question of fact to be resolved from all the
relevant facts and circumstances. Hulter v. Commissioner, supra
at 393; Hastings v. Commissioner, supra; sec. 1.183-2(a), Income
Tax Regs. Greater weight is given to objective facts than to a
taxpayer’s mere statement of intent. Dreicer v. Commissioner,
supra at 645; sec. 1.183-2(a), Income Tax Regs. The taxpayer
bears the burden of establishing the requisite profit objective.
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Rule 142(a); Keanini v. Commissioner, 94 T.C. 41, 46 (1990);
Hastings v. Commissioner, supra.
Petitioner is not entitled to a presumption that his horse
activity is engaged in for profit under section 183(d) because
petitioner’s gross income from his horse activity has not
exceeded deductions for any 2 years in the period of 7
consecutive taxable years ending with the first of the years in
issue. See sec. 183(d). The burden of proof has not shifted to
respondent. It remains on petitioner. See id.
B. Losses From the Horse Breeding Activity
Petitioner’s involvement with horses began in 1996, when he
and his wife purchased Nu Time Spot (NTS), an Appaloosa Stallion,
from a friend. Petitioner bought NTS as a foal. Petitioner
wanted to breed NTS but did not do so immediately, because foals
cannot be bred until they are at least 3 years old. Petitioner
also knew that prospective purchasers wanted older, well-trained
foals. Petitioner believed it was best to obtain broodmares and
breed foals.3 Petitioner and his wife hoped to sell the foals
and offer NTS as a stud.
Regulations promulgated under section 183 provide the
following nonexclusive list of factors which normally should be
considered in determining whether an activity was engaged in for
3
Petitioner had five broodmares and two 2-year-old foals
at the time of trial.
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profit: (1) The manner in which the taxpayer carried on the
activity; (2) the expertise of the taxpayer or his advisers; (3)
the time and effort expended by the taxpayer in carrying on the
activity; (4) the expectation that the assets used in the
activity may appreciate in value; (5) the success of the taxpayer
in carrying on other similar or dissimilar activities; (6) the
taxpayer’s history of income or losses with respect to the
activity; (7) the amount of occasional profits, if any, which are
earned; (8) the financial status of the taxpayer; and (9)
elements of personal pleasure or recreation. Sec. 1.183-2(b),
Income Tax Regs. No single factor, nor the existence of even a
majority of the factors, is controlling, but rather it is an
evaluation of all the facts and circumstances in the case, taken
as a whole, that is determinative. Golanty v. Commissioner, 72
T.C. 411, 426-427 (1979), affd. without published opinion 647
F.2d 170 (9th Cir. 1981); sec. 1.183-2(b), Income Tax Regs.
1. The Manner in Which the Taxpayer Carried On the
Activity
The fact that a taxpayer carries on the activity in a
businesslike manner and maintains complete and accurate books and
records may indicate a profit objective. Sec. 1.183-2(b)(1),
Income Tax Regs.
Petitioner did not keep adequate and accurate records of his
horse breeding activity. He did not describe measures he took
for bookkeeping or discuss a method for recording information
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that would indicate that he carried on the activity in a
businesslike manner. A taxpayer is required to maintain records
sufficient to substantiate deductions that he claims on his tax
return. Sec. 6001; sec. 1.6001-1(a), Income Tax Regs.
Petitioner did not file tax returns for the years in issue, nor
did he seek the advice of an accountant or bookkeeper to maintain
books or records.4
Petitioner commingled the financial affairs of the horse
breeding activity with his personal finances. He paid all the
expenses of the horse activity from his personal account and
maintained no separate financial accounts for the horse activity.
The commingling of funds is an indication that the activity is a
hobby rather than a business for profit. See Ballich v.
Commissioner, T.C. Memo. 1978-497.
To the extent petitioner maintained records of his business
activity, the records were disorganized. He placed canceled
checks and receipts from his horse breeding activity in a box or
in Ziploc bags. Petitioner would store the box or bags in his
4
When this case was first called for trial at a prior
session of this Court, petitioner requested a continuance so that
he could prepare returns for the years in issue. Petitioner’s
request was granted, and the case was scheduled on the next
calendar. One week before trial, petitioner submitted Federal
income tax returns to respondent. Then, at trial, petitioner
requested another continuance in order to adjust the farm
expenses claimed. The request for continuance was denied, and
the trial was held at a date later in the session.
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house, barn, or garage or other places. Petitioner retained some
canceled checks, but his records were incomplete.
Petitioner did not develop a business plan. He never
consulted an accountant or purchased accounting software for his
horse breeding activity. Petitioner did not prepare a written
analysis of the time it would take him to break even or make a
profit.
Petitioner’s wife met with two people in the horse breeding
business. She discussed the financial aspects of their
respective operations and the feasibility of entering into the
horse breeding business. Petitioner did not present any evidence
as to how these discussions affected the conduct of the activity.
Petitioner did not conduct the horse training and breeding
activity in a businesslike manner. This factor weighs against
petitioner.
2. The Expertise of the Taxpayer or His Advisers
A taxpayer’s expertise and extensive study of an activity’s
accepted business and economic practices, or consultation with
experts, may indicate a profit objective. Sec. 1.183-2(b)(2),
Income Tax Regs.
Petitioner did not consult with experts to become
knowledgeable about techniques of training and breeding horses,
nor did he learn the economics of the activity. As previously
indicated, petitioner’s wife spoke with two persons about the
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financial aspects of their respective horse breeding activities.
However, petitioner did not elaborate on those conversations
regarding the advice, if any, or on the economic aspects of horse
training and breeding. Petitioner and his wife may have received
some advice on the economic aspects of horse breeding, but the
facts do not indicate that petitioner received any specific
business advice on how to start and operate a horse breeding
business.
Petitioner’s wife has handled, ridden, and cared for horses
all of her life. Apparently, Mrs. Ryan had gained substantial
experience in the training, breeding, health, and maintenance of
horses since leaving high school. Mrs. Ryan’s experience is not
the same as knowledge of the financial aspects of creating a
profitable horse breeding program. See McKeever v. Commissioner,
T.C. Memo. 2000-288 (taxpayer’s background as a lifelong
horsewoman did not provide sufficient expertise on the economic
aspects of a horse pursuit to indicate a profit objective). This
factor weighs against petitioner.
3. The Time and Effort Expended by the Taxpayer in
Carrying On the Activity
The fact that a taxpayer devotes much of his or her personal
time and effort to an activity may indicate a profit objective,
especially where the activity does not involve substantial
personal or recreational aspects. Id.
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From 1997 through 1999, petitioner worked twelve to eighteen
12-hour shifts each month as a full-time emergency room
physician. Petitioner also worked part time for other medical-
related entities in addition to his full-time work. Petitioner
worked approximately 180 hours each month.
Nevertheless, petitioner spent some of his time working with
his wife in the maintenance and care of their horse breeding
activity. He traveled to horse shows with his wife. He
purchased feed and cleaned, bathed, brushed, and fed the horses.
He took care of the horse farm and ran errands that benefited the
horses. Petitioner’s wife, however, did most of the work
regarding the care of the horses. Petitioner did not use the
horses for more than minimal personal or recreational use. This
factor weighs in petitioner’s favor.
4. The Expectation That the Assets Used in the
Activity May Appreciate in Value
A taxpayer’s expectation that assets such as land and other
tangible property used in an activity may appreciate in value to
create an overall profit may indicate that the taxpayer has a
profit objective as to that activity. Sec. 1.183-2(b)(4), Income
Tax Regs. An overall profit is present if net earnings and
appreciation are enough to recoup losses sustained in prior
years. Bessenyey v. Commissioner, 45 T.C. 261, 274 (1965), affd.
379 F.2d 252 (2d Cir. 1967).
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Petitioner indicated that his primary expectation for a
profit came from the anticipated appreciation in the value of his
horses. He failed to explain the basis of that expectation.
Petitioner knew that it was unlikely that he and his wife would
earn a profit from their horse breeding activity because they
purchased NTS as a foal, and NTS physically could not breed with
a mare for at least 3 years. Petitioner asserted that it would
be another 3 years after NTS was ready for breeding before
petitioner would sell any of the stallion’s foals. This 6-year
timeframe does not include the mare’s 11-1/2 month-gestation
period. Petitioner knew that the sale of a horse from his
breeding activity would not occur until, at least, more than 7
years into the activity.
Furthermore, the record shows that petitioner’s horse
breeding activity produced a history of losses. Petitioner
reported substantial losses for 1997, 1998, and 1999. There is
no record of any receipts for the years in issue or years
following. This factor weighs against petitioner.
5. The Success of the Taxpayer in Carrying On Other
Similar or Dissimilar Activities
Although an activity is unprofitable, the fact that a
taxpayer has previously converted comparable activities from
nonprofitable to profitable enterprises may show a profit
objective. Sec. 1.183-2(b)(5), Income Tax Regs.
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Neither petitioner nor his wife has ever been involved in
any other entrepreneurial ventures. This is a neutral factor.
6. The Taxpayer’s History of Income or Losses With
Respect to the Activity
The fact that a taxpayer incurs a series of losses beyond an
activity’s startup stage may indicate the absence of a profit
objective as to that activity unless the losses can be blamed on
unforeseen or fortuitous circumstances beyond the taxpayer’s
control. Sec. 1.183-2(b)(6), Income Tax Regs.; cf. Golanty v.
Commissioner, 72 T.C. at 427 (horsebreeding activity may be
engaged in for profit despite consistent losses during the
startup phase).
Petitioner attributes part of his losses to a depressed
market due to the September 11, 2001, terrorist attacks.
Petitioner testified that, before 2001, he could have received
$10,000 to $20,000 dollars for a 3-year-old foal, but in 2004,
petitioner believed that a 3-year-old foal would yield a maximum
of $10,000 to $12,000 dollars. Petitioner had several years of
losses because he did not have any 3-year-old foals to sell.
Petitioner had losses totaling $93,893 for tax years 1997,
1998, and 1999 combined. While the events of September 11, 2001,
may have depressed the market, petitioner did not make any sales
or have any foals available for sale during the years in issue.
There is no evidence of any gross receipts from this activity at
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any time before or after the years in issue. This factor weighs
against petitioner.
7. The Amount of Occasional Profits, if any, Which Are
Earned
The amount of profits earned in relation to the amount of
losses incurred, the amount of the investment, and the value of
the assets in use may indicate a profit objective. See sec.
1.183-2(b)(7), Income Tax Regs. Absent actual profits, the
opportunity to earn substantial profits in a highly speculative
venture may be sufficient to indicate that the activity is
engaged in for profit. See id.; see also Dawson v. Commissioner,
T.C. Memo. 1996-417 (taxpayer’s belief that a champion horse
could generate a substantial amount of revenue and
correspondingly large profits may be probative of a profit
objective).
Petitioner speculated that he could have earned substantial
income through breeding NTS. Petitioner purchased NTS because he
was a special stallion, one of two grandchildren of a 10-time,
world champion, Appaloosa horse. When petitioner purchased NTS,
he believed that this stallion could sire foals ranging in value
from $5,000 to $20,000, depending on the foal’s age. Yet
petitioner provided no proof of the Appaloosa breed’s ability to
command a price of $5,000 to $20,000 per foal. This factor
weighs against petitioner.
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8. The Financial Status of the Taxpayer
The fact that a taxpayer does not have substantial income or
capital from sources other than an activity may indicate that the
activity is engaged in for profit. See sec. 1.183-2(b)(8),
Income Tax Regs. The fact that a taxpayer does have substantial
income from sources other than an activity, on the other hand,
may indicate that the activity is not engaged in for profit. The
latter is especially true where losses from the activity generate
substantial tax benefits or where there are personal or
recreational elements involved. Sec. 1.183-2(b)(9), Income Tax
Regs.
Petitioner received approximately $229,176 in 1997, $231,587
in 1998, and $276,600 in 1999 in wages from his work as an
emergency room physician. Petitioner averaged $244,000 per year
as a full-time wage earner over the 3-year tax period. The
salary or income for each tax year in question, which petitioner
hoped to offset by claimed losses, indicates that the activity is
not one engaged in for profit. This factor weighs against
petitioner.
9. Elements of Personal Pleasure or Recreation
The absence of personal pleasure or recreation relating to
the activity in question may indicate the presence of a profit
objective. Sec. 1.183-2(b)(9), Income Tax Regs. The mere fact
that a taxpayer derives personal pleasure from an activity,
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however, does not necessarily mean that he or she lacks a profit
objective with respect thereto. A profit objective may be
present in the latter case if the activity is truly engaged in
for profit as evidenced by other factors.
Petitioner derived some pleasure from the horse breeding
activity (he enjoyed the horses and attended horse shows and
other events with his wife), but we do not find that the
enjoyment rose to the level of recreational activity. Petitioner
did not ride the horses for recreational purposes, although his
wife rode them when she showed the horses at certain horse-
related events. This factor is neutral.
On the basis of the above analysis, we conclude that
petitioner is not entitled to the claimed losses resulting from
his horse breeding activity.
IV. Filing Status
In order to qualify for rates applicable to “Married
Individuals Filing Joint Returns”, an individual must make a
joint return with his or her spouse pursuant to section 6013.
Sec. 1(a)(1). Joint filing status is not permitted unless a
joint return is filed and made a part of the record before the
case is submitted to the Court for decision. Phillips v.
Commissioner, 86 T.C. 433, 441 n.7 (1986), affd. in part and
revd. in part 851 F.2d 1492 (D.C. Cir. 1988); Gudenschwager v.
Commissioner, T.C. Memo. 1989-6 (“If a taxpayer has not filed a
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return by the time his case is submitted for decision, it is too
late for the taxpayer to file a joint return and elect joint
filing status.”).
Petitioner submitted 1997, 1998, and 1999 Federal income tax
returns to respondent approximately 1 week before trial and
before the matter was submitted. On the 1997 and 1999 returns,
petitioner checked the box “married filing joint return”.5 The
returns were signed by petitioner, but not by his wife.
Under certain circumstances, Federal income tax returns may
be considered joint returns if one spouse signs the returns and
checks the box indicating that the returns are joint returns.
Sec. 1.6013-1(a)(2), Income Tax Regs.; see Heim v. Commissioner,
27 T.C. 270, 273 (1956) (where filing status on tax return
indicated married filing joint return, but the taxpayer’s wife
did not sign return, did not object to its filing, or did not
file a separate return herself, it was presumed that the joint
return was filed with the tacit consent of the wife), affd. 251
F.2d 44 (8th Cir. 1958). However, returns signed by just one
spouse will qualify as valid joint returns only if both spouses
intend to file joint returns. Gudenschwager v. Commissioner,
supra.
5
On the 1998 return, petitioner checked the box “married
filing separate returns”. Thus, it is clear petitioner did not
intend to file a joint return for 1998.
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The factors evidencing intent to file a joint return are:
Lack of reason for a refusal to file a joint return, the absence
of objections by the nonsigning spouse, the delivery of tax data
to the husband for the purpose of making the tax return, and the
apparent advantage in filing a joint return. Heim v.
Commissioner, supra.
The Federal income tax returns petitioner submitted to
respondent reported taxable wage income of $223,776 for 1997 and
$274,080 for 1999. Petitioner’s wife received wage income of
$6,288 in 1997 and $9,759 in 1999. The wage income petitioner
reported on the Federal income tax returns does not include the
wage income received by his wife. The returns reflect only
petitioner’s wage income for 1997 and 1999.
There is no evidence that petitioner’s wife intended to file
a joint return with petitioner for 1997 or 1999. We conclude
that petitioner is not entitled to joint filing status for any of
the years in issue. Respondent’s determination is sustained.
V. 1997 Sale of Stock
On November 26, 1997, petitioner sold 700 shares of Barnett
Banks, Inc. stock. Respondent determined in the notice of
deficiency that petitioner had short-term capital gain on the
sale of 700 shares of stock.
Petitioner received proceeds of $49,568 from the sale of the
700 shares of stock. The parties stipulated that petitioner had
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a cost basis of $17,843.15 (including brokerage fees and
commissions) on the first 541.4054 of the 700 shares sold.
Petitioner and respondent did not stipulate the cost basis for
the remaining 158.5946 shares sold. Petitioner substantiated his
claim that the 700 shares of stock were purchased during the
1980s. Petitioner presented credible testimony that he paid for
the stock through automatic deductions from his checking account
over a 5-year period. We are satisfied that petitioner purchased
the 700 shares of stock and held them for more than 1 year;
therefore, petitioner is entitled to long-term capital gain
treatment on the sale of the 700 shares of stock. See sec.
1222(3).
VI. 1997 Nonemployee Compensation
Respondent determined that petitioner received $10,800 in
nonemployee compensation from Florida EMS in 1997. The parties
stipulated that petitioner received nonemployee compensation in
1997 from Florida EMS of “at least” $5,400. Petitioner asserts
that Florida EMS mistakenly sent a duplicate Form 1099-MISC,
Miscellaneous Income, to respondent showing $5,400. Petitioner
presented credible testimony that he received Form 1099 income
during 1997 of $5,400, and not $10,800. Respondent did not
present a copy of a second Form 1099 showing $5,400, but rather
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relied on an IRPTR transcript6 of account reflecting receipt of
two Forms 1099 showing $5,400 each.
Petitioner credibly testified that the second Form 1099 was
a duplicate. At trial, petitioner accepted responsibility for
failing to file his Federal income tax returns and failing to
keep adequate records of the horse breeding activity. He agreed
to all omitted income, except the additional $5,400 reflected on
Form 1099. We conclude, on this record, that petitioner did not
receive additional other income of $5,400 as determined by
respondent.
Reviewed and adopted as the report of the Small Tax Case
Division.
To reflect the foregoing,
Decision will be entered
under Rule 155.
6
The document is a Certificate of Official Record,
Information Returns Master File Transcript. Respondent was
unable to provide any detail as to the source of the $5,400
reflected in the transcript.