I am sorry that you are involved in an issue where the IRS has apparently taken a position that is different than the interpretation of the rules that I received from two experts qualified to deal with IRS audits. I can't provide answers to you on this question where the additional information you have provided has changed the situation as I understood it. Due to differing opinions between experts here at Just Answer, I must withdraw from this question and not provide further information. Again, I apologize that you have become involved in a disagreement between experts, but I can't provide any help to you.
I am sorry that I gave you the impression that I was upset at you. I apologize for that. Please do not try to pay me. You have a very difficult question that is open to multiple interpretations between tax professionals and probably between different IRS agents. Unfortunately, the IRS' current interpretation will probably be the one that counts, because they have the power to enforce their opinion. At Just Answer, we try really hard not to argue different opinions in front of a customer and I certainly don't want you to be caught in an argument. I have been following your discussions with other experts and had I known the information that has come out of those discussions, I wouldn't have tried to answer your question. Since your tax returns that are being audited are from 2005, 2006, and 2007; the applicable tax laws are those in place in those years. I don't have the information from those years easily available, so I can't answer your question with confidence that the information from 2009 that I used in my original answer was applicable in the years you filed your tax returns.
I have asked our customer service people to review your questions and find a way to resolve this issue that is acceptable to you. I apologize that your questions have become a forum for different experts' opinions of the interpretation of the same data. Hopefully, our customer service people can resolve the problem to your satisfaction. But you have been nothing but kind and courteous to everyone throughout a difficult process and I thank you for that. You don't owe me anything since my answer was based on the information in the 2009 issue of Publication 936, which is not applicable to your problem in 2005.