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separate as his filing status on his 1990 return and reported his
adjusted gross income as $77,814. Petitioner's 1988 and 1989
returns were prepared by H&R Block. Petitioner provided the
preparer with amounts to be used on the returns for income and
expense, but he did not supply any supporting documentation.
Petitioner's 1988, 1989, and 1990 returns each included a
Schedule C, Profit or Loss From Business, that listed the
business as Stardust. Petitioner claimed income and expense
items for Stardust on the Schedules C. For 1988, petitioner
claimed an expense of $6,540 for commissions. Petitioner issued
Forms 1099-MISC to three models in 1988 for total commissions of
$6,030. For 1989, petitioner claimed an expense of $17,830 for
wages. Petitioner issued Forms 1099-MISC to six models in 1989
for total wages of $16,530.
During the years in issue, petitioner's wife, Kathy Hardy
(Mrs. Hardy), worked at Clairol. She filed her Forms 1040 for
1988 and 1989 and claimed as her filing status married filing
separate. Her adjusted gross income for 1988 and 1989 was
$17,996 and $19,890, respectively.
Petitioner, Mrs. Hardy, and Mrs. Hardy's daughter resided at
petitioner's parents' home in Oxnard, California, from September
1986 through July 1988. On July 9, 1988, petitioner and
Mrs. Hardy executed a residential rental agreement to rent a home
in Oxnard for $930 per month. As part of the rental agreement,
petitioner paid the new landlord $3,143 for the first and last
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