Robert A. & Gerri M. Smith - Page 4

                                        - 4 -4                                        

          petitioners that they would not be allowed to reopen their                  
          business until they paid their payroll tax delinquencies and                
          filed their 1990, 1991, and 1992 Federal income tax returns.                
               The accounting firm of Faw, Casson, & Co., LLP (Faw),                  
          prepared petitioners' 1990, 1991, and 1992 returns and filed them           
          on January 5, 1994.  On each return, the activities of both                 
          businesses are combined and reported under the name National                
          Distributors; accrual is designated as the method of accounting;            
          and cost is designated as the method of valuing closing                     
          inventory.  Petitioners failed to provide Faw with sufficient               
          information to calculate accurately gross receipts and cost of              
          goods sold.  As a result, the return entries were based largely             
          on estimates (e.g., gross receipts were ascertained by analyzing            
          bank deposits).  Each return contains the following statement:              
               Amounts contained in this return were obtained from the                
               best available information.  In certain cases this                     
               includes estimates.  As additional / better information                
               becomes available this return may be amended.                          
                                                                                     
               On November 8, 1994, petitioners filed amended returns for             
          1990, 1991, and 1992.  Each amended return contains the following           
          statement:                                                                  
               Taxpayers' original Form 1040 was prepared using                       
               estimates where data was not available.  Missing                       
               information has been obtained and reviewed and the                     
               original figures have been adjusted accordingly. * * *                 
          Petitioners, on their amended returns, designated accrual as the            
          method of accounting and cost as the inventory method.  On June             





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