- 8 -
and second, petitioner did not sell all of the items included in
the cost of purchases, due to theft loss and unsold inventory.2
There is no dispute in this case that petitioner used the
cash basis method of accounting for his business, and that he was
not required to take into income any accounts receivable that
were not paid (and therefore were not actually or constructively
received) during the years in issue. See sec. 446(c)(1);
Fankhanel v. Commissioner, T.C. Memo. 1998-403; sec. 1.446-
1(c)(1)(i), Income Tax Regs. In the notice of deficiency,
respondent determined that petitioner had unpaid accounts
receivable of $7,393 in 1993 and $2,517 in 1994. Petitioner,
however, testified that he had unpaid accounts receivable in the
amount of $25,000 in total during the years in issue.
Petitioner’s testimony was credible, and we accept it.
Accordingly, we estimate and find that he had unpaid accounts
receivable in the amount of $12,500 in each of the years in
2 In addition, our finding that respondent’s computation of
petitioner’s gross profit contains errors is buttressed by the
fact that the weight of other evidence in this case goes against,
and we do not believe, the conclusion that petitioner earned
profits of the size determined by respondent during the years at
issue. We found petitioner to be an honest and forthright
witness. His testimony was plausible. He closed down the
service station before the end of the second year in issue
because it was not profitable. Almost 4 years later, he was
still indebted to his suppliers and attempting to repay them.
There is not a scintilla of evidence that petitioner’s net worth,
bank accounts, life style, or spending habits were altered in
such a way as to suggest he was skimming cash from the business.
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 Next
Last modified: May 25, 2011