- 4 -
resigned from this position and opened his own law practice in
1979. Edward’s law practice focused almost exclusively on
personal injury cases. At all relevant times, Edward’s law
practice was operated as a sole proprietorship.
B. 1987 Return and Audit Thereof
During 1989, respondent audited petitioners’ 1986 and 1987
joint tax returns.4
On their 1987 tax return, petitioners reported $6,274
interest income and $60,677 net profit from Edward’s law
practice. On the 1987 Schedule C, petitioners reported $388,000
gross receipts, $18,500 cost of goods sold, and $308,823
deductions, leading to the $60,677 net profit. On the 1987 Form
1040, petitioners reported $3,866 chapter 1 income tax, $5,387
chapter 2 self-employment tax, $502 addition for underpayment of
estimated tax, and no withholding or other payments, for a total
of $9,755 owed. Petitioners timely paid this $9,755.
Respondent proposed adjustments to petitioners’ 1987 taxable
income, and a deficiency and additions to tax as shown in table
1.
4 We do not make further findings as to 1986 because the
parties have stipulated that the $69,617 item which is the basic
adjustment in the instant case is entirely interest on the
underpayment of petitioners’ 1987 tax liability.
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