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The issues for decision are:
(1) Whether petitioners had embezzlement income during
taxable years 1987, 1988, and 1989. We hold that they did not.
(2) Whether the amount of petitioners' unreported income
for taxable years 1987, 1988, and 1989 should be calculated using
a formula advanced by respondent or a similar formula advanced by
petitioners. We hold that the amount of unreported income is to
be calculated using the formula proposed by petitioners.
(3) Whether petitioners are liable for additions to tax and
the penalty for fraud under section 66531 for 1987 and 1988 and
under section 6663 for 1989. We hold that Anthony Walters is
liable for the section 6653 addition to tax for taxable years
1987 and 1988 and the section 6663 penalty for taxable year 1989;
Linda Walters is not liable for such additions or penalty.
(4) Whether petitioners are liable for the addition to tax
under section 6661 for a substantial understatement of income tax
for taxable years 1987 and 1988. We hold that they are to the
extent stated herein.
FINDINGS OF FACT
Some of the facts have been stipulated and are found
accordingly. The stipulation of facts and the attached exhibits
are incorporated herein. At the time the petition was filed,
1Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect during the years in issue,
and all Rule references are to the Tax Court Rules of Practice
and Procedure.
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