Eddie M. and Cynthia L. Chandler - Page 7

                                   - NEXTRECORD  -                                    
               Petitioners executed their income tax return for 1990 on               
          June 6, 1991.  The return was received by respondent's Service              
          Center in Memphis, Tennessee, on June 10, 1991.                             
               In the notice of deficiency, respondent determined that                
          petitioners failed to report accurately their income on their               
          income tax returns for 1989 and 1990.  Accordingly, respondent              
          used an indirect method in order to reconstruct petitioners'                
          income for those years.  Specifically, respondent used the source           
          and application of funds method and determined that petitioners             
          understated their income (or overstated their expenses) on their            
          1989 and 1990 income tax returns by $11,149 and $15,236,                    
          respectively.  Respondent determined these amounts as follows:              


                                  Taxable Year 1989                                   
          Funds Available                                                             
               Wages - per return                                $20,907              
               Interest income - per return                          749              
               Unemployment compensation - per return                145              
               Miscellaneous income - per return                   1,800              
               Interest income - credit union                         67              
               Loan                                               15,000              
               State tax refund                                       95              
               Federal tax refund                                    791              
               Credit union acct #11957 (balance on 1/1/89)          194              
               Credit union share acct #11246 (balance on 1/1/89)  2,884              
               Credit union acct #11246 (balance on 1/1/89)        8,462              
               Sale of truck - oral testimony                        250              
               Sale of 4-wheeler                                   3,000              
               Sale of land to brother                             5,000              
               Total funds available                              59,344              
          Expenditures                                                                
               Federal tax - per W-2                              $1,226              




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