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Petitioner admits that her family maintained a comfortable
lifestyle during 1987 and 1988; she estimates that her personal
and family living expenses for 1988 equaled $104,515. The
majority of these expenses were paid by checks drawn against Mr.
French’s personal account. Some expenses, however, were paid by
petitioner.
On their tax return for 1987, petitioner and Mr. French
reported $804,282 in gross rental receipts and $598,457 in
salaries and wages. The following year, 1988, petitioner and Mr.
French reported $414,715 in gross rental receipts and $79,500 in
salaries and wages. The correct amount of gross rental receipts
for 1988 is $737,200. It has been stipulated that Mr. French was
not aware of the discrepancy between the actual and reported
amounts of gross rental receipts for 1988. The couple reported
$223 of interest income in 1987 and $18,021 of interest income in
1988.
B. Mr. French’s Business Activities
During the 5-year period ending with 1989, Mr. French was
the sole shareholder in a number of S corporations, including
Arundel Housing Components, Inc. (AHC). In furtherance of its
corporate objectives, AHC leased several parcels of real estate
from Mr. French. Substantially all of the rental payments made
by AHC were deposited directly into Mr. French’s personal bank
account. Mr. French’s secretary managed this account, but she
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