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received a credit or refund of the $9,016. Respondent audited
petitioner’s and Betsy’s 1985 joint tax return again sometime
before May 1988, and concluded that petitioner and Betsy had
$2,760 of unreported dividend income for that year; this
unreported income resulted in a $1,380 understatement of
petitioner’s and Betsy’s 1985 tax liability. On May 9, 1988,
respondent mailed to petitioner and Betsy a notice of deficiency
for 1985, based on the $1,380 deficiency; Betsy paid the
deficiency.
Table 14 sets forth petitioner’s and Betsy’s 1985 adjusted
gross income, taxable income, and income tax liability as (1)
shown on their 1985 tax return, (2) adjusted by respondent in
1987, (3) adjusted by respondent in 1988, and (4) determined in
the notice of deficiency in the instant cases.
Table 14
Tax 1987 11988 Notice of
Return Audit Audit Deficiency
Adjusted gross income $272,480 2 2
2
Taxable income 191,733 $173,700 $176,460 $205,679
Income tax liability 76,110 67,094 68,474 83,398
1 The notice of deficiency issued in 1988 mistakenly sets forth
the “corrected” taxable income and tax liability by making the
$2,760 (income) and $1,380 (liability) adjustments as adjustments
directly to the amounts set forth on the 1985 tax return as
filed, ignoring the adjustments made in the 1987 audit. The
effects of the 1988 audit are correctly shown in the notice of
deficiency in the instant cases as the basis for purposes of
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