Charles R. Harp and April B. Harp - Page 16

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                    general contracting business.  Petitioners did not report in                                                                                           
                    Schedule C, or elsewhere, in their return for that year income                                                                                         
                    from any business other than Charles Harp Construction.                                                                                                
                              Petitioners did not include as income in their returns for                                                                                   
                    1989 and 1990 any portion of K & H's and Ms. Velilla's funds that                                                                                      
                    petitioner deposited into petitioners' accounts during those                                                                                           
                    years.  Nor did they include in their returns for those years any                                                                                      
                    income in connection with the Kabeiseman loans.                                                                                                        
                    The Examination of Petitioners' 1989 and                                                                                                               
                    1990 Returns and the Notice of Deficiency                                                                                                              
                              In June 1993, respondent assigned a revenue agent to examine                                                                                 
                    petitioners' returns for 1989 and 1990.  During the course of                                                                                          
                    that examination, the revenue agent did not have sufficient books                                                                                      
                    or records relating to petitioner's sole proprietorship or                                                                                             
                    petitioners' other financial activities during the years at issue                                                                                      
                    in order to determine whether petitioners had reported in those                                                                                        
                    returns all of their income for those years, nor did petitioners                                                                                       
                    attempt during the course of that examination to re-create any of                                                                                      
                    the books or records relating to their financial activities dur-                                                                                       
                    ing the years at issue that they claim were accidentally dis-                                                                                          
                    carded during 1991.  Consequently, in order to reconstruct peti-                                                                                       
                    tioners' income for the years at issue, the revenue agent used                                                                                         
                    the bank deposits method under which that agent examined the                                                                                           
                    deposits that were made during those years into petitioners'                                                                                           
                    accounts at various financial institutions.  Based on certain                                                                                          





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