Ernest L. and Kathleen Newsome - Page 10

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            newspaper carriers as part of a compliance research project.  In                           
            addition, respondent's agents questioned the Star Telegram about                           
            how the figures on the monthly circulation statements were                                 
            calculated.  As a result of these other examinations and the                               
            information received from the Star Telegram, respondent developed                          
            a ratio between the cost of the newspapers charged to a newspaper                          
            carrier and the newspaper carrier's gross receipts.  Agent Wilder                          
            checked the accuracy of her estimates in this case against this                            
            ratio and found them to be within an acceptable range.                                     
                  Based upon Agent Wilder's calculations, in the notice of                             
            deficiency respondent determined that the gross receipts and cost                          
            of goods sold of petitioner's newspaper delivery service were as                           
                                                1991                 1992                              
            Gross receipts or sales             $104,929          $93,323                              
            Cost of goods sold                  71,288            58,848                               

            As previously noted, petitioners now agree that the cost of goods                          
            sold amounts are accurate.  After taking into account the amounts                          
            reported on the Schedules C for these items and an adjustment not                          
            in dispute, respondent increased petitioners' income by $14,842                            
            and $14,758 for the years 1991 and 1992, respectively.3                                    

            3Due to these changes, respondent increased petitioners'                                   
            liability for the self-employment tax imposed by sec. 1401 and                             
            determined that petitioners were ineligible for the earned income                          
            credit.  These adjustments are not in dispute and will be                                  
            resolved in accordance with the resolution of the disputed issue.                          

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