Michael W. Rehtorik, et al. - Page 11

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          managed account funds deposited into the bank accounts in                   
          petitioner’s name.                                                          
               On his 1986 individual Federal income tax return, petitioner           
          claimed $47,802 as an interest expense deduction relating to a              
          home mortgage.                                                              
               On his 1987 individual Federal income tax return, petitioner           
          claimed $108,037 as an ordinary business expense deduction for              
          legal fees relating to the claim against him for damages in the             
          GSC liquidation proceeding.                                                 
               Petitioner attached to his 1987 Federal income tax return a            
          disclosure statement reflecting tax advice that petitioner had              
          received from his tax accountant that the $573,750 in managed               
          account funds reflected in the consent judgment against                     
          petitioner in GSC’s liquidation proceeding should not be treated            
          as income to petitioner but as loans that GSC and petitioner                
          intended to repay to managed account investors.                             

          Respondent’s Audit                                                          
               On audit, using total deposits made into the bank accounts             
          in petitioner’s name (including deposits of managed account                 
          funds) of $299,965, $312,039, and $293,212, for 1984, 1985, and             
               1987, respectively, respondent determined that petitioner              
          received and was taxable on managed account funds in the                    
          following amounts:                                                          







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