-5-
James Luscombe,2 that interest-bearing notes should be prepared to
evidence the loans, advances, and investments. Petitioner did not
follow this advice although petitioners did agree to the accrual of
interest for the year 1984.
Petitioners’ 1982, 1983, and 1984 individual tax returns and
Delivery’s related corporate returns were selected for examination
by respondent’s Wichita, Kansas, district office.3 The examination
included an analysis of Delivery’s shareholder loan accounts. The
balances in the accounts increased by $14,995 in 1982, $75,404 in
1983, and $42,502 in 1984, for a 3-year total increase of $132,901.
Throughout the examination, petitioners (through their
representatives)4 insisted that their withdrawals from Delivery
were loans. The examining agent concluded that a portion ($51,065)
of the increase in the account balances for the 1982-84 years
($132,901) should be taxed as dividend income to petitioners; he
2 From 1963 through 1987, Mr. Luscombe prepared all of
the financial statements and corporate tax returns for Delivery,
as well as petitioners’ individual tax returns. The financial
statements were prepared monthly from records delivered to Mr.
Luscombe by Mrs. Schneller. Following petitioners’ move from
Kansas City to Kentucky, petitioners retained William B. Arthur,
Jr. to perform the accounting and tax work for Delivery and
themselves. The first return Mr. Arthur prepared in 1990 was the
1988 corporate return for Delivery.
3 The examination centered around the examiner’s
determination that the Schnellers underreported their income for
years 1982-84, as well as the examiner’s proposal to assert the
fraud addition to tax.
4 James Baker, an attorney, and Mr. Arthur represented
petitioners with respect to the 1982-84 tax examination.
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