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Included with these letters were copies of the revenue agent's
examination reports (RAR) and waiver forms.
With respect to Simpson Financial, the RAR contained
essentially four types of adjustments to its income tax return
for 1988. First, the RAR increased Simpson Financial's gross
receipts and decreased its cost of goods sold. These adjustments
stemmed from what the revenue agent perceived as a misapplication
by Simpson Financial of its method of accounting. Second, the
RAR decreased, for lack of substantiation, Simpson Financial's
claimed expenses for its office, public relations, travel and
entertainment, insurance, and depreciation. Third, the RAR
disallowed Simpson Financial's claimed net operating loss (NOL)
carryforward from its 1987 taxable year. The revenue agent
disallowed this loss, due to the revenue agent's determination
that there were apparent discrepancies between Simpson
Financial's 1987 Federal income tax return and its books and
records for 1987. Fourth, the RAR determined that Simpson
Financial paid constructive dividends to the Simpsons during the
subject year. The RAR issued to the Simpsons reflected the
revenue agent's adjustment to their taxable income to reflect the
constructive dividends. The RAR's also reflected additions to
tax for delinquent filing of returns, negligence, and substantial
understatement of tax.
Petitioners did not protest the RAR with respondent's
Appeals Division (Appeals). Petitioners requested review of the
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