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The return preparers did not use the cash register tapes
from the business when calculating the amount of gross receipts
to be reported on petitioners' or JKY's Federal income tax
returns. Petitioners prepared monthly written statements of how
much gross receipts were received by the business. These
statements, along with other information supplied by petitioners,
were used in the preparation of petitioners' and JKY's returns.
Petitioners filed joint Federal income tax returns on a cash
basis for each of the years in issue. Petitioners' 1991 return
was filed on February 22, 1993.
JKY filed Forms 1120S for its taxable years ended
December 31, 1990, and December 31, 1991, respectively.
Respondent's Examination and Determination
During an examination of petitioners' returns, the examining
revenue agent requested that petitioners produce bank records and
various other documents. Petitioners did not produce check
registers or all of the bank statements and canceled checks from
petitioners' various accounts or other records adequate to
determine petitioners' taxable income. The agent therefore
reconstructed petitioners' income as described below.
Respondent's Net Worth Calculations
Respondent computed petitioners' beginning net worth by
calculating bank balances, inventory, personal property, real
property, and other assets owned at the end of 1988 and reducing
this amount by loans and accumulated depreciation. Any apparent
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