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petitioners' 1990 taxable year. The issues2 presented for our
consideration are: (1) Whether respondent correctly
reconstructed petitioners' income by use of the bank deposits
method, and (2) whether petitioners are liable for a penalty
under section 6662.
FINDINGS OF FACT3
Petitioners resided in Boulder, Colorado, at the time their
petition was filed in this case. Sarkis Balbanian (petitioner),
a jeweler since 1956, beginning in 1987 owned and operated a
retail jewelry business located in Northglenn, Colorado.
Petitioners used the cash method of accounting for financial and
tax reporting purposes.
Petitioner met Robert Joseph (Joseph) and, about 1983, began
manufacturing and/or selling jewelry to Joseph. Joseph operated
a Ponzi scheme under the name M&L Business Machine Co., Inc.
(M&L). Under the scheme, Joseph accepted currency from
individuals and promised them an extraordinary rate of return on
a monthly basis. The scheme was operated by Joseph’s paying
"investors" monthly interest funded by the currency received from
newer investors. At some point, Joseph turned to check kiting to
keep his Ponzi scheme afloat.
2 Petitioners conceded a third issue of whether their cost
of goods sold was overstated by $15,000 for 1990.
3 The parties’ stipulation of facts and attached exhibits
are incorporated by this reference.
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