Stuart and Betsy Bobry, et al. - Page 9

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                               Lyell Metal’s                                                            
               Calculation of Purchases of Scrap Metal     Lyell Metal's Reported                       
             Year    By Check       By Cash    Total Purchases      Cost-of-Goods Sold                  
             1989   $8,813,624    $5,637,214     $14,450,838           $14,434,001                      
             1990   8,492,978     4,662,030      13,155,008            13,137,949                       
             1991   6,722,992     3,745,733         10,468,725             10,094,291                   
             1992    6,410,910    3,330,418       9,741,328            9,610,215                        

                  For 1989 through 1992, petitioners timely filed their joint                           
            Federal income tax returns reflecting the pass-through tax                                  
            consequences of Lyell Metal’s S corporation status.                                         
                  On audit, respondent disallowed for each year for lack of                             
            substantiation approximately 83 percent of Lyell Metal’s reported                           
            purchases of scrap metal by cash, and respondent determined the                             
            tax deficiencies in dispute herein based on this disallowance.                              
            The 17 percent of alleged purchases of scrap metal by cash that                             
            respondent allowed apparently reflects respondent’s estimate of                             
            Lyell Metal’s total cash purchases of scrap metal for amounts                               
            under $200 per transaction.                                                                 
                  For 1992, respondent disallowed 83 percent of Lyell Metal’s                           
            reported purchases of scrap metal by cash even though Lyell                                 
            Metal's reported amount therefor was based not only on the                                  
            canceled checks made payable to cash but also on the copies of                              
            the receipts and cash register tapes that were retained by Lyell                            
            Metal for 1992 that reflected cash purchases.  Respondent's                                 
            disallowance for 1992 apparently was based on the fact that the                             
            canceled checks and copies of the receipts did not contain all of                           






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