Thomas J. Gaffney and Anne F. Gaffney - Page 3

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          a statutory notice of deficiency that increased petitioners' 1993           
          interest income by $14,845 to reflect the unreported original               
          issue discount.3                                                            
               Respondent's determinations in the statutory notice of                 
          deficiency are presumed to be correct, and petitioners bear the             
          burden of proving otherwise.  Rule 142(a); Welch v. Helvering,              
          290 U.S. 111, 115 (1933).                                                   
               Section 61(a) includes in gross income all income from                 
          whatever source derived.  The amount of any item of gross income            
          shall be included in the gross income for the taxable year in               
          which it is received by the taxpayer under the taxpayer's method            
          of accounting.  Sec. 451(a).  Petitioners use the cash receipts             
          and disbursements method to compute their income.  See sec.                 
          446(c)(1).  Generally, under the cash receipts and disbursements            
          method, all items which constitute gross income, whether in the             
          form of cash, property, or services, are to be included for the             
          taxable year in which actually or constructively received.  Sec.            
          1.446-1(c)(1)(i), Income Tax Regs.  However, special rules exist            
          under sections 1271 through 1275 for the ratable inclusion of               
          original issue discount in respect of certain corporate                     
          obligations.  Sec. 1.451-1(d), Income Tax Regs.                             



          3         The difference between the original issue discount                
          amount reported on the Form 1099 and the amount determined in the           
          statutory notice of deficiency is due to rounding.                          




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