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that Kolyn received $790,000. The disclosures stated that these
funds were not taxable to either Kolyn or the Kaos. In 1992, the
Internal Revenue Service conducted an audit of Kolyn's 1988,
1989, and 1990 returns. Agent Jimmy Chan was assigned to the
case. On January 14, 1992, Agent Chan met with Dr. Kao for
approximately 7 hours to review Kolyn's corporate records.
During the interview, Agent Chan discovered numerous deposits in
Kolyn's accounts. In response to Agent Chan's questions, Dr. Kao
explained that these deposits were cash gifts from his father.
Dr. Kao refused, however, to provide Agent Chan with any records
to corroborate his explanation.
Because Dr. Kao failed to provide records to corroborate his
explanation for these and other deposits in petitioners'
accounts, respondent used the bank deposits method to reconstruct
petitioners' income for the years in issue. After completing
this analysis, respondent issued notices of deficiency to
petitioners and determined for the years in issue that: (1) KCW
received unreported income of $121,857; (2) the Kaos received
unreported income of $905,502; and (3) Kolyn received unreported
income of $6,777,319, and this amount was taxable to both Kolyn
and the Kaos. Respondent has subsequently conceded that a
$300,000 deposit into Cheng and Susan Kao's checking account, as
well as funds deposited into two other accounts at World Savings
and Loan, are not taxable to the Kaos.
OPINION
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