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Mrs. Marzullo prepared all invoices and kept track of whether
checks in payment of the invoices had been received. If an invoice
was not paid, she would contact the customer concerning payment.
When checks were received, she gave them to Mr. Marzullo, who
deposited the checks, paid the bills, and kept a record of income
and expenses. His participation in the business was essentially
clerical. Mrs. Marzullo sometimes made corrections to Mr.
Marzullo's records. Mr. Marzullo did not deal with customers and
had no knowledge of the video production business.
Petitioners used their personal checking account for MPM's
business checks and deposits. MPM was operated from petitioners'
residence, and the business paid no salary or commissions. Mrs.
Marzullo obtained a business phone number, corporate stationery,
and business cards.
MPM elected S corporation status. It filed a Form 1120S
return for the period September 1 to December 31, 1987, but in 1988
petitioners filed a Schedule C reporting MPM's activities with
their return. Petitioners' Form 1040 for 1988 stated that Mrs.
Marzullo was self-employed.
Petitioners understated the gross receipts of MPM on their
Federal income tax returns as follows:
Year Actual Receipts Reported Receipts
1987 $71,750 $14,900
1988 44,722 19,682
Respondent increased the expenses attributable to MPM's operations
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