Anthony J. Marzullo and Mary P. Marzullo - Page 10

                                        -10-                                          
               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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