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$3,752 from her import sales business in 1990, as petitioners
reported on their amended return for 1990.
3. International
Petitioners reported that International had gross receipts
of $23,574 in 1990 and $147,426 in 1991, cost of goods sold and
expenses of $39,550 in 1990 and $162,917 in 1991, and losses of
$15,976 in 1990 and $15,491 in 1991.
Petitioner-husband deducted Schedule C expenses for
International of $22,963 in 1990 and $30,234 in 1991. The
parties agree that petitioners' taxable income should be
decreased by $1,119 in 1990 and increased by $4,670 in 1991
because of changes to International's Schedule C expenses for
those years.
4. Net Operating Loss Carrybacks
Petitioners reported net operating losses of $15,976 on
their original return ($14,448 on the amended return) for 1990
and $15,491 on their return for 1991. Petitioners elected to
carry the net operating losses back to 1987 and 1988 by filing
Forms 1045. Petitioners' net operating losses equaled the
Schedule C losses from International in 1990 and 1991.
H. Respondent's Examination
Revenue Agent Margaret Davis (Davis) began to examine
petitioners' returns for 1990 and 1991 late in 1992. Davis asked
petitioners for the books and records of International, including
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