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Petitioners never did file an amended return.
Petitioners did not consult a certified public accountant or
a tax attorney with respect to the tax treatment of the income
from Sanrio and losses from Regent. However, they did ask an
accountant about the extent of their mortgage interest deduction
and about amending their return to claim an additional deduction.
E. The Audit Process
Richard Clement (Clement) is respondent's revenue agent
responsible for the audit of petitioners' 1990 Federal income tax
return. He is familiar with real estate practices in the San
Francisco Bay area and has conducted audits of companies engaged
in real estate transactions.
In July of 1994, Clement examined the Federal income tax
return filed by Sanrio. While auditing this return, he noticed
Sanrio's $840,000 payment by wire transfer to Susanna's account
at BNP. Accordingly, he requested an RTVUE, which is a computer-
generated document showing certain types of information from a
tax return (such as gross receipts reported on a Schedule C).
Using the RTVUE, Clement discovered that the Paus had reported
gross receipts on their 1990 Schedules C in an amount less than
the $840,000 transfer reflected on Sanrio's return.
After reviewing the Paus' 1990 return, Clement decided to
audit it. He selected for examination gross receipts and
expenses from the Schedules C, and Schedule A deductions for home
mortgage interest and contributions. Clement left several
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