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expenses. Mr. Reaves told Lawson that Davis would probably say
to tell the truth.
Lawson stopped working for Reaves Livestock in January 1990.
4. Reaves Livestock's Second Amended Tax Return
Davis filed a second amended corporate return for 1986 in
August 1990, because he had misclassified a $55,000 check. In
it, Davis decreased the amount reported for purchases by $55,000.
5. Criminal Conviction of Mr. and Mrs. Reaves
On April 1, 1991, petitioners were indicted for willfully
signing and filing false returns under section 7206(1) for 1984,
1985, 1986, and 1987. On June 3, 1991, Mrs. Reaves pleaded
guilty to violating section 7206(1) for 1986 and Mr. Reaves
pleaded guilty to violating section 7206(1) for 1987. The other
counts were dismissed.
6. Mr. and Mrs. Reaves' 1990 Tax Returns
Davis prepared and filed Mr. and Mrs. Reaves' 1990 joint
individual Federal income tax returns on August 15, 1991. Davis
included the previously unreported income as a constructive
dividend on Mr. and Mrs. Reaves' 1990 return. As a result, they
reported that they had received a $171,928 dividend from Reaves
Livestock. They intended that amount to represent unreported
income of $13,054 for 1984, $15,645 for 1985, $75,933 for 1986,
$49,802 for 1987, and $17,494 for 1988 from the First Citizens
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