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On his Federal income tax return for 1990, petitioner
reported income from two sole proprietorships (Sungate Travel and
Sungate Tours located on Alcosta Boulevard in San Ramon,
California), in addition to his wages from the corporation. He
reported gross receipts of $1,649,088 from Sungate Travel and
$115,982 from Sungate Tours. On his 1991 return, he reported
gross receipts of $1,090,975 from Sungate Travel and he reported
the sale of Sungate Tours.
During 1993 and 1994, an agent of the Internal Revenue
Service conducted an audit of the corporation's returns for the
taxable years ending May 31, 1991 and 1992, and petitioner's
individual returns for taxable years 1990 and 1991. Petitioner's
accountant was present at all meetings with petitioner and the
agent. The agent reviewed documents such as invoices and
contracts supporting the corporation's depreciation schedule of
items related to the construction and furnishings of the loft.
The documents showed the purchase of a leather sofa and chair,
kitchen cabinets, fixtures for the bathroom, and blinds.
During the course of the audit, the agent visited the office
building twice, once in July 1993 and again in July 1994. While
walking down the hallway in the loft during the second visit, the
agent noticed a mattress with box spring and a cabinet in one of
the rooms.
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