William O. Harrison - Page 20

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             petitioner received from the Houston firm in 1988 was not                
             a loan, as petitioners claimed, and should have been                     
             included in petitioners' income as ordinary income, less                 
             petitioner's basis of $195,351 (i.e., net ordinary income                
             of $304,649).  Respondent also determined that the payments              
             of $552,218 and $617,482 petitioner received in 1989 and                 
             1990, respectively, from the Houston firm, are ordinary                  
             income, rather than capital gain, as reported by                         
             petitioners on their tax returns.                                        
                  Respondent also determined that petitioners are liable              
             for the addition to tax under section 6651(a)(1) for                     
             failure to timely file their 1988, 1989, and 1990 returns.               
             Respondent determined that the extension of time to file                 
             each of petitioners' tax returns for 1988, 1989, and 1990                
             was invalid because in filing Form 4868, for each of those               
             years, petitioners did not properly estimate their correct               
             tax.  The notice of deficiency describes this determination              
             as follows:                                                              
                  Since your income tax returns for 1988, 1989 and                    
                  1990 were not filed within the time prescribed                      
                  by law, and it is determined that the extensions                    
                  you filed were invalid since you did not properly                   
                  estimate your correct tax, 25 percent of the                        
                  total underpayment of tax is added as provided                      
                  by section 6651(a)(1) of the Internal Revenue                       
                  Code * * *                                                          








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