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information set forth below, which was known to respondent at the
time the statutory notice of deficiency was issued, and which
information remained unchanged at the time of respondent's answer
to the petition, we are satisfied that respondent had a basis in
fact for the position that PCCL had (1) received unreported
income in the amount of $14,443; (2) erred in claiming "Other
Deductions" to the extent of $263,956; and (3) erred in claiming
an interest expense deduction in the amount of $37,777.
(1). Unreported Income
The notice of deficiency issued to PCCL included an
adjustment in the amount of $14,443 due to unreported income from
the sale of PCCL's equipment by petitioner. Respondent received
copies of eight canceled checks made out to petitioner. Also, as
described in A.(1) above, petitioner admitted to sales by PCCL.
(2). Other Deductions (PCCL)
On its 1993 tax return, PCCL had claimed a total of $376,431
in "Other Deductions".10 The notice stated that "it has not been
verified that any amount in excess of $109,875 constitutes an
ordinary and necessary business expense or was expended for the
purpose designated."
10 We note that petitioners contend in their pleadings
that respondent arbitrarily denied all of PCCL's business
expenses. The notice of deficiency is clear that only a portion
of the expenses were disallowed.
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