Donald C. Richardson and Rita M. Allaire - Page 17

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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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