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petitioners' cost of goods sold by adding the following amounts:
$196,398 shown in petitioners' vendor ledger sheets; $67,321
shown on canceled checks that did not appear to be a duplication
of those shown on the vendor ledger sheets; $373 based on oral
representations received by Agent Koczergo; $22,939 shown on
check stubs for December (no canceled checks were available for
December) that did not appear to be a duplication of those shown
on the vendor ledger sheets; and $3,053 shown on check stubs, for
months other than December, that did not appear to be a
duplication of those shown on the vendor ledger sheets. In this
manner, Agent Koczergo computed a total cost of goods sold of
$290,084 for 1993. Respondent's notice of deficiency contained
the determination that the $32,453 petitioners reported as cost
of goods sold should be increased by $257,631 to arrive at the
$290,084 calculated by Agent Koczergo.
Petitioners reported on their 1993 income tax return a
$65,329 opening and a $32,876 ending inventory and no purchases,
costs of materials, labor, or supplies. After subtracting the
reported ending from the opening inventory, petitioners reflected
a $32,453 cost of goods sold. Agent Koczergo did not observe any
inventory on hand during audit-related trips to petitioners'
home/business location, and she did not use an inventory figure
in arriving at cost of goods sold.
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