Srichai and Pusadee Rungrangsi - Page 6

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          Deductions.  For 1993, petitioners reported on Schedule C a loss of         
          $48,483 from the operation of Stanton Mexicatessen, and interest            
          expenses of $10,277 on Schedule A.  For 1994, petitioners did not           
          file a Schedule C and did not report any income or loss from the            
          operation of Stanton Mexicatessen.                                          
               Petitioners filed Form 4797, Sales of Business Property, for           
          1994 and reported a loss from the sale of Stanton Mexicatessen's            
          assets of $123,557 (less a $4,712 gain from the disposition of              
          other restaurant property for a net loss of $118,845).  Form 4797           
          reported a sales date for the restaurant of January 1, 1994.                
          Notice of Deficiency                                                        
               Respondent asserts that petitioners gave Ms. Eagatatt a                
          security interest in the assets of Stanton Mexicatessen, as opposed         
          to selling  the  restaurant  to  her.  Accordingly,  respondent             
          determined that because petitioners did  not  sell  Stanton                 
          Mexicatessen, they are not entitled to the claimed capital loss for         
          1994.  As a consequence of that determination, respondent                   
          determined that petitioners failed to report the restaurant income          
          for 1994, and further, that they underreported the restaurant               
          income for 1992 and 1993.  Respondent, therefore, reconstructed             
          petitioners' restaurant income for each of the years in issue by            
          determining the net profit from the restaurant as 3 percent of the          
          restaurant's gross receipts (as reported by petitioners in 1992 and         
          1993, and as reported by Ms. Eagatatt in 1994).                             

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