Martin and Barbara Schachter - Page 8

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               On June 6, 1988, 6 days after respondent’s representative              
          first contacted petitioner to initiate the audit of petitioners'            
          Federal income tax returns and of Cal Ben's partnership tax                 
          returns for 1985 through 1988, petitioner closed the Lloyds/Sanwa           
          account.                                                                    
               On October 24, 1986, petitioner signed an application for a            
          credit card on which he represented that Cal Ben had gross sales            
          for 1985 of $2.1 million.                                                   
               On Cal Ben’s 1986, 1987, and 1988 partnership tax returns,             
          costs for various personal items and for items that, during                 
          respondent’s audit, petitioners could not substantiate were                 
          claimed as deductions.                                                      
               On petitioners' 1985 through 1988 joint Federal income tax             
          returns, petitioners underreported petitioner's share of the net            
          income of Cal Ben, as follows:                                              

                               Year         Amount                                    
                             1985      $333,931                                      
                             1986      337,606                                       
                             1987          257,871                                   
                             1988           79,799                                   

               On their 1987 joint Federal income tax return, petitioners             
          underreported gain realized on sale of petitioners' residence               
          located in Aptos, California.  The gain was underreported as a              
          result of petitioners’ inclusion of nondeductible repair expenses           
          and recurring items in the calculation of their adjusted tax                
          basis in the residence and of petitioners’ failure to adjust the            




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