Martin and Barbara Schachter - Page 11

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               Respondent has the burden of proving fraud by clear and                
          convincing evidence.  Sec. 7454(a); Rule 142(b); Bagby v.                   
          Commissioner, 102 T.C. 596, 607 (1994).                                     
               As we have found, the evidence establishes that Cal Ben's              
          sales were significantly underreported for each year at issue and           
          that as a result petitioner's share of Cal Ben's sales income was           
          underreported on petitioners' joint Federal income tax returns.             
               Petitioners contend, however, that Cal Ben's unreported                
          sales for each year should be offset by additional deductible               
          business expenses of Cal Ben that allegedly were paid out of the            
          Lloyds/Sanwa account, that were not properly recorded as expenses           
          in Cal Ben’s cash disbursements journal, and that were not                  
          claimed on Cal Ben's partnership tax returns.  Petitioners                  
          contend that the additional expenses, if allowed, would greatly             
          reduce the unreported net income of Cal Ben and the unreported              
          taxable income of Cal Ben chargeable to petitioner.  In support             
          of the claimed additional business expenses, petitioners offer              
          evidence of net profit margins of other wholesale businesses.               
          Petitioners note that without allowance of the claimed additional           
          business expenses, net profit margins of Cal Ben would far exceed           
          average net profit margins relating to wholesale businesses, as             
          set forth in government and business survey data.  Further,                 
          petitioners claim that funds used to purchase bonds, a yacht, and           
          other expensive items for personal use constituted accumulated              






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