Jeffrey C. and Kelly O. Stone - Page 3

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          petitioners' residence.  Until September 1994, when Mr. Stone               
          hired a secretary, petitioner Kelly O. Stone (Mrs. Stone) helped            
          in the business by maintaining the business records and answering           
          the telephone.  Mrs. Stone did not go to the shop; rather, she              
          performed these activities from petitioners' home.  In 1994,                
          petitioners had four children, Toni, Teni, Tally Jo, and Tucker,            
          who were ages 12, 9, 7, and 4, respectively.                                
               On their joint 1994 income tax returns (Federal and State),            
          with regard to the Schedule C for the appliance repair business,            
          petitioners reported gross receipts in the amount of $82,369 and            
          a cost of goods sold in the amount of $28,890.  Petitioners                 
          claimed a deduction for expenses in a total amount of $42,737.              
          Petitioners' 1994 Federal and State returns were prepared by Cody           
          & Co.  As a joint project, respondent and the Montana Department            
          of Revenue audited Federal and State income tax returns that had            
          been prepared by Cody & Co.  The Montana Department of Revenue's            
          audit of petitioners' 1994 State return resulted in adjustments             
          to the cost of goods sold and the disallowance of some of the               
          claimed expenses.  The results of the audit were shared with                
          respondent, and a notice of deficiency was sent to petitioners.             
          The following shows the expenses petitioners claimed during the             
          Montana Department of Revenue audit and the amounts that were               
          allowed by the Montana Department of Revenue and respondent.3               


               3  All amounts have been rounded to the nearest dollar.                




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