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Cash Noncash
Year Deposits Deposits Withdrawals Balances
1991 -- -- -- $2,513.21
1992 $34,795.83 $542.86 $36,694.70 1,157.20
1993 25,500.00 -- 24,140.78 2,516.42
1994 14,300.00 377.00 15,694.50 1,498.92
Respondent audited Crabtree Investments’ corporate
income tax returns for taxable years 1992, 1993, and 1994.
During the audit, petitioners provided the following
records to the revenue agent: Canceled checks, purchase
orders, daily reports, cash register tapes, summaries of
the cash register transactions referred to as Z tapes,
deposit slips, and general ledgers. The revenue agent
analyzed the corporation’s bank account records. She found
a substantial disparity between the total deposits made to
the bank account at First Union Bank and the sales reported
on the corporation’s tax return for 1992. She also found
that relatively little cash had been deposited into the
account despite the cash nature of the business.
The revenue agent determined that the records of
Crabtree Investments were insufficient to determine gross
income. Therefore, she recomputed Crabtree Investments’
gross income for 1992, 1993, and 1994, both in the package
store and in the bar using the unit markup method. As the
starting point for the reconstruction, the revenue agent
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Last modified: May 25, 2011