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Accuracy-Related Penalty
Year Deficiency Sec. 6662
1991 $600 $120
1992 20,285 4,057
1993 20,919 4,170
Following concessions by each party, the primary issue for
decision is whether petitioners understated their 1991, 1992, and
1993 income by $2,165, $69,187, and $54,661, respectively.
Resolution of this issue turns upon the correctness of respondent's
revenue agent's use of the markup method to reconstruct the gross
sales of alcoholic beverages of a bar/restaurant (Classic Pub) in
Virginia Beach, Virginia, operated by Classic Pub, Inc., an
electing S corporation, during the 3 years in question.
Petitioners owned 28.98 percent of Classic Pub, Inc.'s stock in
1991 and all of its stock in 1992 and 1993.
In computing Classic Pub's gross sales of alcoholic beverages,
the revenue agent first determined the potential number of drinks
that could be sold from the amount of liquor available for
consumption. Petitioners agree with the revenue agent's
computation of Classic Pub's potential gross sales of alcoholic
beverages before an allowance for drinks sold at discount prices,
as well as his computation for spillage, breakage/waste, and theft
of alcoholic beverages. However, they posit that (1) the revenue
agent arbitrarily and erroneously used the markup method to
reconstruct Classic Pub's income for the years in issue, and (2)
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