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surrounding Jasiak's sale of stock to Bailey. Bailey concluded
that Cost Less was entitled to amortize the full $175,000 over a
7-year period, on the assumption that Cost Less paid $175,000 for
a covenant not to compete and nothing for the stock. Bailey
prepared amended returns for Cost Less in which Cost Less
amortized the $175,000 over 7 years.
Petitioner told Bailey how the Cost Less inventory system
worked. Petitioner estimated that Cost Less overstated its
inventory by about $10,000 per year. Bailey accepted
petitioner's estimate and reduced closing inventory by $10,000 on
each of Cost Less' amended returns that he prepared.
Petitioner and Bailey also discussed petitioner's van use
and payment of miscellaneous expenses. Petitioner did not give
Bailey any incorrect information. In the amended returns Bailey
prepared, Cost Less deducted $3,000 per year for petitioner's van
use, and $50 per week for petitioner's payment of miscellaneous
Cost Less expenses.
On December 15, 1993, Cost Less filed the amended income tax
returns that Bailey prepared for 1988, 1989, and 1991.
Respondent disallowed the changes Bailey made in Cost Less'
amended returns.
Respondent mailed a notice of deficiency to petitioners on
July 9, 1996. All of the adjustments in the notice of deficiency
relate to Cost Less. Petitioners filed a petition in which they
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