Hans C. Sherrer - Page 8




                                         -8-                                          

                             1989         1990       1991       1992                  
          Gross receipts     $336,545   $450,252   $476,785 $234,677                  
          Allowed business   280,733    264,280  271,515  103,262                     
          expenses                                                                    
          Unreported net     55,812     185,972  205,270  131,415                     
          business income                                                             
          Allowed expenses   83.4%     58.7%     56.9%    44.0%                       
          as a percentage                                                             
          of gross receipts                                                           
          Respondent's Reconstruction of Petitioner's Income for 1993-94              
               Respondent did not use the "specific items" method to                  
          reconstruct petitioner's income for 1993 and 1994.  Instead,                
          respondent determined petitioner's income by reference to Bureau            
          of Labor Statistics average cost-of-living survey information.              
          Using this information, respondent determined that petitioner had           
          a cost of living--and therefore must have had unreported net                
          business income--of $34,533 and $35,638, in 1993 and 1994                   
          respectively.  After allowing petitioner one personal exemption,            
          the standard deduction, and a deduction for self-employment tax,            
          respondent determined that petitioner's taxable income was                  
          $26,043 and $26,870 in 1993 and 1994, respectively.                         

                                       OPINION                                        
          I.   Is Petitioner Entitled to Additional Deductions for 1989-92?           
               Prior to trial, the parties stipulated that petitioner's               
          gross receipts for 1989-92 were equal to the amounts determined             
          by respondent.  The parties also stipulated that petitioner's               
          unreported net business income for 1989-92 was equal to the                 




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