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Johnson), one of the partners, formed William J. Johnson &
Associates (Johnson & Associates). Johnson & Associates retained
petitioners’ account and prepared their tax returns from 1986
through 1991.
Laura Kauls (Ms. Kauls) was employed as an accountant with
Brigante & Johnson and then with Johnson & Associates. Ms. Kauls
was responsible for the preparation of petitioners’ tax returns
from 1984 through 1986.
Bad Debt Deduction Inquiry in 1985
In 1985, petitioner claimed exemption from Federal income
tax withholding on Forms W-4 that he filed with respect to his
businesses (URI and Huntington Harbor). In December 1985, the
office of the W-4 Technical Unit of the Internal Revenue Service
(IRS) requested additional information as to why petitioner
believed he did not owe any Federal income tax. Petitioners
forwarded the requests to Ms. Kauls. Ms. Kauls filled out Form
6450 (Questionnaire To Determine Exemption From Withholding) and
Form 6355 (Worksheet to Determine Withholding Allowances). Form
6355 indicated that petitioners expected to claim a net loss of
$1 million on Form 4797 (Sale of Business Property) of their 1985
return. She forwarded these forms to petitioners for their
signature on January 6, 1986.
Ms. Kauls also filled out a Tax Shelter Questionnaire on
behalf of petitioners to be sent to the IRS. It is not clear
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