Patrick C. Badell and Lillian A. Badell - Page 6




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               3.   Roofing Services Provided by Kelso                                
               In 1994, Badell hired Kelso to construct a slate roof on the           
          Badells’ residence.  Kelso usually gives estimates to customers             
          before beginning to work on projects.  However, it did not give             
          B&W or the Badells an estimate of the cost of constructing the              
          roof on the Badells’ residence.  Kelso began to construct the               
          roof in 1994.                                                               
               Kelso billed B&W $49,000 on December 31, 1994, for                     
          constructing the roof on the Badell residence.  B&W made no                 
          payments to Kelso until September 1997.  Kelso did not try to               
          collect that amount for an extended period of time because its              
          personnel believed B&W was “working off” B&W’s charges for legal            
          services by constructing the roof on the Badell residence.  Kelso           
          reported the $49,000 as income on its 1994 return, and on its               
          gross profit report for 1994.  Kelso credited its accounts                  
          payable to B&W for legal services by $49,000 as of December 31,             
          1994.                                                                       
               Kelso worked on the Badell residence from 1994 to 1999, for            
          which it billed B&W as follows:                                             















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