- 3 -
or another complete records did not exist at the time of the
audit and that reconstructions of petitioners’ income and
expenses had to be made. The reconstructions to a large extent
were based upon petitioners’ checks and deposit tickets from the
years in issue. The examining agent also relied upon bank
records and summary documents prepared by petitioners’
accountant.
The primary issues discussed by the parties prior to the
issuance of the notice of deficiency were cost of goods sold,
gross receipts, and the sale of oil royalties. The third issue,
sale of oil royalties, was resolved in petitioners’ favor prior
to the issuance of the notice of deficiency. Because petitioners
believed they would owe no taxes if the first issue, cost of
goods sold, were decided in their favor, petitioners in
settlement negotiations agreed to concede all other issues if
respondent made a favorable determination regarding the cost of
goods sold amounts.
Respondent issued a statutory notice of deficiency to
petitioners dated May 19, 1998. The notice set forth the
following adjustments:
1992 1993 1994
Advertising expense ($14,725) -0- -0-
Aircraft expense -0- -0- ($14,186)
Commission expense -0- $31,000 -0-
Cost of goods sold 219,038 (2,204) 289,491
Depreciation expense (471) (902) (832)
Gross receipts (16,808) 5,113 (200,250)
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