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service business, stating that JJH’s business activity was
“sales”, and that the product or service was “process”. In so
mischaracterizing, petitioner intended that a large portion of
the personal expenses be buried in cost of goods sold, minimizing
the possibility that the personal nature of the expenses would be
detected.9 These claims were false and petitioner knew it.10
Petitioner’s testimony that “any personal expenses that are paid
by the corporation are not deducted by the corporation" is not
credible. Finally, petitioner’s failure to include in his income
JJH’s payment of his personal expenses resulted in a large
understatement of his income.
Petitioner failed to maintain adequate records of his income
and expenses. Petitioner maintained three corporate checking
accounts from which he paid all business and personal expenses,
and he maintained no records to determine which expenses were
business or personal. The records petitioner did keep were
inadequate. Petitioner purportedly maintained a ledger for his
“draw account” from JJH. This ledger recorded negligible amounts
as “drawn” by petitioner, did not include JJH’s payment of the
9Petitioner was aware that the largest expense of a
merchandising business is generally cost of goods sold, and he
knew a large cost of goods sold was less likely to “red flag” his
return than larger expenses elsewhere on the return.
10As just one example, petitioner admitted that the
insurance paid by JJH to Prudential was a personal expense, and
that he deducted it anyway, stating: “It’s not probably
technically, in the truest accounting sense a good thing to do”.
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