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petitioners’ 1989 Federal income tax return; consequently, no
section 1 income tax liability is reported on that return. Their
1989 return also reflects a section 1401 self-employment tax of
$208.32, and an earned income credit of $222, resulting in a
refund claim for $13.68.
The net profit from the business and a $12,791 “NOL” are the
items included in the negative adjusted gross income reported on
petitioners’ 1990 Federal income tax return. As with 1989, no
section 1 income tax is listed on the return, but petitioners
reported a section 1401 self-employment tax of $1,303.87, which
is partially offset by an earned income credit of $953.
Petitioners were first contacted in writing by respondent
with respect to the examination of their 1989 and 1990 Federal
income tax returns by letter dated June 6, 1991. Revenue Agent
Judy Pearson (Ms. Pearson) conducted the examination. Ms.
Pearson met with petitioner and/or their return preparer, Carol
Reid (Ms. Reid), on several occasions and issued several
information document requests to petitioners during the course of
the examination. It appears that the examination focused
primarily upon deductions claimed on the Schedules C. Because
certain of those deductions related to payments made to
petitioners’ son, Ms. Pearson extended her examination to include
the 1989 and 1990 Federal income tax returns of petitioners’ son.
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