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respondent stated in the explanation of adjustments (explanation)
included in the notice: “in the absence of adequate books and
records an indirect method was utilized to determine Gross
Receipts”. Exhibit C of the explanation further detailed the
method that respondent used to determine the increase in peti-
tioners’ 1995 gross receipts, as follows:
December 31, 1994
Total expense per 1994 Form 1040
as originally filed $1,871,671
Gross profit per 1994 Form 1040
as originally filed 2,624,759
Total expense to gross profit
percentage (divide item 1 by 2) 71.31%
December 31, 1995
Total expense per 1995 Form 1040
as originally filed $1,973,107
Total expense to gross profit
percentage (see above) 71.31%
Corrected gross profit (divide
item 4 by 5) 2,766,943
Amount per return 1,876,224
Adjustment to income 890,719
In the notice, respondent also determined, inter alia, to
disallow the depreciation deductions of $9,400 that petitioners
claimed in the 1995 Schedule C.
Respondent also determined in the notice that petitioners
are liable for 1995 for the accuracy-related penalty under
section 6662(a).
Certain Pre-Trial Conduct of Petitioners
32(...continued)
and not to unreported taxable income.
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