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the following information:
Source of funds:
Adjusted gross income $15,154
Loan balance 12/31/93 52,210
Bank account balances 1/1/93 1,667
Depreciation (noncash deduction) 20,276
Amount payable on equipment 12/31/93 21,328
Self-employment tax deduction 848
Cash on hand 1/1/93 3,000
Total sources available 114,483
Application of funds:
Personal living expenses $21,980
Loan balance 1/1/93 56,894
Bank balance 12/31/93 3,250
Increase in inventory 67,868
Equipment purchases 35,504
Amount payable on equipment 1/1/93 -0-
Cash on hand 12/31/93 3,000
Total application of funds 188,496
Total sources available 114,483
Understatement of income 74,013
OPINION
We consider here whether petitioners underreported income
from the sale of a capital asset and from a business. We also
consider whether petitioners are entitled to a bad debt and/or a
casualty loss deduction. Finally, we must decide whether
petitioners are liable for accuracy-related penalties.
Was Petitioners’ 1991, 1992, and/or 1993 Business Income
Underreported?
Respondent, using the source and application of funds
method, determined that petitioners’ income was underreported for
the tax years 1991, 1992, and 1993 in the amounts of $28,195,
$22,695, and $74,013, respectively. Petitioners contend that
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Last modified: May 25, 2011