Greg McIntosh and Sheila R. McIntosh - Page 15

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          Regs.  Such books and records should properly classify                      
          expenditures as between capital and expense.  See sec. 1.446-               
          1(a)(4)(ii), Income Tax Regs.                                               
               Petitioners did not maintain a set of books and failed to              
          provide an accounting of the expenses associated with their home-           
          building activity.  Although petitioners presented some folders             
          containing receipts and canceled checks related to the building             
          of the Vallecito property, they were intermingled with those from           
          the construction of a personal home on Montana Avenue, Shasta               
          Lake, California.  In an attempt to verify the amounts shown on             
          petitioners' returns, respondent's agent had to reconstruct the             
          costs incurred in acquiring and constructing the Vallecito                  
                    Cost of Goods Sold                                                
               Any amount claimed as cost of goods sold must be                       
          substantiated.  See sec. 6001; Ranciato v. Commissioner, T.C.               
          Memo. 1993-536.  Among the items in the folders presented by                
          petitioners during the examination was a canceled check in the              
          amount of $11,104.67 payable to the "US Bank".  It was not                  
          readily apparent that the US Bank check represented an amount               
          associated with the cost of acquiring or constructing the                   
          Vallecito property.  It was only after the notice of deficiency             
          was issued on July 21, 1999, that petitioners supplied on                   
          September 2, 1999, a copy of an escrow statement indicating that            
          petitioners had made a deposit for an unnamed property in the               

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