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goods sold of $18,742, and business expenses totaling $10,996,
resulting in a net loss of $8,886. In computing cost of goods
sold, petitioners reported $1,500 opening inventory, $18,742
purchases, and $1,500 ending inventory.
Respondent’s Examination and Determinations
On July 16, 1998, Carol had her first meeting with
respondent’s examining agent, Susan Leary (Leary), regarding
petitioners’ 1995 Federal income tax return. At this initial
meeting, Leary asked Carol a number of routine background
questions, including but not limited to questions about
petitioners’ ages and education levels, and about their savings
and investments. Leary also requested sales records relating to
Columbia. At the initial meeting, Carol gave Leary no indication
where the sales records might be.
Carol and Leary met on two subsequent occasions in August
1998. At the subsequent meetings, Carol informed Leary that the
Columbia sales records had been lost.
By notice of deficiency dated January 6, 2000, respondent
determined a $6,125 deficiency in petitioners’ 1995 Federal
income tax. As part of this determination, respondent reduced
petitioners’ claimed Schedule C expenses by $7,212, as follows:
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