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FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulations of the parties, with accompanying exhibits, are
incorporated herein by this reference. At the time the petition
was filed in this case, petitioners resided in Los Angeles,
California.
During 1996, petitioners operated a proprietorship under the
name of EJX Contractor (EJX). EJX was engaged in the business of
sewing materials provided by a contracting manufacturer into a
finished product. All materials necessary to complete the items,
with the exception of thread, were supplied by the manufacturer.
Through such arrangements, EJX was principally involved in the
sewing of jeans and shorts. EJX’s day-to-day operations during
the year at issue were managed by Miguel X. Mendez, petitioners’
son.
On the Schedule C attached to their 1996 Federal income tax
return, petitioners reported gross receipts from EJX of $485,009,
cost of goods sold of $274,109, and total expenses of $183,427.
Accordingly, EJX was reflected as having earned a net profit of
$27,473. Such receipts and expenditures were computed using the
cash method of accounting.
As a result of the subsequent examination of petitioners’
return, respondent issued a notice of deficiency making
adjustments to the foregoing Schedule C amounts. Respondent
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