Efrain J. and Josefina Xuncax - Page 3




                                        - 3 -                                         
                                  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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