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During 1992 and 1993, petitioner and Jack operated a body
shop on property located at Netherland Inn Road in Kingsport,
Tennessee. The body shop purchased wrecked autos which it would
repair and resell through Murphy’s.
During the years in issue, petitioner and Jack also built
and sold condominiums.
On May 3, 1995, petitioner signed and gave a "Personal
Financial Statement" to NationsBank representing as "true and
complete" that he had a salary of $144,000 and a net worth of
$1,321,650.
Petitioners’ returns were prepared by an old school friend
of Jack’s who was an accountant in Florida. To prepare the tax
returns, the accountant used information from a one-page summary
that Jack supplied.
On their 1993, 1994, and 1995 returns, petitioners reported
adjusted gross income (loss) of ($11,652), $16,270, and $18,635,
respectively. Petitioners’ returns indicate that Murphy’s was on
a cash basis for 1993 and 1994 but on an accrual basis for 1995.
Respondent’s examination of petitioners’ 1993, 1994, and
1995 returns began in May 1996. Following an initial examination
of petitioners’ books, respondent’s agent reconstructed
petitioners’ income using the net worth method. To that end,
respondent’s agent identified petitioners’ assets, liabilities,
and expenses. Respondent’s agent then reconstructed petitioners’
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