David D. Brayshaw and Nora D. Brayshaw - Page 4




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          measurements on the bay throughout the year using a yacht                   
          petitioners had owned since approximately 1984.  Mr. Brayshaw               
          began selling this software in early 1997.                                  
               In addition, Mr. Brayshaw prior to 1996 had formed a                   
          corporation named First Draft Legal System, Inc. (FDLS).  This              
          corporation was engaged in the sale of a computer software                  
          program which automated the creation of legal documents.  A                 
          separate bank account was maintained in the corporation’s name.             
          For taxable year 1996, a Federal income tax return was filed for            
          FDLS.  This return reported $57,553 in income, $825 in cost of              
          goods sold, and $55,500 in salaries, leaving $1,228 in taxable              
          income.  Mr. Brayshaw was an employee and/or an independent                 
          contractor of FDLS.  Finally, Mr. Brayshaw was engaged in                   
          “database work” which was unrelated to either of his other                  
          business activities.                                                        
               Prior to 1996, petitioner wife (Ms. Brayshaw) conducted a              
          medical consultation business.  By 1996, however, she had ceased            
          operating this business.                                                    
               Petitioners filed two Schedules C, Profit or Loss from                 
          Business, with their joint Federal income tax return for taxable            
          year 1996.  The first was filed for an alleged business activity            
          of Ms. Brayshaw, the second was for the business activities of              
          Mr. Brayshaw.  In the statutory notice of deficiency, respondent            
          disallowed all of the expenses claimed on each Schedule C,                  






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