William T. Butler, Transferee - Page 9




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               A.   Underpayment of Tax                                               
                    1.   Metro’s Omitted Income                                       
               Respondent determined the amount of Metro’s omitted income             
          by compiling checks written by Poor Richards to Metro and Village           
          Sanitation.  See sec. 446(b) (authorizing the Commissioner to               
          reconstruct a taxpayer’s income where the taxpayer fails to                 
          maintain adequate records).  Petitioners contend that the                   
          worksheets used to bill Poor Richards, as summarized by McGraw,             
          more accurately reflect income to Metro.                                    
               The worksheets were incomplete and not compiled                        
          contemporaneously with Butler’s receipt of the diverted funds.              
          Accordingly, we sustain respondent’s determinations relating to             
          the amounts of income omitted from Metro’s returns.                         
                    2.   Metro’s Alleged Deductions                                   
               Petitioners concede that Metro underreported subcontract               
          income during the years in issue, Metro overstated its                      
          subcontract expense in 1988 and 1989, and all of the funds                  
          related to the underreporting and overstatement were diverted to            
          Butler.  Petitioners contend, without supplying any                         
          contemporaneous documentary evidence or third-party testimony,              
          that all funds diverted to Butler were used to pay Metro’s                  
          ordinary and necessary business expenses (e.g., cash payments for           
          lower dumping fees, black-market truck parts, compensation to               
          Butler and other Metro employees, etc.).  See Franklin v.                   






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