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until June 15, 1994, but did not file its FYE 1993 return until
October 1995.
On August 23, 1995, respondent issued a notice of deficiency
to Vortex for its FYEs 1991, 1992, and 1993. Although
respondent’s agents performed net worth analyses and source and
application of funds analyses on Vortex and the Zhadanovs in an
effort to reconstruct their income for the years at issue, those
analyses proved inconclusive. Consequently, respondent
determined in the notice of deficiency issued to Vortex that
Vortex had unreported vial income for those years equal to the
cash receipts shown in Vortex’s cash receipts journal ($728,346)
and that Vortex was liable for fraud penalties under section 6663
for FYEs 1991 and 1992 and for the addition to tax for
fraudulently failing to file its return for FYE 1993.9 The
Zhadanovs filed timely joint Federal income tax returns for 1990,
1991, and 1992, and filed timely married filing separate returns
for 1993. The Zhadanovs subsequently signed Form 872, Consent To
Extend The Statute Of Limitations On Assessment And Collection Of
Their Individual Tax, extending the period of limitations for
1991 to December 31, 1995.
9Respondent does not dispute that the cash receipts journal
accurately reflects the cash income Vortex received from the
plastic vial sales. The Zhadanovs admit that the cash received
from the plastic vial sales was deposited in the safe and not
included as income on Vortex’s tax returns.
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