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account. Of these deposits, $3,500 were nontaxable transfers
from bank accounts controlled by petitioners. Petitioners also
deposited $141,130.52 into the Cohen account during 1996. Of
these deposits, $74,857 represented nontaxable items.
Petitioners had unexplained deposits into the two accounts in
1996 totaling $78,791.02.
During 1996, petitioners maintained a brokerage account with
Bear, Sterns & Co., Inc. (brokerage account). Petitioners
recognized short- and long-term capital gains of $18,521 in 1996.
Federal Tax Returns
Grey acted as petitioners’ accountant and filed both
business and personal returns for petitioners beginning in or
around 1983. Petitioners filed a joint Federal income tax return
for 1996 on July 18, 1997. They reported adjusted gross income
of $10,075.42, no taxable income, and self-employment tax of
$1,067.77. On their Schedule C, petitioners reported gross
receipts of $20,680, other income of $80, and expenses of
$13,202.96. Petitioners reported a net profit of $7,557.04 as
business income on their return. Grey prepared petitioners’
personal return and the Form 1120 for NHIL. Grey reviewed the
return with petitioners, who then signed the return.
On July 8, 1998, petitioners filed a Form 1040X, Amended
U.S. Individual Income Tax Return, for 1996. The only change
reported on this return was a claim by petitioners for the earned
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