David J. Edwards - Page 7

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          determine petitioner’s tax liability.  On March 31, 2000,                   
          respondent issued a notice of deficiency to petitioner.                     
          Respondent did not send a 30-day letter before issuing the notice           
          of deficiency.  The period of limitations for making an                     
          assessment of petitioner’s 1996 tax liability would have                    
          otherwise expired on April 15, 2000.                                        
               In the notice of deficiency, respondent determined that the            
          trusts petitioner created were shams and should be disregarded,             
          or were grantor trusts all of whose income is taxable to                    
          petitioner.  Respondent determined that petitioner’s reported               
          gross income should be increased by the gross income reported by            
          the trusts ($560,184 for 1996 and $495,048 for 1997) and by                 
          unexplained deposits made to petitioner’s bank account ($170,619            
          for 1996 and $131,190 for 1997) and to one of petitioner’s trust            
          bank accounts ($2,900 for 1996).  Respondent disallowed all                 
          deductions claimed by petitioner and the trusts, because                    
          petitioner failed to provide substantiation for the deductions              
          claimed on the returns ($574,430 for 1996 and $619,094 for 1997).           
          Respondent made other computational adjustments to petitioner’s             
          returns resulting from the additional income respondent                     
          determined (such as determining that petitioner underreported               
          self-employment taxes by $42,103 for 1996 and $39,443 for 1997).            
          As a result of these adjustments, respondent determined that                








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