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For the years at issue, the gross income, expenses, and net
profit (or loss) of the funeral home were reported by petitioner
on his Federal income tax returns as follows:
1995 1996 1997
Gross income $43,274 $59,144 $45,430
Total expenses 48,112 53,023 41,162
Net profit (loss) ($ 4,838) $ 6,121 $ 4,268
The gross income amounts shown were based on reported gross
receipts of $58,552, $82,501, and $60,251, respectively, for the
3 years.
Petitioner's income tax returns for the 3 years in question
were selected for examination by the Internal Revenue Service.
As a result of that examination, it was revealed that Allan had
been diverting funds from the funeral home's gross receipts to
support his drug dependency. Following this disclosure,
petitioner dismissed his brother from his duties with the funeral
home. The examination also revealed inadequacies in the books
and records of the funeral home, and respondent determined the
gross receipts of the business by use of the bank deposits
method. In the notice of deficiency, respondent determined that
petitioner underreported the gross receipts of the funeral home
in the amounts of $98,608, $99,779, and $73,224, respectively,
for the years in question. In making this determination,
respondent allowed and did not include in the unreported gross
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