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and brake services. Petitioner denied conducting any other major
mechanical repair services. Subsequently, however, petitioner
provided Pascual with receipts and invoices for mechanical repair
work in order to substantiate Mena’s expenses. When Pascual
questioned petitioner regarding the repair work, petitioner took
the invoices back from Pascual and told him not to include the
invoices in the calculation of expenses. Petitioner later told
Pascual that he received a 10-percent fee for referring Mena’s
customers for repair work completed by third parties. Petitioner
also did not disclose to Pascual gross receipts from two public
telephones located on Mena’s property.
On July 10, 2001, respondent sent to petitioners a notice of
deficiency listing adjustments for unreported gross receipts and
disallowing a portion of the cost of goods sold and of the
business expenses. Respondent also disallowed petitioners’
earned income credit for all 3 years.
The petition disputed respondent’s determination of cost of
goods sold but not the determination of unreported gross
receipts. Petitioner stipulated that he had unreported gross
receipts from Mena’s in the amounts of $302,550, $579,528, and
$561,200 for 1993, 1994, and 1995, respectively. Respondent
concedes that petitioners are entitled to cost of goods sold of
$99,251 in 1993 and $336,008 in 1994 in addition to the amounts
previously determined, decreasing the deficiency and penalty
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