Ray W. and Marilyn S. Sowards - Page 9

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          expenses.  Mr. Sowards represented to Agent Daleiden that his               
          wife performed paralegal services associated with his law                   
          practice.  Similarly, in responding to respondent’s interrogatory           
          concerning the substantiation of the business consulting                    
          expenses, Mr. Sowards answered: “All of petitioners’ financial              
          and tax data for the years in dispute were destroyed in a fire on           
          April 8, 1998.”  In his second set of interrogatories, respondent           
          asked Mr. Sowards to “State what duties Marilyn Sowards performed           
          as an organizational consultant during 1996.”  Mr. Sowards                  
          responded: “Marilyn Sowards performed light filing and mailing.”            
          However, Ms. Sowards never had a consulting business.  Mr.                  
          Sowards fabricated the business.12                                          
               On their 1996 and 1997 returns, petitioners included                   
          Schedules C for Mr. Sowards’s law practice.  On these Schedules             
          C, petitioners claimed deductions for expenses of $11,197 and               
          $14,805 for 1996 and 1997, respectively.  Respondent denied all             
          of petitioners’ claimed deductions for lack of substantiation.              
          Additionally, respondent imputed additional income of $7,725 in             
          1997 to petitioners from the law practice utilizing the bank                
          deposits method of income reconstruction.                                   


               12Mr. Sowards testified at trial that the income and                   
          expenses shown on his wife’s Schedule C were from his law                   
          practice and that he reported them on his wife’s Schedule C to              
          get credit for Social Security purposes.  Ms. Sowards did not               
          know of the claimed existence of “her” fabricated organizational            
          consulting business until the Internal Revenue Service (IRS)                
          commenced the examination of petitioners’ returns.                          




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