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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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