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Respondent determined deficiencies in petitioners’ Federal
income taxes of $26,783 and $122 for the taxable years 1991 and
1994. The issue for decision is whether petitioners are entitled
to certain deductions they claimed on Schedule C, Profit or Loss
From Business, in 1994. Petitioners resided in San Diego,
California, on the date the petition was filed in this case.
On April 6, 1993, petitioner husband (petitioner)
incorporated an entity in the State of California with the name
Access Anytime Anywhere, Inc. On May 12, 1993, this
corporation’s name was changed to Navis Communications (Navis).
On December 19, 1993, petitioner signed a document as director of
Navis that, inter alia, named petitioner as the chairman,
president, chief executive officer (CEO), secretary, and chief
financial officer of Navis. By letter dated May 2, 1994, Navis
was notified by the Internal Revenue Service that its election to
be treated as an S corporation had been accepted “effective
beginning Jan. 1, 1994, subject to verification if we examine
your return.” Navis’s status was suspended on December 16, 1997,
and then again on June 1, 2001.
On November 9, 1994, petitioner incorporated another entity
in the State of California with the name Search2000. The
corporation’s name was changed to Power Agent, Inc., on September
19, 1995, and its status was suspended on January 2, 2001. A
Federal income tax return was filed for Power Agent in September
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