Garrett Lawrence Bailey - Page 2

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                                  FINDINGS OF FACT                                    
               Some of the facts have been stipulated.  We incorporate the            
          stipulated facts into our findings by this reference.  Petitioner           
          resided in Pasadena, California, when his petition in this case             
          was filed.  Petitioner is a lawyer authorized to practice law in            
          the State of California who, during the years at issue, was                 
          employed as an associate in a law firm.                                     
          1995 and 1996 Tax Liabilities                                               
               Petitioner filed Form 1040, U.S. Individual Income Tax                 
          Return, for 1995 and 1996.  On each return, petitioner reported             
          his filing status as married filing separate and claimed three              
          personal exemptions:  One for himself, one for his wife, and one            
          for his dependent son.  Petitioner also claimed Schedule C,                 
          Profit or Loss From Business or Profession (Sole Proprietorship),           
          business expenses of more than $50,000 on each of his 1995 and              
          1996 returns.                                                               
               In December 1997, respondent notified petitioner of changes            
          to petitioner’s 1995 return as a result of an examination.  The             
          changes included the disallowance of two of three personal                  
          exemptions and all of the Schedule C business expenses claimed on           
          petitioner’s 1995 return for lack of substantiation.                        
               In January 1998, petitioner sent letters to respondent                 
          requesting audit reconsideration and/or an Appeals conference               







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