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RAF’s accountant showing loans to RAF from Mr. Lenzen and Mr.
Schoenecker and RAF’s interest expense on the loans.
On February 12, 2003, respondent issued RAF a notice of
deficiency disallowing $100,793 of the sales expense deduction.
Specifically, respondent disallowed charges of $62,392 on the
corporate card, charges of $1,807 on an American Express
Corporate Optima Platinum card (Optima card), and a series of
miscellaneous expenses totaling $36,594.43 (miscellaneous
expenses). Of the disallowed amounts charged to the corporate
card, $27,202.50 was charged by Mr. Lenzen, $28,158.09 was
charged by Mrs. Lenzen, $5,439.01 was charged by Steven Lenzen,
and $1,593.40 was charged by David Lenzen.
Respondent has conceded that all the Optima card charges,
miscellaneous expenses, and corporate card charges made by Steven
Lenzen and David Lenzen were properly deducted and that $7,687 of
Mr. Lenzen’s corporate card charges were properly deducted.
Respondent maintains that all of Mrs. Lenzen’s corporate card
charges, $28,158, and the remainder of Mr. Lenzen’s corporate
card charges, $19,516, were for personal expenses of the Lenzens.
B. The Lenzens’ 1999 Return
The Lenzens filed a joint Form 1040, U.S. Individual Income
Tax Return, for 1999. On their 1999 return, the Lenzens reported
interest income of $49,598 from RAF. The Lenzens’ 1999 return
also indicates that they received gambling income of $17,204 and
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