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income tax returns until October 28, 2002. On February 2, 2003,
respondent prepared a substitute for return for 1997. On July
12, 2004, respondent issued notices of deficiency to petitioner
for the years at issue.
Respondent determined petitioner received taxable income in
1997 based upon the Internal Revenue Service administrative
record of petitioner’s 1997 third-party payor information
(Administrative Record). Based upon the Administrative Record,
petitioner received: (1) W-2, Wage and Tax Statement, income of
$69,990, consisting of (a) $22,438 from Auspex Systems, Inc.; (b)
$33,269 from Microcadam, Inc.; and (c) $14,283 from NPC Admin.
Services DCP (NPC); (2) 1099-INT, Interest Income, income of
$120, consisting of (a) $13 from Capital One FSB; (b) $18 from
Glendale Federal Bank; and (c) $71 from Pasadena Federal Credit
Union; and (3) 1099-R, Distributions from Pensions, Annuities,
Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts,
etc., income of $8,399 from the Public Employees’ Retirement
System, for the State of California.
Respondent disallowed petitioner’s Schedule C expenses of
$46,669, $44,451, $44,063, and $39,135 for 1998, 1999, 2000, and
2001, respectively, for lack of substantiation. The disallowance
of Schedule C expenses caused petitioner’s adjusted gross income
to increase. As a result, petitioner’s Schedule A, Itemized
Deductions, deductions were reduced by $873, $864, and $764 in
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