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income tax returns. Mr. Hernandez relied upon information
furnished by Mr. Pennoni regarding the sale of HouTex stock when
preparing the Melniks’ 1997 returns.
On his 1997 Federal income tax return, Moshe Melnik reported
$1,608,515 as a long-term capital gain from the sale of his 2,900
shares of HouTex. The sales proceeds reported by Moshe Melnik on
his 1997 return were $29,000 less than the total consideration
received.30
On their 1997 joint Federal income tax return, Zalman and
Lea Melnik reported $1,179,183 as a long-term capital gain from
the sale of Zalman Melnik’s 2,100 shares of HouTex. The sales
proceeds reported were $21,000 less than the total consideration
received.31
Respondent’s Determinations
In notices of deficiency dated August 24, 2001, respondent
determined that the Melniks’ sale of their HouTex stock to Clend
was a sham transaction lacking economic substance. Pursuant to
this theory, respondent determined that Zalman Melnik and Lea
should recognize additional capital gain of $2,611,010, and Moshe
30The sale price that Moshe Melnik reported as a long-term
capital gain on his 1997 return reflected a mathematical error in
the amount of $19,881. The mathematical error and the $29,000
underreporting of the total consideration received were taken
into account in respondent’s notice of deficiency.
31The $21,000 underreporting of the total consideration
received was taken into account in respondent’s notice of
deficiency.
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