Joseph and Marlene Schnell - Page 3

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               On March 31, 1986, petitioner incorporated Barad Plumbing              
          Corp. (Barad) in the State of New York, County of Suffolk.  Barad           
          has never filed corporate Federal income tax returns.  To date,             
          Barad has not dissolved, but its status is listed by the NYS                
          Department of State, Division of Corporations, as inactive.                 
               Sometime after petitioner was licensed as a master plumber             
          and incorporated Barad, he, as agent for Barad, entered into                
          contracts with the City of New York (the City).  Barad was later            
          declared to be in default of those contracts.  Barad ceased                 
          performing plumbing services around 1989.                                   
               Petitioners filed Form 1040, U.S. Individual Income Tax                
          Return, for 2001 reporting Schnell’s wages of $46,406 and                   
          claiming business losses of $38,500.  On Schedule C, Profit or              
          Loss From Business, for Barad, petitioner claimed $34,500 of bad            
          debts, $1,500 of advertising expenses, and $2,500 of office                 
          expenses.  A tax refund of $3,946, the amount of Federal income             
          tax withheld from Schnell’s wages for the year, was requested by            
          petitioners.                                                                
               For 2002, petitioners reported Schnell’s wages of $48,461.91           
          and claimed business losses from bad debts of $34,000.  A tax               
          refund of $3,532, the amount of Federal income tax withheld from            
          Schnell’s wages for the year, was requested by petitioners.                 
          Similarly, for 2003, petitioners reported Schnell’s wages of                
          $50,587.63 and claimed business losses from bad debts of $35,000.           






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