Rhett Rance Smith and Alice Avila Smith - Page 3

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          with respondent’s Appeals Officer Laura M. Gonzalez in Omaha to             
          administratively resolve the cash contribution issues determined            
          in the notice of deficiency and raised by the pleadings.  Ms.               
          Gonzalez requested substantiation of the cash contribution                  
          deductions claimed on petitioners’ return.  In particular, she              
          requested receipts or evidence of payment and information showing           
          that any entity to which a contribution was made was one that               
          qualified under section 501(c)(3).2                                         
               Following the exchange of multiple letters between the                 
          parties, on January 6, 2006, one of petitioners’ representatives,           
          Attorney Eric Johnson, sent Ms. Gonzalez a letter which, in                 
          pertinent part, contained the following:                                    
               I propose that we settle this case.  I think it would                  
               be fair for the government to agree that the taxpayers                 
               may deduct as a charitable contribution the $74,200                    
               paid to Open Heaven Ministries for tax year 2002.  As                  
               stated in my letter of August 23, 2005, the itemized                   
               list of contributions made by the taxpayers after the                  
               Service Center contact totals $223,906, which is                       
               somewhat less than the $226,774 reported on the income                 
               tax return, and of that $223,906, the taxpayers are                    
               unable now to produce substantiation for $1,825, which                 
               leaves $222,081 in substantiated contributions.  The                   
               taxpayers hereby offer to settle this case on the basis                
               that they are entitled to $222,081 of the charitable                   
               contribution of $226,774 reported on the return.                       
               If you are not satisfied with various aspects of the                   
               Open Heaven Ministries issue, we would invite a                        
               counter-offer from the government containing a                         
               percentage disallowance of the Open Heaven Ministries                  
               contribution deduction for 2002 reflecting what the                    

               2 Section references are to the Internal Revenue Code as               
          amended and in effect for the period under consideration.                   





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