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liability. Unless otherwise indicated, all section references
are to the Internal Revenue Code in effect for the year in issue,
and all Rule references are to the Tax Court Rules of Practice
and Procedure.
Background
At the time of filing the petition, petitioners resided in
Paoli, Pennsylania.
Petitioner Hugh D. Summers’s Criminal Case and Amended 1989
Tax Return
During 1992, petitioner Hugh D. Summers (Mr. Summers)
pleaded guilty to conspiring to defraud the Internal Revenue
Service (IRS) by concealing and diverting income in violation of
18 U.S.C. section 371 (2000). Mr. Summers acknowledged that he
received unreported taxable income of $963,000 between 1982 and
1990. Mr. Summers was sentenced to 4 years’ probation and agreed
to file an amended tax return for 1989. See United States v.
Hugh D. Summers, No. 93-CR-35 (E.D. Pa.).
Petitioners’ Previous Tax Court Case
On May 24, 1993, petitioners filed an amended tax return for
1989, reporting an increase in their tax liability in the amount
of $69,289. On November 8, 1993, respondent assessed petitioners
the $69,289 shown on petitioners’ 1989 amended tax return.
On June 1, 1995, respondent sent petitioners a notice of
deficiency regarding negligence penalties for petitioners’ 1989
taxable year. Petitioners timely filed a petition with this
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