Frank H. and Marla C. Black - Page 6

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          expenses, and evidence showing that petitioners had acquired                
          assets and made substantial expenditures, Agent McCarter decided            
          to use an indirect method of proof to reconstruct Mr. Black’s               
          income for 1991 and 1992.  Agent McCarter ultimately determined             
          that the net worth method would be the most appropriate method to           
          use.  Agent McCarter prepared a revenue agent’s report setting              
          forth the results of her examination of petitioners’ returns for            
          the taxable years 1991 and 1992.                                            
               On June 9, 2004, respondent issued a statutory notice of               
          deficiency to petitioners for taxable years 1991 and 1992.  In              
          the notice of deficiency, respondent determined petitioners’                
          taxable income for 1991 and 1992 using the net worth method of              
          proof.  Respondent determined that petitioners made nondeductible           
          expenditures during taxable years 1991 and 1992 of $108,768.01              
          and $188,219.01, respectively.                                              
               Mr. Black applied for a $250,000 life insurance policy.                
          Mr. Black’s business wrote check No. 1908 dated 12/10/92 to First           
          Colony Life Insurance Co. of $318.24 for a $50,000 life insurance           
          policy on Mr. Black.                                                        
               Respondent’s net worth computations treat certain payments             
          made by Mr. Black’s businesses during 1991 and 1992 for medical             
          expenses as nondeductible personal expenditures made by                     

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