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1994 amended return was prepared on the cash basis method of
accounting. ISOA, Inc.’s 1994 amended Form 1120S reflected
ordinary income of $12,894.
On or about March 19, 1997, respondent received from ISOA,
Inc., a Form 1120S for the taxable year beginning January 1,
1996, and ending August 15, 1996. ISOA, Inc.’s 1996 return was
prepared on the cash basis method of accounting. ISOA, Inc.’s
1996 Form 1120S reported taxable income of zero and total
deductions of $69,937, for a loss of $69,937. The total
deductions included travel expenses of $22,856.
On or about March 19, 1997, respondent received ISOA, Inc.’s
Form 1120, U.S. Corporation Income Tax Return, for the taxable
year beginning August 16, 1996, and ending December 31, 1996.
The 1996 Form 1120 reflected that the return was prepared on the
accrual method of accounting. On the 1996 Form 1120, ISOA, Inc.,
reported total income of $446,454 and total deductions of
$482,825, for a loss of $36,371. On the balance sheet attached
to the Form 1120, ISOA, Inc., listed under “Other Current
Liabilities” ending balances for “Royalty Payable” and “Deferred
And Unearned Income” of $185,500 and $195,000, respectively.
II. Respondent’s Examinations
On June 12, 1996, respondent notified petitioners by letter
that their 1992 individual tax return had been selected for
examination in respondent’s Lubbock office. Revenue Agent Susan
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