Timothy and Barbara Kosinski - Page 9




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          to petitioner and deposited into the personal bank account of               
          petitioners.  All of the checks that were made payable to                   
          Phillips or to Phillips Contracting but endorsed back to                    
          petitioner were treated as cost of goods sold on the Forms 1120S            
          of T.J. Construction for tax years 1996 through 1998.                       
               From early 1996 through 1998, petitioner’s brother, George             
          Kosinski, performed substantial home improvements on petitioners’           
          personal residence and on the home in which petitioner’s mother             
          lived, which home was owned by petitioners.  The work performed             
          by George Kosinski was billed by his company, Rougewood                     
          Construction, to “Tim Kosinski” but was paid for by checks out of           
          T.J. Construction’s account.  Until December 1997, invoices from            
          Rougewood Construction were addressed to petitioners’ personal              
          residence.  Beginning in December 1997, the invoices were                   
          addressed to petitioner at his business address.  All of the                
          checks to Rougewood Construction, totaling nearly $141,000 from             
          1996 through 1998, were signed by petitioner, and none had any              
          notation indicating that they were for personal expenses.                   
          Payments to Rougewood Construction for personal home improvement            
          expenses of petitioners were deducted as business expenses on the           
          Forms 1120S of T.J. Construction.  Some of the personal home                
          improvement work for petitioners was performed by Star                      
          Mechanical, a subcontractor of Rougewood Construction, and Star             








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