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regarding the amounts that T.J. Construction owed to Phillips,
and petitioner kept no reliable records to substantiate any
liabilities or payments.
Because T.J. Construction is a flowthrough entity,
petitioners claimed the benefit of the corporate deductions and
costs of good sold taken for checks written to Phillips for which
Phillips did not actually receive payment. Due to the volume of
the cash withdrawn by petitioners and the absence of any accurate
records as to how much actually was given to Phillips, it is
impossible to determine how much of the amount paid out in
endorsed back checks represented payments received by Phillips.
However, respondent has conceded $1 million as an approximation
of cash received by Phillips from petitioner, and thus $1 million
of the endorsed back checks is allowable as cost of goods sold in
1997.
In an amended answer, respondent alleged that the cost of
goods sold of T.J. Construction was overstated by an additional
$21,253 because T.J. Construction paid for personal home
improvement expenses of petitioner in that amount in 1997 for
work performed by petitioner’s brother and his brother’s
subcontractor. Petitioners concede that these payments are
personal, but they allege that they were not improperly treated
under cost of goods sold for 1997 on the Form 1120S because
petitioner allegedly had contributed funds to T.J. Construction
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Last modified: November 10, 2007