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that resulted in an increase in petitioners’ taxable income by
$12,385 as a result of an adjustment decreasing cost of goods
sold by $15,182 and other adjustments that reduced taxable
income.
After the second audit, respondent issued a notice of
deficiency that increased petitioners’ taxable self-employment
income by an additional $68,638, primarily because of adjustments
increasing by $70,572 the net profit reported on Schedule C,
Profit or Loss From Business. Respondent based these adjustments
on a series of deposits into petitioners’ business checking
accounts totaling $146,362. The second audit also resulted in
the allowance of a foreign tax credit of $19,030, which
eliminated petitioners’ regular income tax liability.
Respondent also reduced the cost of goods sold for 1998 to
$5,818 after the first audit. Exhibits and testimony at trial
establish that this cost of goods sold figure does not include
many of the expenses Mr. Rusten incurred buying equipment and
materials for the railroads for which he provided consulting
services. There was a great deal of testimony offered about
other possible cost of goods sold items, but the records of
income and expense petitioners produced at trial were
disorganized and incomplete.
In the notice of deficiency, respondent also determined that
petitioners were liable for a penalty under section 6662.
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Last modified: March 27, 2008