C. Richard Roose, Jr. and Betty B. Roose - Page 7

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               The IRS also inquired about petitioners' failure to report             
          credit card sales receipts.  Petitioners explained that, because            
          they did not consider credit card sales as cash-on-hand, they did           
          not enter credit card sales into the cash register or include               
          those amounts as part of the Daily Cash Report total.  Mr. Roose            
          falsely represented to the revenue agent that he wrote checks               
          from the Bank One account to the Middlefield account to transfer            
          funds back to the store.                                                    
               The use of the manual accounting system for certain payments           
          on accounts received by mail was also questioned during the                 
          examination.  Mr. Roose told the revenue agent that the manual              
          system saved time when numerous checks arrived in the mail.  In             
          the same conversation, Mr. Roose stated that the use of the cash            
          registers allowed him to keep accurate records of how much money            
          came in and went out of the store.                                          
               In September 1987, the case was referred to the criminal               
          investigation division.  Mr. Roose was indicted for attempted               
          income tax evasion relating to petitioners' 1984 and 1985                   
          returns.  After a trial, Mr. Roose was found not guilty.                    
               Section 6501(a) generally provides that income tax must be             
          assessed within 3 years after the filing of a return or the due             
          date for the return, whichever is later.  Section 6501(c)(1)                
          provides for an exception to the general period of limitations in           
          the instance of a fraudulent return.  Respondent's burden of                

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