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that petitioner and his former spouse each owned 50 percent of
the stock of Elan. Elan reported that it had $12,334 in negative
retained earnings at the end of 1989.
At a date not specified in the record, Elan applied to the
State Insurance Fund for a disability insurance policy. The
application states that both petitioner and his former spouse
owned Elan.
C. Petitioner's Receipt of Elan's Funds in 1990
Sharif Designs, Ltd. (Sharif), and Jay Herbert Handbags,
Inc. (Jay Herbert), were customers of Elan in 1990. Petitioner
received $368,288 in checks from Sharif and Jay Herbert in 1990.
Sharif and Jay Herbert made the checks payable to petitioner.
Petitioner endorsed and cashed them.
Petitioner deposited $222,095 of the $368,288 into Elan’s
checking account. He did not deposit $146,193. Petitioner used
$26,134 of the $146,193 to pay expenses for Elan.
D. Elan's 1990 Tax Return
Late in 1994 or early in 1995, petitioner’s present spouse
contacted Kabir Sheikh (Sheikh), an accountant, and gave him some
of Elan’s records. Sheikh prepared a Form 1120 (U.S. Corporation
Income Tax Return) for 1990, not knowing that Elan could have
been an S corporation. On February 23, 1995, petitioner filed
that return for Elan. On it, he reported that the $368,288 from
Sharif and Jay Herbert was gross income to Elan. Elan reported a
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