Stephen R. and Mary K. Herbel - Page 21

                                       - 21 -                                         
                  Postage and delivery          87                                    
                  Amortization-organization cap     135                               
                  Bank charges                   55                                   
                  Total deductions                        58,363                      
                                                                                     
                  Ordinary loss                           (36,394)                    

             Attached to Malibu's 1988 return are two Schedules K-1,                  
             Shareholder's Share of Income, Credits, Deductions, Etc.                 
             Mr. Herbel's Schedule K-1 reports $3,639 as his                          
             distributive share of Malibu's loss, and Mr. Webb's                      
             Schedule K-1 reports $32,755 as his share.                               
                  Upon audit of Malibu’s return for 1988, respondent                  
             determined that Malibu had understated its gross receipts                
             by $1,825,086.  Respondent's agent made the following                    
             explanation of this adjustment:                                          

                  It is determined that payments made to you by                       
                  Arkla, Inc. and Subsidiaries under a "take or                       
                  pay" contract, in the amount of $1,825,086.00                       
                  were not reported by you on your 1988 tax                           
                  return.  Therefore, taxable income is increased                     
                  $1,825,086.00 for 1988.                                             

                  The following schedule summarizes the amounts reported              
             on Malibu's 1988 return, and the adjustments determined by               
             respondent:                                                              

             Malibu's                                                                 
             1988 Return                                                              
             on Form 1120S      Per Return    Adjustments     Corrected               
             Gross receipts     $24,914.00   $1,825,086.00  $1,850,000.00             
             Cost of goods sold (2,945.00)   --             (2,945.00)                
             Total income       21,969.00    1,825,086.00   1,847,055.00              





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