Bill McDonald - Page 7

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          Petitioners maintained the books and records of Gold.  M&M did              
          not claim expenses, and any expenses concerning petitioners’ tax            
          accounting businesses were paid and/or deducted by Gold.  Gold              
          had no employees other than petitioners.                                    
               Similar to M&M, petitioners maintained no cash receipts                
          journal, accounts receivable list, or client list for Gold.  Also           
          paralleling the practices at M&M, copies of client billing                  
          invoices were discarded after payment was received from the                 
          clients.  Petitioners, however, maintained cash disbursements               
          records for Gold during 1989.                                               
               Petitioners maintained a bank account in Gold’s name at the            
          Merchants National Bank (Merchants Bank), and some, but not all,            
          of the receipts from clients were deposited into that account.              
          Petitioners’ method of determining Gold’s annual income for tax             
          purposes began by totaling the Merchants Bank deposits and                  
          reducing the total by reimbursements for health insurance.  The             
          difference was then adjusted by picking up net increases or                 
          decreases in accounts receivable to convert to the accrual                  
          method.  Finally, the accrual method amount was reduced by                  
          expenses that petitioners had billed to and collected from                  
               For the 1989 and 1990 fiscal years, Gold’s income was                  
          computed and reported by petitioners as follows:                            

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