Bill McDonald - Page 9

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          due to lack of capacity after the State of California had                   
          suspended its charter.                                                      
               Respondent’s agent, Arthur Pease (Pease), examined M&M’s               
          partnership returns for the taxable year ended September 30,                
          1987, and the calendar years 1987, 1988, and 1989.  Petitioners             
          did not provide the identification of their clients, and Pease              
          was forced to reconstruct client information by using Internal              
          Revenue Service computer data (return preparer information) and             
          by canvassing third parties (petitioners’ clients and banks).               
          Pease obtained copies of clients’ returns prepared by petitioners           
          that reflected the fee for tax preparation.  Pease also received            
          a rate sheet for M&M from one of petitioners’ clients.  In                  
          addition, Pease received numerous letters that contained                    
          information about the fees charged for return preparation.  Pease           
          also engaged in numerous telephone conversations with                       
          petitioners’ clients concerning the fees that petitioners charged           
               Based on his research, Pease prepared a schedule of clients,           
          referencing the accumulated information along with references to            
          sources for respondent’s reconstruction of petitioners’ income              
          for the 1989 taxable year.  Where Pease determined that an                  
          individual return had been prepared and that no invoice, deposit            
          information, canceled check, or client information was available            
          to reflect the fee charged, he used a $275 preparation fee, the             
          minimum charge for an individual return reflected on M&M’s rate             
          schedule.  Based on the information available to him, Pease                 

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