Bill McDonald - Page 15

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          continuous from 1976 through 1989, the year at issue, it was                
          operated through several entities.  Until both petitioners had              
          financial difficulties and went through bankruptcy, they had                
          operated their business as a partnership.  After the financial              
          difficulties, petitioners interposed a corporate entity partly to           
          deceive creditors and others.  The corporate entity allegedly               
          paid all expenses of petitioners’ tax accounting business, and              
          only a part of the income from such activity was reported by the            
          corporate entity.  Allegedly, the corporate entity did not pay              
          petitioners’ salary for their return preparation activity.                  
          Instead, petitioners allegedly received benefits such as                    
          insurance and automobile allowances, and their business overhead            
          was borne by the corporation.                                               
               After the corporate formation, the partnership entity                  
          continued to operate and report some of the business income, but            
          none of the expenses.  The income reported on the partnership               
          return was distributed as guaranteed payments to partners in                
          unequal amounts, even though petitioners were shown in the                  
          Schedules K-1 as 50-50 partners and no partnership agreement was            
          in existence.  Petitioners, by commingling these entities and               
          their business activities, created a murky environment in which             
          it is difficult to discern the sources of income or the entity by           
          which an expense had been incurred.  Petitioners’ discarding                
          records of income made this situation even more difficult to                
          unravel.  Finally, petitioners did not cooperate in the                     
          examination process, forcing respondent’s agent to seek third-              

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