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Petitioners did not report for 1989 or 1990 income from the check
exchanging arrangement. Also, during July 1990, M&L caused a
$207,000 check to be deposited in petitioners' Santa Barbara
Savings and Loan account.
Clara Spake (Spake) had been petitioners' tax return
preparer for about 15 years, and she prepared their 1990 return.
She was aware of the check exchanges with M&L, and she kept track
of them for a short time during 1988. Spake advised petitioner
that she did not know whether it was illegal, but if petitioner
came out ahead of M&L in any year, the difference would be
income. Petitioner encouraged several others, including Spake,
to invest with Joseph/M&L, and he received a "broker fee" for new
investors steered to M&L. Petitioner's broker fee was "paid" by
means of increases to his M&L investment. M&L filed for
bankruptcy during October 1990, and petitioners, in August 1993,
filed a $140,000 claim against the M&L bankrupt estate.
Spake performed the monthly bookkeeping and prepared
petitioners' annual tax returns, computing income on the basis of
the jewelry store register receipts and undocumented information
from petitioner. Petitioner, in addition to selling jewelry
through his store, manufactured and sold custom jewelry.
Numerous payments for custom jewelry received by petitioner were
not run through the jewelry store register and, instead, were
reported orally to Spake without documentation subject to
verification. Spake recorded petitioners' business bank deposits
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