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in a ledger, but she did not verify or check the amount of the
bank deposits in relation to the amount of recorded sales.
During October 1992, M&L's bankruptcy trustee filed a
complaint against petitioners to recover any funds they held that
may have belonged to the bankruptcy estate. Petitioners were
represented by Kevin Allen (Allen) in the bankruptcy matter. The
trustee was seeking amounts approaching $5 million from
petitioners on the theory of preferential transfers and
fraudulent conveyances. Petitioners contended that they held no
funds or assets of M&L, and they also disputed whether the
asserted legal theories applied to them. A settlement was
reached, and petitioners paid the bankruptcy estate $280,000
($220,000 in 1993 and $60,000 in 1994).
Respondent's agent, Monty Careswell (Careswell), a certified
public accountant with a master’s degree in taxation, began an
examination of M&L and related individuals, including
petitioners. Initially, Careswell examined petitioners'
involvement with M&L and attempted to reconstruct petitioners'
income using a check exchange analysis, but he found that the
payments from M&L for jewelry and those for the check exchanges
could not be distinguished. Additionally, Careswell could not
reconcile or verify the gross jewelry sales reported by
petitioners. Careswell concluded that petitioners' records were
inadequate, and he prepared a bank deposits reconstruction of
petitioners' income.
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