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if the money were bound together by rubber bands, but he did not
respond.
Prior to the March 1993 meeting with petitioner, Hensley had
concluded that there were indicia of fraud in petitioner's case.
Afterwards, she referred the case to the Criminal Investigation
Division (CID) of the IRS. The investigation resulted in no
indictment of petitioner. No direct link between petitioner and
the criminal activity of his father during 1989 and 1990 was
uncovered by the agents assigned to the CID.
I. The Notice of Deficiency
Respondent issued a statutory notice of deficiency on April
5, 1996, for the taxable years 1989 and 1990. Among other
things, respondent made adjustments to petitioner's gross income
of $32,697 in 1989 and $93,809 in 1990, utilizing the bank
deposits and cash expenditures method of income reconstruction.
Respondent also disallowed certain Schedule C expenses for 1990
related to the dog kennel business in the amount of $2,418.
Moreover, respondent determined that petitioner was liable for
self-employment taxes pursuant to section 1401 on the entire
amount of the understatements of gross income for 1989 and 1990.
In addition, respondent determined that petitioner was liable for
accuracy-related penalties for 1989 and 1990 for negligence
pursuant to section 6662(a).
In the pleadings, petitioner conceded that he improperly
omitted $3.43 of taxable interest income from the Life and
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