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petitioner's percentage of the fees that Stardust charged for a
session. The X's were often in different color inks on the same
day.
In September 1991, in a criminal trial in the Superior Court
of California, County of Ventura, petitioner was convicted of
nine counts of pandering and two counts of pimping in connection
with his operation of Stardust. In March 1993, the Court of
Appeals of the State of California, Second Appellate District,
Division Six, conditionally reversed and remanded petitioner's
State court conviction for further action on petitioner's
discriminatory prosecution claim. Petitioner subsequently
pleaded guilty to nine counts of pandering and two counts of
pimping by a Felony Disposition Statement filed July 21, 1993.
In October 1992, the IRS began an audit of petitioner's 1988
and 1989 Federal income tax returns. Revenue Agent James Deguchi
(Deguchi) received the 1988 return, transcripts, and information
obtained from the Criminal Investigations Division of the IRS.
Deguchi made copies of numerous documents, including the
calendars that were obtained through use of the search warrants.
Deguchi counted the number of X's on the calendars for 1988 and
1989 and multiplied the number by $50 to establish petitioner's
gross income from Stardust. Deguchi was aware that many of the
sessions were 1-hour sessions and outcalls for which petitioner
received a higher fee, but Deguchi used only the half-hour fee in
his computations. Deguchi used the same method to determine
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