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Petitioners did not fill out either a credit or loan application
prior to receipt of the funds reflected in the Universal Notes.
On August 19, 1991, petitioners and Alex Yung, as trustee of
the Herkeios Group, entered into a Credit Agreement, which
extended petitioners a $25,000 unsecured line-of-credit at 5-
percent interest. Petitioners did not complete a loan or credit
application for purposes of the Credit Agreement. Petitioners
received $3,100 of funds in 1991 pursuant to this agreement.
Mr. Maranto wrote several checks to himself on the account
of J.S. Khalsa during 1991, including checks advancing funds to
petitioners pursuant to the Universal Notes. Petitioners
deposited the funds received pursuant to the Universal Notes and
Credit Agreement, which totaled $15,100, into their checking and
savings accounts at Grossmont Bank in San Diego, California.
On Schedule C (Profit or Loss From Business) of their 1991
Federal income tax return, petitioners included as part of gross
receipts $2,450, which represented Mr. Maranto's compensation for
1991 from the Herkeios Group. Apart from the $2,450, petitioners
also reported a net profit from the business of $1,756.23. On
their 1990 return, petitioners had reported a net profit from
J.S. Khalsa of $43,920.
The Herkeios Group did not provide Mr. Maranto with a Form
W-2 for 1991. Mr. Maranto had no other employment during this
time.
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