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Petitioner received his CPA certificate during 1984. At
that time, he began a private accounting practice and
incorporated David Musgrave CPA, Inc. (the S Corporation) to
carry on the practice. During February 1986, William T.
Jeffcott, CPA (now deceased) and petitioner merged their
respective accounting practices. Petitioner changed the name of
the S Corporation to Jeffcott & Musgrave, CPAs, Inc. Petitioner,
however, remained the sole shareholder of the S Corporation.
During September 1986, petitioner and Mr. Jeffcott each
completed an application for key man life insurance through a
group plan sponsored by the American Institute of Certified
Public Accountants and underwritten by Prudential Insurance
Company of America (Prudential). Each policy provided for
$200,000 life insurance with double indemnity in the event of
accidental death. The applications for both petitioner and Mr.
Jeffcott stated the insurance beneficiary as "Jeffcott &
Musgrave, CPAs, Inc."
Sometime during December 1987, it was discovered that Mr.
Jeffcott had embezzled approximately $165,000 from Color Q, Inc.
(Color Q), a client of the S Corporation. Mr. Jeffcott, an
employee of the S Corporation at the time of the embezzlement,
was providing services to Color Q pursuant to an engagement
letter between Color Q and the S Corporation and for which the S
Corporation was paid fees by Color Q. On December 16, 1987, Mr.
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