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that occurred on March 13, 1988, and a Schedule E loss of
$28,195, which consisted of a net loss of $28,968 with respect to
petitioners' rental properties and the $773 of income that
petitioners reported with respect to White Star. Petitioners
received refunds for 1985, 1986, and 1987 in the amounts of $48,
$3,353, and $2,919, respectively.
Respondent's Examination of Petitioners' Returns
Based on a prime lead referral that was generated because an
Internal Revenue Service employee observed a Rolls Royce that,
after further investigation, was determined to belong to peti-
tioners, Revenue Agent Karen Lyle (Ms. Lyle) was assigned to
examine petitioners' 1987 return. Thereafter, Ms. Lyle sent a
letter (appointment letter) to Mr. Dennett, who, on August 29,
1989, had filed Form 2848, Power of Attorney and Declaration of
Representative (Form 2848), authorizing him to represent peti-
tioners with respect to their taxable year 1987. In the appoint-
ment letter, Ms. Lyle requested books, records, savings account
passbooks, and various other documents relating to petitioners'
taxable year 1987. However, Ms. Lyle never conducted a field
visit with petitioners because Revenue Agent Leonard R. Kaply
(Mr. Kaply) replaced her.
On September 25, 1989, Mr. Kaply met (September 1989 meet-
ing) with petitioners, Mr. Dennett, and Ms. Wildes. At that
meeting, petitioners told Mr. Kaply about the types of written
materials that Ms. Olbres maintained during 1987 for Design
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