Peter S. Pau and Susanna H. Pau - Page 3

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          I.  The Unreported Income                                                   
               During 1990, and at all relevant times before and after that           
          year, the Paus operated a real estate development, management,              
          and brokerage business as sole proprietors doing business as                
          d.b.a. Sand Hill Property Co. (Sand Hill).  Petitioner was                  
          actively engaged in the real estate management and development              
          side of the business; Susanna was largely concerned with                    
          commercial real estate purchases and sales.  Susanna generally              
          dealt with major commercial properties, and most of her clients             
          hailed from Hong Kong and Japan.  Despite separate roles in Sand            
          Hill, petitioners worked together and were aware of each other's            
              Petitioner began working as a developer in 1979, having                
          earned a bachelor's degree in civil engineering from the                    
          University of California at Berkeley in 1975 and a master's                 
          degree in construction management from Stanford University in               
          1976.  Susanna earned a bachelor's degree in business                       
          administration and accounting from the University of California             
          at Berkeley in 1974.                                                        
               A.  The Stockton Street Property Transaction                           
               In March of 1990, Susanna brokered the sale of real property           
          located at 39 Stockton Street in San Francisco, California (the             
          Stockton Street property).  Meiyan Enterprises, Inc. (Meiyan),              
          sold the property to Sanrio, Inc. (Sanrio), a Japanese company,             
          for use as a retail outlet.  The sale generated a broker's                  

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