Peter S. Pau and Susanna H. Pau - Page 6

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          directed BNP to transfer $100,000 of the $840,000 to the Bank of            
          America account.  Sanrio mistakenly failed to issue a Form 1099             
          to petitioner for its payment of $840,000, because the payment              
          was made via a wire transfer rather than through its accounts               
          payable system.  Petitioners and Sanrio never discussed the                 
          issuance of a Form 1099 upon the completion of the transaction.             
               The BNP account was an interest-bearing account from which             
          Susanna periodically transferred funds to the Bank of America               
          account or to a checking account maintained at the Bank of the              
          West.  Except for the $840,000 from Sanrio, petitioners did not             
          deposit any other business income directly into the BNP account             
          in 1990; all other deposits in BNP were transfers from other                
          accounts held by petitioners.                                               
               C.  Petitioners' Recordkeeping Methods                                 
               Despite Susanna's accounting background, petitioner is Sand            
          Hill's bookkeeper.  He alone possessed signature authority over             
          the Bank of America account.  Petitioners used that account to              
          deposit their commission checks, management fees, and reimbursed            
          expenses.  Whenever the Bank of America account held a                      
          particularly large balance, petitioner would transfer funds via             
          check into other accounts, especially the BNP account, for the              
          purpose of accruing greater interest.  Petitioner claimed that              
          when he wrote checks on the Bank of America account for deposit             
          into another account, he did not verify that it contained                   






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