Peter S. Pau and Susanna H. Pau - Page 7

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          sufficient funds to cover the checks because there was always a             
          large balance.                                                              
               Business income and expenses for Sand Hill during 1990 were            
          evenly apportioned between petitioner and Susanna and reported on           
          two separate Schedules C attached to their 1990 return.  To track           
          expenses incurred by petitioners on Sand Hill's behalf,                     
          petitioner used the check register which showed the various types           
          and amounts of expenses.  Petitioner did not keep copies of bank            
          deposit slips and did not record the sources of the deposits,               
          although he did have access to monthly bank statements.  When               
          petitioner was ready to file the income tax return for himself              
          and Susanna, he simply resorted to his memory to determine what             
          transactions took place, since Susanna engaged in very few                  
          transactions on a yearly basis which generated commissions.                 
          Petitioner did not consult with Susanna to verify her income, nor           
          did he search Sand Hill's files.  For miscellaneous income,                 
          including interest from banks and brokerage firms, petitioner               
          relied on Forms 1099.                                                       
               For petitioners' Federal income tax returns, including the             
          1990 return, petitioner then prepared a one-page summary of Sand            
          Hill's income and expenses on his computer and gave it to                   
          petitioners' accountant.  The accountant used the summary to                
          prepare the Paus' tax returns.  The one-page summary is the only            
          record petitioner gave to the accountant.  In the summary,                  

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