Peter S. Pau and Susanna H. Pau - Page 10

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               Petitioners never did file an amended return.                          
               Petitioners did not consult a certified public accountant or           
          a tax attorney with respect to the tax treatment of the income              
          from Sanrio and losses from Regent.  However, they did ask an               
          accountant about the extent of their mortgage interest deduction            
          and about amending their return to claim an additional deduction.           
               E.  The Audit Process                                                  
               Richard Clement (Clement) is respondent's revenue agent                
          responsible for the audit of petitioners' 1990 Federal income tax           
          return.  He is familiar with real estate practices in the San               
          Francisco Bay area and has conducted audits of companies engaged            
          in real estate transactions.                                                
               In July of 1994, Clement examined the Federal income tax               
          return filed by Sanrio.  While auditing this return, he noticed             
          Sanrio's $840,000 payment by wire transfer to Susanna's account             
          at BNP.  Accordingly, he requested an RTVUE, which is a computer-           
          generated document showing certain types of information from a              
          tax return (such as gross receipts reported on a Schedule C).               
          Using the RTVUE, Clement discovered that the Paus had reported              
          gross receipts on their 1990 Schedules C in an amount less than             
          the $840,000 transfer reflected on Sanrio's return.                         
               After reviewing the Paus' 1990 return, Clement decided to              
          audit it.  He selected for examination gross receipts and                   
          expenses from the Schedules C, and Schedule A deductions for home           
          mortgage interest and contributions.  Clement left several                  

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