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On August 5, 1994, Susanna informed Clement's manager that
petitioners had retained counsel. However, as of August 10,
1994, Clement had not received a power of attorney from
petitioners, and he therefore could not discuss the Paus' tax
matters with another individual. A power of attorney was not
received until after Clement prepared the notice of deficiency
and forwarded petitioners' file on August 10, 1994, to the office
responsible for mailing such notices.
The notice of deficiency was issued on August 11, 1994, and
increased petitioners' Schedule C income for 1990 by $545,000
each, for a combined increase in their taxable income of
$1,090,000, as a result of the $840,000 income from Sanrio and
the $250,000 commission from the sale of the Stockton Street
property. (That commission had in fact been reported.)
Respondent also disallowed a total of $334,073 in Schedule C
expenses and $132,261 in itemized deductions.
Clement learned of Susanna's $150,000 consultation fee only
after receiving a copy of the canceled check pursuant to the
summons served upon the Bank of America. Neither Susanna nor
petitioner explained to Clement why they had not reported the
consultation fee on their return.
After Clement notified petitioners of the audit, petitioner
prepared a bank deposits analysis to show the transfer of funds
between and among petitioners' various accounts. Petitioner did
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