Peter S. Pau and Susanna H. Pau - Page 13

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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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