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not give this analysis to Clement. Among the records petitioner
used to reconstruct Sand Hill's income were monthly statements
from its Bank of America account.
On October 31, 1995, Clement met with petitioner and his
accountant to review records for Sand Hill's expenses and
petitioners' deductions disallowed in the notice of deficiency.
For recording Sand Hill's expenses, petitioner used a spiral-
bound notebook with accounting paper. Using this notebook,
petitioner verified each and every expense paid by Sand Hill for
which deductions were claimed by petitioners on their Schedules
C. Clement determined that petitioner kept the notebook in the
ordinary course of business during 1990 and that it was an
adequate record for petitioners' business. Petitioner, however,
did not present records of Sand Hill's income to Clement, so the
agent used petitioners' bank records to analyze deposits and
transfers to reconstruct Sand Hill's income.
In their petition, the Paus denied that they had received
income of $840,000 that they did not report on their 1990 return.
Respondent's answer asserted that petitioners failed to report
additional Schedule C income of $616,789, including the $150,000
consultation fee received by Susanna. Respondent further
asserted that the underpayment of petitioners' tax for 1990
attributable to their unreported income was due to fraud, and
that any deficiency stemming from that income is subject to the
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