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G. The Beach House
Mr. Reaves asked Kenneth Davis (Davis), a certified public
accountant and return preparer, if it would be proper for Reaves
Livestock to lend money to Mr. and Mrs. Reaves to buy a beach
house. Davis said that it would. Mr. Reaves told Mrs. Reaves
that they were going to borrow $55,000 from Reaves Livestock to
buy a beach house for themselves.
On November 24, 1986, Reaves Livestock lent $55,000 to Mr.
and Mrs. Reaves. Mrs. Reaves used that $55,000 and other money
to buy a beach house on November 25, 1986.
On December 11, 1986, Mrs. Reaves repaid Reaves Livestock
with a $55,000 check drawn on the S&J account.
In early 1987, Mrs. Reaves paid Allendale Furniture Co.
$6,000 from the George K. Reaves First Citizens account for beach
furniture.
H. Petitioners' Tax Returns
1. Reaves Livestock's Tax Returns
Davis prepared Reaves Livestock's income tax returns for the
years in issue.
At the end of the year, Wright or Lawson gave Reaves
Livestock's ledgers and journals to Davis for him to prepare its
corporate income tax return. Neither Mr. nor Mrs. Reaves gave
Davis any of Reaves Livestock's records. Mr. Reaves gave
inventory information to Wright or Lawson to give to Davis to
include in the corporate tax return. Davis could have reviewed
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