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1991 and 1992, petitioner was liable for deficiencies in the
respective amounts of $1,432,427 and $1,057,707, and accuracy-
related penalties under section 6662(a) in the respective amounts
of $286,485 and $211,541. Essentially, respondent's
determinations were based on two contentions: (1) Petitioner's
method of accounting did not clearly reflect income, and, as a
result, various items of interest and discount income were
understated, and (2) petitioner failed to substantiate deductions
for bad debts, rental expenses, and depreciation. With regard to
the first contention, respondent determined that petitioner's
books and records were inadequate to establish the amount of
petitioner's gross income.
Petitioner timely filed a petition with this Court.
Subsequently, petitioner hired Milton D. Mittelstedt
(Mittelstedt), a certified public accountant with Deloitte &
Touche LLP, to assist in the litigation. Mittelstedt apparently
did not attempt to reconcile petitioner's income from its
accounting records. Rather he prepared net worth analyses. A
net worth analysis is a reconstruction of a taxpayer's taxable
income based on changes of net worth from the beginning to the
end of a taxable period. These analyses became the basis of a
settlement that was reached between petitioner and respondent's
appeals officer. For services rendered between June 1995 and
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