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The second element exists when a taxpayer files a return
that contains an inadequately disclosed item and respondent
accepts that return and allows the period of limitations to
expire without an audit of that return. Id.; Mayfair Minerals,
Inc. v. Commissioner, 56 T.C. 82, 88 (1971), affd. per curiam 456
F.2d 622 (5th Cir. 1972); see Hughes & Luce, L.L.P. v.
Commissioner, T.C. Memo. 1994-559, affd. on another issue 70 F.3d
16 (5th Cir. 1995).
Spencer Medical indisputably did not provide sufficient
facts to give the IRS actual knowledge of the 1983 Coral
contract. Spencer Medical's 1983 return did not disclose that
the claimed research expense arose out of a promissory note or
out of a transaction with Coral. The transaction was not
examined in any prior examination of Spencer Medical. Compare
Erickson v. Commissioner, T.C. Memo. 1991-97; Gmelin v.
Commissioner, T.C. Memo. 1988-338, affd. without published
opinion 891 F.2d 280 (3d Cir. 1989).
Petitioner argues, however, that the project list that was
discovered by Gibb in February 1987 provided the IRS with a
reason to know on or before April 15, 1987, that Spencer Medical
invested in Coral in 1983 and claimed erroneous expenses. In
addition, petitioner argues that the IRS had the capabilities to
identify the necessary information regarding the clients on the
project list by using the IRS computer data bases. (Proffered
expert testimony on this subject was excluded because petitioner
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