Paul L. Blanton and Cynthia D. Blue-Blanton - Page 7

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               On December 15, 1992, petitioners bought a new residence at            
          3620 Jefferson Drive, Spokane, Washington (Jefferson property),             
          for $361,678.                                                               
          C.   Petitioners' Credit Applications                                       
               On June 2, 1989, petitioners submitted a residential loan              
          application.  On the line marked "present address" petitioners              
          typed: "106 E. 3rd Suite 1".  On the line for "No. Years" at                
          their present address they typed "6 mth".                                   
               On February 13, 1990, petitioners submitted a loan                     
          application to Rainier Bank.  On it, petitioners listed the W.              
          22d property as their home address, and wrote "1990" in the box             
          marked "YRS & MOS THERE".                                                   
               Petitioners submitted a credit application dated March 15,             
          1991, to Security Pacific Bank.  On it, they listed as their                
          residence address the W. 22d property, and wrote "1 year" in the            
          box marked "YRS & MOS THERE".                                               
          D.   Petitioners' 1992 Income Tax Return                                    
               Friends of petitioners recommended an accountant in Spokane,           
          Joseph Schmitz (Schmitz), to them.  Schmitz told petitioners that           
          he had obtained extensions to file their 1992 return.                       
          Petitioners' 1992 return was due October 15, 1993.                          
               Schmitz prepared petitioners' 1992 income tax return.                  
          Petitioners filed it on July 25, 1994.  Schmitz attached Form               
          2119, Sale of Your Home, to petitioners' 1992 return.  On the               
          Form 2119, Schmitz checked a box to indicate that petitioners had           




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