-7-
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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