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morning. Nick Kikalos, Jr. (Nick, Jr.) managed store No. 2, and
petitioners' daughter, Liz Lukowski (Liz), managed store No. 3.
Petitioners computed their income using the cash receipts
and disbursements method. Every business day, Nick made entries
of income and expenses on bound, sequentially paged ledgers for
each of his three stores. Nick maintained a separate checking
account for each of the three stores and an additional "lotto"
account, which he maintained as a fiduciary for the State of
Indiana. Nick did not account for the lotto receipts directly.
Instead, he funded the account twice a week from the daily
proceeds of store No. 3. Keeping strict lotto accounts, he
reported, would be a "big pain." The State of Indiana obtained
its funds from the lotto account by means of electronic fund
transfers.
There was one cash register in each of the stores. Despite
advice that he do so, Nick did not retain the receipts or daily
summaries produced by the cash registers during the years in
issue.
Nick dealt substantially in cash. All sales were in cash;
credit cards were not accepted, and personal checks were rarely
taken. Customers could, however, pay for part of their cigarette
purchases with manufacturers' coupons. These took two forms:
"Physical" coupons, which Nick would send to the manufacturers
for redemption, and "buy down" coupons, for which the
manufacturers paid Nick directly. Petitioners' employees rang up
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