Donald C. Richardson and Rita M. Allaire - Page 20

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               Based on the foregoing analysis, we also conclude that                 
          respondent had a basis in law for all of the adjustments in the             
          notices of deficiency and the answer to the petition, as provided           
          under the Internal Revenue Code.                                            
                    C.  Fraud (PCCL and Petitioners)                                  
               Respondent determined that PCCL and petitioners were liable            
          for penalties for fraud as provided under section 6663.                     
          Respondent's agents conducted an examination and investigation of           
          these cases from October 1994 through March 1997.  This                     
          investigation included interviewing third parties that had                  
          relevant information and/or documentation pertinent to the issues           
          at hand.  In addition, respondent's revenue agent and special               
          agents interviewed petitioners, sent document requests to                   
          petitioners, and examined PCCL's financial statements.                      
          Respondent's revenue agent thoroughly reviewed PCCL's American              
          Express statements and drafted a report based on her conclusions            
          of the examination.                                                         
               With regard to the unreported income, petitioner admitted to           
          receiving income from selling PCCL's inventory.  He admitted                
          these sales did not go through PCCL's normal sales channels.  He            
          also admitted that such income was not reported.  Respondent was            
          aware that petitioners were in control of PCCL.                             
               With regard to the home improvements, respondent discovered            
          petitioner Allaire signed PCCL's checks to pay for the work being           

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