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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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