Compact Equipment Company - Page 13

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          taxable periods at issue.  In response to the agents’ questions,            
          Atkinson stated that petitioner had not deducted any of the                 
          construction expenses on its corporate tax returns.                         
               Atkinson, however, stated that if petitioner paid his                  
          personal expenses, he would repay petitioner when petitioner                
          billed him for those amounts.  Atkinson explained that he                   
          recollected one instance when petitioner paid $75,000 for lumber            
          to be used in the construction of the Carnelian Bay residence               
          which he subsequently repaid.  Atkinson failed to disclose to the           
          agents that petitioner paid various other construction expenses             
          for which he did not reimburse petitioner.  The IRS subsequently            
          served Atkinson with a summons seeking the construction invoices,           
          but they were never delivered to the IRS.                                   
               On September 12, 1991, a Federal grand jury charged Atkinson           
          with violating section 7201 with regard to Atkinson’s 1985 and              
          1986 individual tax returns and section 7206(1) with regard to              
          petitioner’s corporate tax returns for the taxable periods at               
          issue.  Atkinson subsequently was convicted.  On December 20,               
          1991, a Federal district court judge ordered Atkinson to serve 1            
          year and 1 day in prison, to pay a $500,000 fine, and to pay the            
          taxes owed with regard to the Atkinsons’ 1985 and 1986 individual           
          tax returns.                                                                
               In separate notices of deficiency dated March 14, 1997,                
          respondent determined that petitioner fraudulently deducted the             

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