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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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