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Taylor (now Janet Eggleston), for the taxable years 1984, 1985,
1986, 1987, and 1988. On July 6, 1987, respondent's Examination
Division commenced an examination of their joint 1984 and 1985
returns. The examination was expanded later to include the joint
returns for the 1986 through 1988 taxable years and the corporate
returns for the same periods of Highline Industrial Supply, Inc.
(Highline), a corporation wholly owned by petitioner and Ms.
Taylor. Petitioner and Ms. Taylor were the only employees of
Highline. Petitioner worked primarily in sales, and Ms. Taylor
primarily maintained the books and records.
On October 13, 1988, the Examination Division referred the
case to the Criminal Investigation Division (CID). It is
established procedure of the Internal Revenue Service that when
during his investigation a revenue agent in the Examination
Division discovers an indication of fraud, he is required to
suspend his examination and refer the case to the CID. See
United States v. Gilpin, 542 F.2d 38, 40 (7th Cir. 1976). CID
accepted the case on December 15, 1988, and contacted petitioner
and Ms. Taylor on April 12, 1989. The criminal investigation
covered 5 years of the returns of the individuals and Highline.
The underlying theory of the criminal investigation was that
Highline had paid personal expenses of petitioner and Ms. Taylor
and that they had not reported that income on their Federal
income tax returns. Highline did not maintain adequate books and
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