Jeffrey R. Taylor - Page 3

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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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