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protested the proposed adjustments at an administrative review in
the Internal Revenue Service Office of Appeals (Appeals).
Appeals returned the case to the revenue agent with instructions
to consider whether additional evidence that petitioner had
presented at the administrative review provided the required
substantiation.
The parties were not able to reach an agreement on the
disputed items, and petitioner refused to agree to a statutory
extension of the time to assess tax. Accordingly, on April 30,
1998, respondent mailed a notice of deficiency to petitioner.
In the notice, respondent determined deficiencies of
$219,885 and $249,372, and accuracy-related penalties of $43,977
and $49,874, for petitioner's fiscal years 1994 and 1995,
respectively. The deficiencies were based on the disallowance of
deductions that petitioner claimed for casual labor, security
expenses, talent scouting expenses, music expenses, and
management consulting fees.
The notice of deficiency stated that the deductions for the
casual labor, security expenses, music expenses, and management
consulting fees were disallowed because petitioner did not
provide substantiation, including invoices, matching canceled
checks, and Forms 1099, to support its claimed deductions.
Respondent disallowed the deduction for the talent scouting
expenses, because he determined that $104,000 of the amount
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