Dereco, Inc. - Page 3




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               a company known as Merka Jewelry and Trophies, Inc.,                   
               for $29,550.00.                                                        
                    (d)  On December 22, 1987, petitioner's president                 
               Donald J. Marino paid $25,000.00 of the purchase price                 
               described in subparagraph (c), above, with petitioner's                
               corporate check.                                                       
                    (e)  When questioned by respondent's agent                        
               regarding the payment described in subparagraph (d),                   
               above, petitioner's president Donald J. Marino stated                  
               that the purchase was for trophies.                                    
                    (f)  The $25,000.00 payment described in                          
               subparagraph (d), above, was included in petitioner's                  
               cost of goods sold on its tax return for the year ended                
               September 30, 1988.                                                    
                    (g)  Petitioner provided funds to its president                   
               Donald J. Marino to pay his and his family members'                    
               personal expenses during the tax year ended September                  
               30, 1988, in the amount of $253,602.00.                                
                    (h)  Petitioner deducted $148,282.00 of the amount                
               described in subparagraph (g), above, as travel and                    
               entertainment expenses on its tax return for the year                  
               ended September 30, 1988.                                              
                    (i)  Petitioner deducted $105,320.00 of the amount                
               described in subparagraph (g), above, as research and                  
               development expense on its tax return for the year                     
               ended September 30, 1988.                                              
                    (j)  Petitioner directly paid and provided funds                  
               to its president Donald J. Marino to pay his and his                   
               family members' personal expenses during the tax year                  
               ended September 30, 1989, in the amount of $152,706.00.                
                    (k)  Petitioner deducted the $152,706.00 amount                   
               described in subparagraph (j), above, as travel and                    
               entertainment expenses on its tax return for the year                  
               ended September 30, 1989.                                              
                    (l)  Petitioner's president Donald J. Marino                      
               endorsed and deposited a check in the amount of                        
               $27,716.00 payable to petitioner from J&L Steel into                   
               his personal bank account.                                             
                    (m)  The $27,716.00 described in subparagraph (l),                
               above, constitutes taxable income to petitioner for the                
               tax year ended September 30, 1988, which income was not                
               reported on its tax return.                                            
                    (n)  Petitioner deducted on its tax return for the                
               year ended September 30, 1988, subcontractor expenses                  
               in the amount of $651,871.00.                                          
                    (o)  Petitioner only paid or incurred $294,801.00                 
               of the subcontractor expenses described in subparagraph                
               (n), above.                                                            





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