Ted and Tammy Estes - Page 3

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          or another complete records did not exist at the time of the                
          audit and that reconstructions of petitioners’ income and                   
          expenses had to be made.  The reconstructions to a large extent             
          were based upon petitioners’ checks and deposit tickets from the            
          years in issue.  The examining agent also relied upon bank                  
          records and summary documents prepared by petitioners’                      
               The primary issues discussed by the parties prior to the               
          issuance of the notice of deficiency were cost of goods sold,               
          gross receipts, and the sale of oil royalties.  The third issue,            
          sale of oil royalties, was resolved in petitioners’ favor prior             
          to the issuance of the notice of deficiency.  Because petitioners           
          believed they would owe no taxes if the first issue, cost of                
          goods sold, were decided in their favor, petitioners in                     
          settlement negotiations agreed to concede all other issues if               
          respondent made a favorable determination regarding the cost of             
          goods sold amounts.                                                         
               Respondent issued a statutory notice of deficiency to                  
          petitioners dated May 19, 1998.  The notice set forth the                   
          following adjustments:                                                      
                                             1992      1993      1994                 
               Advertising expense           ($14,725)    -0-       -0-               
               Aircraft expense              -0-       -0-   ($14,186)                
               Commission expense            -0-    $31,000      -0-                  
               Cost of goods sold            219,038    (2,204)  289,491              
               Depreciation expense          (471)     (902)     (832)                
               Gross receipts                (16,808)    5,113  (200,250)             

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