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account served primarily as a “clearing account” through which
petitioner circulated funds for the purpose of paying Craig’s
personal and construction expenses, and other personal expenses
of petitioner’s family. During 1994, the deposits into Coastal’s
checking account consisted of primarily checks written from JJH
and also included checks from CCA and a small amount of
unidentified deposits. The transfers from JJH’s account were not
loans, and the transfers were not related to petitioner’s
accounting business.3 Craig used the funds in the Coastal
account to pay some of his personal living and construction
expenses and to funnel money to other family members. During
1994, Craig wrote a total of $39,863 in checks from this account,
including $22,335 in checks to JJH and $11,920 in checks to
petitioner, Charlene, CCA, and Craig.
Tax Reporting
Petitioner—Petitioner filed a 1994 income tax return
claiming married filing separate status. Charlene did not file a
return for 1994. On his 1994 return, petitioner reported no
salary, wages, dividends, or other compensation from JJH. He
reported total income of $31,500, comprising $1,000 Schedule C
income, $10,000 rent income, $3,000 capital gain income, and
$17,500 as income from a covenant not to compete. On the
3Petitioner admitted these transfers were made “on the basis
of an affinity, of a relationship” between him and his family.
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