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During 1984 and 1985, the arcade industry began facing
competition from home video games that caused many arcades in the
area surrounding Banner to go out of business. However, although
Banner’s business declined, Mr. Karcho kept the arcade in
business and continued to run it through the time of trial, some
6 years after the last of the years in issue in this case.
In applying for a City of Royal Oak, Michigan, business
license in 1987, Mr. Karcho knowingly failed to report 8
electronic games maintained on Banner’s business premises. By so
doing, Mr. Karcho temporarily evaded licensing fees of $100 per
game, until an inspection by the City revealed the undisclosed
games.
Notice of Deficiency
On April 8, 1996, respondent issued a notice of deficiency
covering petitioners’ 1987, 1988, 1989, 1990, and 1991 taxable
years. Respondent determined the unreported income for each year
at issue by treating Banner’s gross receipts as equal to the
total of the daily Meter Readings Sheets for each year, plus
estimated receipts from the sale of food and miscellaneous items,
and subtracting the gross receipts reported on Banner’s return
for each year.2
2 The records examined by respondent did not contain Meter
Readings Sheets for January and February of 1991; as a result,
respondent did not determine that there was any unreported arcade
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