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discovered that he had underreported his income from those
activities; petitioners had originally estimated the income from
these activities for Federal income tax purposes by way of rough
calculations. When respondent notified petitioners that he would
be auditing their personal returns, Mr. Barnard notified
respondent that petitioners had just amended (but not yet filed)
their 1987, 1988, and 1989 personal income tax returns to report
additional rental income. Mr. Barnard gave those amended returns
to Revenue Agent Bruce Smith (Revenue Agent Smith) pursuant to
his request. The 1987 amended return reported additional income
of $16,030 and $1,860 from Bridge Street and Lake Michigan
Heights, respectively. The 1988 amended return reported
additional income from those respective rentals of $20,963 and
$1,850. The 1989 amended return reported additional income of
$24,840 from Bridge Street and a reduction of income of $3,959
from Lake Michigan Heights. Because respondent never processed
any of these amended returns, the deficiencies shown in the
notice of deficiency include the underpayments reflected on those
returns.
On February 12, 1991, Revenue Agent Smith referred
petitioners' 1987, 1988, and 1989 returns to respondent’s
Criminal Investigation Division. The assigned agent, Special
Agent Robert Keller, concluded that he could ascertain
petitioners’ taxable income only through an indirect method of
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