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interest in the stock purchased by KSCI. When KSCI sold stock,
KSCI was required to repay a portion of its loans from the bank
in an amount equal to 50 percent of the original purchase price
of the stock sold.
On April 25, 1991, KSCI elected to be treated as an S
corporation by filing Form 2553, Election by a Small Business
Corporation, with the Internal Revenue Service (IRS). On July 8,
1991, the IRS accepted KSCI’s election to be treated as an S
corporation. KSCI timely filed Forms 1120S, U.S. Income Tax
Return for an S Corporation, for taxable years 1992 and 1993.
KSCI’s returns were prepared by Han Fin Chang (Mr. Chang), a
certified public accountant.
Petitioner and his wife timely filed with the IRS joint
Forms 1040, U.S. Individual Income Tax Return, for taxable years
1992 and 1993. Mr. Chang prepared the returns for petitioner and
his wife.
On October 20, 1994, the IRS sent KSCI a letter stating that
KSCI’s 1992 tax return had been assigned to Melvin Matos (Mr.
Matos), an IRS examiner, for examination. Petitioner, on behalf
of KSCI, contacted Mr. Matos on October 25, 1994, by telephone
and advised Mr. Matos that KSCI’s accountant, Mr. Chang, would
contact Mr. Matos to schedule an appointment to commence the
examination of KSCI’s 1992 return. On December 5, 1994, Mr.
Matos contacted Mr. Chang by phone, and they agreed to meet on
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