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On September 15, 1995, Mr. Matos, with the approval of his
supervisor, began treating KSCI as a personal holding company and
not an S corporation for the 1992 and 1993 tax years. On
September 21, 1995, Mr. Matos met with petitioner, and petitioner
refused to agree to any adjustment that included the personal
holding company tax. On September 27, 1995, petitioner sent Mr.
Matos by facsimile a list of expenses for KSCI’s 1993 tax year.
On November 13, 1995, Mr. Matos prepared Forms 1120, U.S.
Corporation Income Tax Return, for KSCI using information derived
from KSCI’s Forms 1120S and other materials obtained during the
examination. At a December 15, 1995, meeting, Mr. Matos proposed
adjustments based on an examination of the Forms 1120S filed by
KSCI for the 1992 and 1993 tax years that treated KSCI as a
personal holding company rather than as an S corporation.
On December 15, 1995, petitioner and Mrs. Chan (the Chans)
executed Forms 872, Consent to Extend the Time to Assess Tax, for
each of their joint tax returns filed for tax years 1992 and
1993. On January 16, 1996, the IRS sent petitioner a letter
proposing examination adjustments to the Chans’ 1992 and 1993 tax
returns. In the letter, the IRS treated KSCI as a C corporation
and proposed to treat certain payments made by KSCI as
constructive dividends to the Chans.
On January 16, 1996, the IRS sent a letter to petitioner
proposing examination adjustments to KSCI’s 1992 and 1993 tax
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