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OPINION
I. Issues Relating to Deficiencies
A. Background
Petitioners contend that for each of the years in issue the
expiration of period of limitations precludes the assessment of
any deficiency. Respondent, however, contends that the fraud
exception to the statute of limitations applies for each year in
issue; consequently, respondent maintains, assessment of the
deficiencies is not barred for any year in issue. Alternatively,
respondent argues that the period of limitations for 1990 has not
expired because the unreported income for that year exceeds 25
percent of the income Frank and Katherine included on their
return for that year; therefore, a 6-year statute of limitations
applies for 1990. Petitioners, however, maintain that Frank and
Katherine did not understate their income for any year in issue.
Respondent used an indirect method to reconstruct Frank and
Katherine’s income for the years 1983 through 1990, specifically
the source and application of funds method, to determine that
Frank and Katherine had understated their income for those years.
Petitioners contend that, during those years, Frank and Katherine
used a previously acquired cash hoard to purchase assets and to
pay personal expenses for themselves and other family members.
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