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Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
After concessions, the primary issue for decision is whether
respondent’s position in Payne v. Commissioner, T.C. Memo. 1998-
227, revd. 224 F.3d 415 (5th Cir. 2000), as to the tax
deficiencies and the fraud additions to tax was substantially
justified.
Background
During 1987 and 1988, petitioner practiced law, and
petitioner owned and operated in Houston, Texas, a law firm under
the name of Payne & Associates. Petitioner provided extensive
legal representation to and eventually managed, controlled, and
owned the stock of 2618, Inc. (2618 Inc.), a corporation that
owned and operated a topless dance club in Houston, Texas, under
the name Caligula XXI (the Club).
Petitioner received funds relating to various transactions
involving 2618 Inc., the Club, and other entities and activities.
Those funds were generally deposited into petitioner’s bank
accounts. Portions of those funds were then disbursed from
petitioner’s bank accounts for and on behalf of 2618 Inc. and the
Club; other portions of the funds were used by petitioner for his
personal purposes.
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