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Commissioner, 96 T.C. 858, 875 (1991), affd. 959 F.2d 16 (2d Cir.
1992); Beck v. Commissioner, T.C. Memo. 2001-270.
Metro’s two officers, Butler and McGraw, both concede their
participation in the two schemes that led to the
misrepresentations on Metro’s tax returns, which McGraw signed.
Metro’s accounting department, under Butler’s orders and McGraw’s
supervision, did not keep books and records relating to the funds
diverted to Butler. McGraw caused Metro to file an incorrect
return even after his attorney told him to report the income
accurately. During Metro’s 1990 and 1991 tax audits, neither
Butler nor McGraw informed the Federal or State taxing
authorities about the income omissions and deduction
overstatements. Participants in the schemes primarily dealt in
cash, and any checks used to facilitate the schemes were written
for less than $10,000 to avoid Internal Revenue Service scrutiny.
Petitioners contend that they believed Metro’s returns did
not reflect an underpayment because Butler used the diverted
funds to pay Metro’s expenses. We disagree. McGraw, Metro’s
chief financial officer, readily acknowledged that, when Metro’s
return was filed, he did not know how much Butler was receiving
nor what he was doing with the money. McGraw knowingly
participated in both schemes by accounting for, and causing Metro
to deduct, fictitious subcontract expenses. In addition, Butler
pled guilty to violating section 7206 for aiding and abetting the
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