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In the notice of deficiency, respondent determined that the
trusts created by petitioner were shams with no economic
substance and should be disregarded, or were grantor trusts all
of whose income is taxable to petitioner. Respondent determined
that petitioner’s reported gross income should be increased by
the gross income reported by the trusts ($560,184 for 1996 and
$495,048 for 1997) and by unexplained deposits made to
petitioner’s bank account ($170,619 for 1996 and $131,190 for
1997) and to one of petitioner’s trust bank accounts ($2,900 for
1996). Respondent disallowed all deductions claimed by
petitioner and the trusts, because petitioner failed to provide
substantiation for the deductions claimed on his returns
($574,430 for 1996 and $619,094 for 1997). Respondent made other
computational adjustments to petitioner’s returns resulting from
the additional income respondent determined (such as determining
that petitioner underreported self-employment taxes by $42,103
for 1996 and $39,443 for 1997). As a result of these
adjustments, respondent determined deficiencies of $540,192 for
1996 and $511,866 for 1997.
Respondent also determined that petitioner is liable for 20-
percent accuracy-related penalties under section 6662(a), because
petitioner was negligent or disregarded rules and regulations in
understating his taxable income, made substantial understatements
of income tax, and had not shown reasonable cause for the
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