Lee G. Gale - Page 16




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          activity, (4) excess Schedule E depreciation deductions of                  
          $15,317, and (5) computational adjustments related to personal              
          exemptions.                                                                 
               1993 and 1994 Individual Returns                                       
               On December 2, 1996, respondent issued a letter (no change             
          letter) in connection with the audit of petitioner’s 1993 and               
          1994 fiduciary returns, which stated:                                       
                    Since there was no material change in the tax you                 
               reported, we are accepting your return with the changes                
               noted.  You can contest these changes only when the                    
               result changes the amount of your income tax.  Changes                 
               that affect carryovers to future years or periods                      
               cannot be protested at this time because we are not                    
               changing the tax reported on your return.  If                          
               additional tax is proposed for a later year based on an                
               adjustment of a carryover reflected in this report, you                
               can contest the issue at that time.                                    
               On November 19, 1997, respondent issued a notice of                    
          deficiency (1993/1994 notice) to petitioner determining                     
          deficiencies, an addition (1993 only), and penalties for the                
          calendar years 1993 and 1994.  After concessions,6 respondent has           
          continued to assert adjustments for the following items: (1)                

               5(...continued)                                                        
          $35,000 of the amount petitioner wrongly claimed as a cost of               
          goods sold.                                                                 
               6 Under the assumption that petitioner would not be entitled           
          to exclude the United Ready Mixed settlement proceeds from income           
          in 1992 or deduct the payment made to petitioner’s attorney’s               
          trust account in 1992, respondent conceded that in 1993                     
          petitioner paid to Lurie & Zepeda and was entitled to deduct from           
          gross income in arriving at adjusted gross income under sec. 162            
          $200,000 in legal fees.  Respondent also conceded that petitioner           
          was not subject to tax on $642,698 and $114,839 of deposits made            
          to the living trust in 1993 and 1994, respectively.                         





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