Terrell Equipment Company, Inc., et al. - Page 7

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               In May 1991, Vernon and Janet’s joint Federal income tax               
          returns for 1987, 1988, and 1989 were selected for audit.                   
          Revenue Agent Danny Craddock (RA Craddock) was assigned to the              
          audit.  During the audit, Vernon cooperated with RA Craddock.               
          Vernon gave RA Craddock a desk inside TECO’s office and allowed             
          RA Craddock to copy documents and to speak with TECO employees              
          unsupervised.  TECO’s officers, employees, and agents cooperated            
          with the IRS during the audit of petitioners.  Vernon answered RA           
          Craddock’s questions.  When requested by RA Craddock, petitioners           
          extended the period of limitations on assessment several times.             
               On August 22, 1991, RA Craddock referred the 1987, 1988, and           
          1989 tax years to the Internal Revenue Service (IRS) Criminal               
          Investigation Division.  Special Agent Andrew D. Bishop (SA                 
          Bishop) was assigned to conduct a criminal investigation of                 
          Vernon.  RA Craddock assisted SA Bishop.                                    
               No criminal charges were brought against Janet.  Vernon,               
          however, was tried for violating section 7206(1), willfully                 
          making and subscribing a return under penalties of perjury that             
          he did not believe to be true and correct as to every material              
          matter, for 1988 and 1989.  He was acquitted on both counts.                
               During the years in issue, TECO did not have income from               
          illegal activities and did not deal in cash to avoid reporting              
          income.  Neither Vernon nor Janet had unexplained increases in              
          net worth, had substantial expenditures over available sources,             

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