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income tax credit for 1996. As a result of filing the amended
return, petitioners received a refund of tax in the amount of
$3,030.
Procedural Matters
The examination of petitioners’ income tax liability for
1996 arose out of an examination of NHIL’s employment tax
liability. During the examination, petitioners did not provide
any information to respondent’s revenue agent and failed to
produce bank records or documentation in support of their
position. Petitioners informed Grey, who represented petitioners
during the audit, that the records were missing or were not in
their possession.
The notice of deficiency was sent to petitioners on July 13,
2000, shortly prior to expiration of the period of limitations.
Third-party records received pursuant to summonses for various
bank accounts were received by the IRS subsequent to the notice
of deficiency and disclosed additional bank deposit income.
Respondent then amended his answer to allege an increased
deficiency, addition to tax, and penalty.
On July 12, 2001, petitioners answered respondent’s
interrogatories and request for admissions. The interrogatories
specifically asked petitioners to identify any nontaxable sources
of the deposits made into the Nationwide account, the Cohen
account, or the NHIL account. Petitioners responded that they
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