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The Commissioner commenced an audit of the individual and
corporate 1990 and 1991 returns after discovering during the
audit of a personal injury attorney that the attorney had written
checks to various physicians and that those checks had been
cashed. The revenue agent interviewed both of the Les as part of
their and DDL’s audit. During those interviews, both of the Les
provided false, misleading, and inconsistent statements on DDL’s
check cashing activities, their involvement in those activities,
and the completeness of DDL’s books and records. On April 3,
1998, the Les agreed to extend to December 31, 1998, the time to
assess their personal income tax liability for 1991. They later
agreed on July 1, 1998, to extend that term until July 31, 1999.
Respondent determined that the amounts of the attorney
checks which were diverted by the Les were includable in their
gross income as constructive distributions received from DDL. As
to 1990, respondent determined (and included in the notice of
deficiency) that the Les failed to report constructive dividends
of $201,341 and constructive long-term capital gains of $82,100.
As to 1991, respondent determined (and included in the notice of
deficiency) that the Les failed to report constructive dividends
of $137,801 and constructive long-term capital gains of $62,034.
Following the issuance of the notice of deficiency, respondent’s
national office analyzed DDL’s earnings and profits to verify the
portions of the distribution that under section 301(c) were
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