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deductions relating to NLP and Scooper’s. From 1986 through
1990, David managed NLP and reported on his 1990 return $109,000
of compensation relating to his management activities. In that
year, David transferred his one-third interest to the other
partners.
In 1987, Demetree and Associates employed Julia Lloyd as a
full-time property manager. She was responsible for collecting
rents, preparing monthly rental summaries, and assisting David in
securing tenants and negotiating leases for NLP.
Following Arthur’s death in 1991, David began managing the
properties formerly managed by his father. Ms. Lloyd worked for
David in the same capacity that she had for Arthur. David
reported the income relating to his property management
activities on the Schedules C accompanying his 1991 and 1992
returns and claimed a rental loss deduction relating to 1992.
In 1996, Ms. Lloyd asked David to terminate her so that she
would be eligible to collect unemployment benefits. When David
refused, she retaliated by filing a complaint with the local
government authorities alleging David’s business use of a
residential condominium. She also contacted respondent, alleged
that David had taken funds from Demetree and Associates and
failed to report such funds to the Internal Revenue Service, and
prepared ledgers documenting the alleged improprieties.
Respondent then initiated a criminal investigation of David and
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