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determine petitioner’s tax liability. On March 31, 2000,
respondent issued a notice of deficiency to petitioner.
Respondent did not send a 30-day letter before issuing the notice
of deficiency. The period of limitations for making an
assessment of petitioner’s 1996 tax liability would have
otherwise expired on April 15, 2000.
In the notice of deficiency, respondent determined that the
trusts petitioner created were shams and should be disregarded,
or were grantor trusts all of whose income is taxable to
petitioner. Respondent determined that petitioner’s reported
gross income should be increased by the gross income reported by
the trusts ($560,184 for 1996 and $495,048 for 1997) and by
unexplained deposits made to petitioner’s bank account ($170,619
for 1996 and $131,190 for 1997) and to one of petitioner’s trust
bank accounts ($2,900 for 1996). Respondent disallowed all
deductions claimed by petitioner and the trusts, because
petitioner failed to provide substantiation for the deductions
claimed on the returns ($574,430 for 1996 and $619,094 for 1997).
Respondent made other computational adjustments to petitioner’s
returns resulting from the additional income respondent
determined (such as determining that petitioner underreported
self-employment taxes by $42,103 for 1996 and $39,443 for 1997).
As a result of these adjustments, respondent determined that
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