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On March 16, 1991, petitioner traded an unimproved 5-acre
parcel of land that he owned for Grand Video, a video rental
business with a store located in Vancouver, Washington. The
selling price for the business, which did not include the land or
building in which the store was located, was $30,000. On his
1991 Federal income tax return, petitioner reported a $53,000
basis in the land and claimed a long-term capital loss of $23,000
as a result of the acquisition of Grand Video. Petitioner owned
and operated Grand Video as a sole proprietorship from the date
he acquired it throughout the years in issue.
Grand Video’s store was typically open from 10:30 in the
morning until midnight, 7 days a week. Initially, petitioner was
the only person who worked in the store. He eventually hired
employees to assist him. At first, petitioner paid his employees
“under the table”; that is, in cash, without withholding for
Federal and State income and employment taxes. He failed to file
the requisite Federal and State employment tax forms until
examined by State employment tax authorities. As a result of the
State audit, petitioner was determined to be an unregistered
employer from June 1993 through July 1995. He was fined $500,
plus penalties and interest.
Petitioner used unnumbered, duplicate receipts to track
video rentals at Grand Video. When a video was rented,
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