Meri R. and William R. Kaufman - Page 2

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          was liable for section 6663 fraud penalties of $4,909.50 for                
          1993, $8,682.75 for 1994, and $13,669.50 for 1995.  (In the                 
          alternative to the fraud penalties, respondent asserted accuracy-           
          related penalties under section 6662.)  Unless otherwise                    
          indicated, all section references are to the Internal Revenue               
          Code in effect for the years in issue, and all Rule references              
          are to the Tax Court Rules of Practice and Procedure.                       
               On January 14, 1998, respondent issued to petitioners a                
          statutory notice determining the above deficiencies and                     
          penalties.  The deficiencies were based on respondent’s                     
          determination that petitioners realized unreported income from              
          misappropriated or embezzled funds.  On April 13, 1998,                     
          petitioners filed a petition with this Court disputing the notice           
          of deficiency.  Petitioners at that time resided in Cranston,               
          Rhode Island.                                                               
               Respondent then answered the petition and further set forth            
          specific allegations of fact in support of the fraud penalties,             
          as follows:                                                                 
                    6.  FURTHER ANSWERING the petition, and in support                
               of the respondent’s determination that, in regard to                   
               Petitioner Meri R. Kaufman, a part of the underpayments                
               of tax required to be shown on petitioners’ joint                      
               income tax returns for the taxable years 1993, 1994 and                
               1995 is due to fraud, the respondent alleges:                          
                         a.  The Petitioner Meri R. Kaufman signed and                
               filed joint returns with her husband for the 1993, 1994                

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