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Petitioners’ Federal income tax returns were prepared by a
certified public accountant (C.P.A.) who was also licensed to
practice law, with whom petitioner had a business relationship
for more than 20 years.
On July 10, and November 14, 1996, respectively, Mr. and
Mrs. Merritt filed late their joint Federal individual income tax
returns for 1994 and 1995. On their 1994 return, Mr. and
Mrs. Merritt did not include the $129,000 independent contractor
fee income that petitioner returned to the law firm in December
of 1994.
On July 6, 1998, respondent determined a deficiency in
Mr. and Mrs. Merritt’s joint Federal income tax liability for
1994 based on, among other things, respondent’s inclusion in
income of the $129,000 that petitioner received as fee income in
1994 but which petitioner returned to the firm.
Also, for 1994 and 1995, respondent determined against
Mr. and Mrs. Merritt additions to tax under section 6651(a)(1) in
the amounts of $20,980 and $5,405, respectively, for failure to
timely file their Federal income tax returns and accuracy-related
penalties under section 6662 in the amounts of $16,784 and
$21,619, respectively.
On August 28, 1995, and on October 3, 1996, respectively,
the law firm filed late its corporate Federal income tax returns
for its taxable years ending November 30, 1994 and 1995. On
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