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registered as an investment adviser with the Securities and
Exchange Commission. In the mid-1970s, Southeast Trust’s name
was changed to Trust Investment Management (Trust Investment).
As owner and operator of Trust Investment, petitioner managed a
$2 million investment portfolio, including employee benefit
accounts.
From 1983 through 1993, petitioner, while continuing to
operate Trust Investment, worked as senior vice president for
First Tennessee Investment Management (First Tennessee). From
1989 through 1993, petitioner deposited a portion of the
management fees he earned from Trust Investment into certificates
of deposit, municipal bonds, and a cash management fund.
In 1993, First Tennessee terminated petitioner’s employment
for violating bank and corporate policies. In that year, an FBI
special agent interviewed petitioner relating to petitioner’s
alleged misappropriation of First Tennessee funds (i.e., five
checks totaling approximately $28,000 and made payable to Trust
Investment).
Petitioner timely filed his 1989 through 1993 Federal income
tax returns. On the Schedule C, Profit or Loss From Business,
accompanying petitioner’s 1993 return, he deducted, from gross
receipts and sales, $65,586 of returns and allowances. By letter
dated June 2, 1994, the Internal Revenue Service notified
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