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In March 1996, Mr. Kerkinni approached petitioner and
informed him that IMC could no longer afford to pay him a salary.
Petitioner claims that at that time, he agreed to continue
working for IMC without a salary. Petitioner and Mr. Kerkinni
agreed that IMC would reimburse petitioner for any expenses he
paid in performing his duties as an employee. The reimbursement
payments were to be made whenever and in whatever amounts IMC
could afford to make them. Mr. Kerkinni also agreed that IMC
would purchase any of petitioner’s old tools that were being used
by employees of IMC. At Mr. Kerkinni’s request, petitioner kept
an inventory list of the tools and equipment owned by him and
used by IMC employees and added to the list annually.
During 1996, 1997, 1998, and 1999, petitioner paid expenses
related to his work at IMC. Petitioner’s expenses included
travel and purchases of new equipment. IMC issued checks to
petitioner between March and December 1996, and in 1997, 1998,
and 1999. The amounts of these checks were not reported to
petitioner on a Form W-2, and petitioners did not report the
amounts of the checks on their 1996, 1997, 1998, or 1999 Federal
income tax returns. The checks from IMC were issued almost every
month, although on different days each month. The amounts of the
checks varied, from $500 (January 2, 1997) to $4,000 (September
20, 1996), and were generally in round numbers. Petitioner did
not receive a statement allocating the amounts of the checks
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