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second financial statement, dated August 8, 1989 (the 1989
financial statement), in connection with a refinancing. The
financial statements listed “Employment Income” of $77,811 and
$125,256 for 1987 and 1989, respectively. The “Employment
Income” shown on each financial statement represented
petitioner’s estimate of the gross income, unreduced by any
expenses, generated by her law practice as of the date of the
financial statement.5
In his notice of deficiency for 1987, respondent determined
that petitioner had unreported Schedule C income of $77,811,
equal to the amount of “Employment Income” listed in the 1987
financial statement. Respondent calculated the adjustment to
petitioner’s Schedule C income for 1987 by treating the
“Employment Income” shown on the 1987 financial statement as
additional unreported income from petitioner’s law practice.
Respondent did not reduce the income adjustment to take into
account petitioner’s reported Schedule C gross income of $75,097.
In his notice of deficiency for 1988-90, respondent
determined that petitioner had unreported Schedule C income for
each year based upon the $125,256 listed as “Employment Income”
in the 1989 financial statement. For 1988, respondent determined
5Petitioner explained the entries to ANB, the financial
institution to which she submitted the financial statements, and
to the revenue agent who was assigned to conduct the examination
of her returns for the years at issue.
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