William S. Fairey, Jr., and Susan R. Fairey - Page 9

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               Petitioner showed some of those documents to Hughs at a                
          meeting on August 24, 2001.  However, he did not provide a                  
          history of the Schedule C business or statements of employee                
          reimbursement policies from the employers.  Immediately after               
          that meeting, Hughs asked petitioners to provide documentation of           
          their employee business expenses, depreciation, travel expenses,            
          and telephone expenses not later than October 1, 2001.                      
               2.   Examination of Petitioners’ 2000 Tax Return                       
               Hughs informed petitioners that their 2000 income tax return           
          was being audited relating to miscellaneous itemized deductions,            
          cash contributions, and Schedule C expenses.  Hughs received a              
          letter on October 9, 2001, stating that petitioner did not know             
          when he would be available for a meeting and informing Hughs that           
          he would wait to have his 2000 income tax return audited.                   
          Petitioners did not provide Hughs with any of the documents she             
          had requested.  Petitioner and Hughs rescheduled the second                 
          meeting for November 26, 2001.  Petitioner called Hughs to                  
          reschedule the November 26 meeting for December 13, 2001.                   
          Petitioner later called Hughs to reschedule the December 13                 
          meeting for January 10, 2002.  Hughs agreed.  Neither petitioner            
          met with Hughs on January 10, 2002.                                         
               Hughs met with petitioner on February 8, 2002.  Hughs issued           
          another request for documents to petitioners dated February 21,             
          2002, seeking substantiation of various expenses and an                     






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